Are Automatic Gratuities Going Away?

Dealnews reports:

A new IRS ruling has resulted in some frustrated restaurant owners and disappointed servers, and could possibly end a practice that's bugged many restaurant patrons for years. At the center of this controversy is the automatic gratuity, that compulsory charge many eateries tack on to your bill when you dine with a large group of people. As of January 1, 2014, the IRS will start treating automatic gratuities as a service charge, a change that's got the food service industry up in arms.

Servers May Feel the Pinch

When the IRS ruling, which was enacted in June 2012, starts being enforced in January, servers will no longer be responsible for self-reporting their income from automatic gratuities to the IRS. Instead, restaurant owners will have a choice: they can start adding those automatic gratuities into a server's wages (which would mean more paperwork), or they can stop charging customers for automatic gratuities altogether. According to Denise Wheeler, an attorney who spoke with the Wall Street Journal, it's likely that "the vast majority of restaurant owners will discontinue the practice."

This could be bad news for servers who depend on tips because their hourly wages are usually far below the minimum wage. When the restaurant where he works stopped charging automatic gratuities, server Michael Turney, who spoke with USA Today, noticed a significant change in his income. "I feel like larger parties don't tip as well as they should for the amount that they spend at the restaurant," Turney said. "When they spend $200 and leave $20, you're losing out on about $16 or $17." He went on to say that some servers at the restaurant are now hesitant to take on large parties, because they can make more tips on smaller groups.

I agree, this could happen.  Back in the day when I was working in food service, we saw this a lot - the same people who would leave a 20% tip for a party of four would only leave 10% for a party of 10.  For some reason, the percentage becomes less important than the dollar amount when the cost goes up due to larger parties.  That doesn't make it right, but I do see how this is a concern.  Now, the flip side...

While restauranteurs and servers may resent the IRS's automatic gratuity rule change, several customers have been vocal in their hatred of the practice. "Even if you generally tip more than 18%, automatic gratuities can't help but rub you the wrong way," read an editorial for the Chicago Tribune. "From a customer's perspective, a predetermined tip is mighty presumptuous. A server who doesn't have to earn his or her tips has little incentive to try, and the customer has no choice but to pay a premium anyway." The editorial also pointed out that a customer is rarely notified when an automatic gratuity is charged, which may lead them to leave a larger tip than they'd intended. "That's dishonest," the writer asserted.

I agree with that, too!  We may be abnormal, but we always confirm the price of our meal (including the tip) before paying, but even when you're looking it can sometimes be hard to spot.  Especially with a large group or multiple checks, it can hide rather easily.  And yes, I completely agree with the presumptuousness of adding the gratuity on from the start!  Plus, there have been times where I would have tipped more if left to my own preference, but since the restaurant forced me into the 18%, that's what the server got.  Again, we may be abnormal in that, but surely there are others who function the same way out there.

Dealnews offers some interesting suggestions and speculations about how it will play out, so check out the link above if you want to see it.  Personally, I've never understood why wait staff get paid a lousy $2.whatever in the first place.  How did that one job get exempted from the minimum wage?  Wouldn't it make more sense if they got the same $7.25/hour as other hourly jobs, and then any tip would be treated as it was meant to be (for excellent service over and above the bare minimum)?  As someone who worked for years in food service, and as someone who now regularly pays the bill at various restaurants, that seems more fair to me overall.

I wonder what that cost structure would do to the price of restaurant food, or what it would do to the typical wages earned by wait staff?  I honestly don't know what the net effect would be, but I bet there are some smart economist type people out there who could figure it out, or at least make a good guess.  If anyone happens to see anything related, feel free to drop me a comment and let me know.

Regardless, it will be interesting to see how this new IRS rule plays out in the real world.  It seems there is an unfortunately high rate at which IRS rules that seem good actually turn out pretty badly.