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Gratuity vs. Tip: Debating Automatic Gratuity in Restaurants

Gratuity and tipping are synonymous with the service industry. It’s one of the many things that keep people returning to serving and other similar job positions. The benefit of earning extra income on top of your hourly wage makes up for the psychological and physiological output associated with the job for many.

For many restaurant and bar owners, this might raise the question: Should I include gratuity in the check or leave the tip up to the customer? This has been largely debated for years by many within service. We will go over the key differences between tipping and gratuity at your restaurant so you can make an educated decision. If done correctly, your choice could lead to happier staff, lower turnover rates, and improved guest experiences.

History of Tip-Included Restaurants

Tipping is said to have existed as early as the Roman period and has continued throughout the ages. It’s long been used as a way for the wealthy to assert their financial status by freely giving money to those working below them. Serfs, enslaved peoples, and all those in service were the targets of tipping. In post-13th Amendment America, tipping had been abolished through law to ensure previously enslaved people couldn’t get additional financial compensation to their already low or non-existent wages. Even after the federal minimum wage was established in 1938 after the anti-tipping laws were repealed, tipped workers were not included.

Today, the minimum wage for tipped workers still firmly sits at $2.13/hr with the exception of just seven states. The modern climate of tipping has changed quite a bit, with tipping being standard in most service jobs. For higher-end establishments, automatic gratuity became an option for restaurants to alleviate the stress of check splitting with large parties. Now, we’re seeing all kinds of restaurants and bars implement automatic gratuity into their service. Since tipping has become a hot topic recently in tandem with the cost of living going up, many establishments are using automatic gratuity as a way to ensure their staff can bridge that gap equitably.

What is Automatic Gratuity?

Automatic gratuity is a percentage added to the cost of a guest check to account for labor. It’s essentially a built-in tip system. A tip would be an optional additional payment you can add to a check in whatever amount you choose, whereas an automatic gratuity is a set rate added to the check. 

Is Automatic Gratuity Legal?

Automatic gratuity is legal within the United States so long as you disclose the charge beforehand. It’s important to note, however, that automatic gratuity is not viewed the same as tipping in the eyes of the law. Taxes and things of that nature will view automatic gratuity as a service fee, which means it’ll be included in wages and taxed differently. 

Should You Have Automatic Gratuity in Your Restaurant?

Automatic gratuity sounds great on paper, but it does come with its own set of pros and cons.

Pros of Automatic Gratuity

  • Increase revenue.

When you have happy staff, you have happy customers. The guest experience is a huge part of what makes a restaurant a great one. Having a lower turnover rate means paying less on new employees too, making you more efficient and giving your staff an opportunity to hone in on their skills.

  • Consistency in compensation.

One of the biggest worries people in the service industry have is how they’re going to make ends meet. With automatic gratuity, it takes some of the stress off. This is a big contributing factor to your staff’s happiness and makes your restaurant a more attractive place to work.

  • Increased efficiency during payroll. 

Since you’ll just be adding on a service charge, it’ll be a lot easier to do payroll. Automatic gratuity is taxed just as regular wages, so you don’t have to do any separate taxes or calculate different tip percentages.  

Cons of Automatic Gratuity

  • Guests don’t like it. 

While most guests understand the purpose of a service charge, some have a problem with it. There are guests who don’t like the fact that tipping isn’t optional. Some guests might also enjoy giving an extra tip on top of the automatic gratuity charge for exceptional service. You can assess either of these situations as you see fit for your business. 

  • Legality depends on the location of the restaurant.

Make sure to look up what your local laws are for automatic gratuity. Every state has their own laws regarding how gratuity should be handled. If you’re not in compliance with the law, it could lead to you getting sued or reported to the department of labor by your staff.

  • Logistical challenges.

If you choose to do automatic gratuity based on party size, that can create some confusion logistically. You’ll also need to ensure your payment infrastructure is prepared to handle things like automatic gratuity.

  • Some unhappy waitstaff.

If you improperly handle your automatic gratuity, you’ll end up frustrating your staff. If you decided to set all checks to have a 15% gratuity charge, that limits your staff to only ever getting 15%. Many guests like to tip bigger on smaller checks, so this might take away a lot of opportunities for your staff to make more money.

Implementing Automatic Gratuity

If you’d like to give automatic gratuity a try, here are some basic tips to avoid problems:

  • Inform your guests. Make sure your guests are aware of your service charge. You can put it on your menu or have signage at the front of your establishment.
  • Set a fair percentage.
  • Try to find a good balance between pleasing your staff and not overcharging your guests.

Consider suggested tip amounts. If automatic gratuity doesn’t sound like it’s for you, some establishments will print out suggested tip amounts based on the check instead.

Ryan Philemon


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