Joe's Crab Shack made headlines yesterday when it announced that it is doing away with "tipping," and raising its wages for all traditionally "tipped" employees. Joe's became the first chain restaurant company in the country to make this change. However, Joe's is not the first to do away with tipping. In fact, there has been a movement quietly making a push across the country. Last month, Danny Meyer's Union Square Hospitality Group in New York City did away with tipping. In recent years, Thomas Keller’s Per Se in New York and French Laundry in Yountville, Calif., Alice Waters’ Chez Panisse in Berkeley, Calif., and Grant Achatz’s Alinea in Chicago all did away with tipping.
There are many reasons that restaurants and bars are moving away from the traditional tipping model. Any number of articles on the subject point out that there are arguable benefits for the employee, the employer, and the customer. For example, restaurants that shift the compensation model away from tipping, pay the employees a higher hourly wage. This provides for a more stable, consistent, and meaningful living wage for employees - who do not have to be concerned with the risks of customers failing to tip. For the restaurant itself, it increases menu prices 10-15% to offset the higher labor costs. Additionally, the prevailing thought is that employee retention would increase, creating lower turnover rates that result in lower labor costs. The customer also benefits as it would ultimately pay a lower total for the bill because standard tipping has become 18-20% of the total bill.
However, noticeably absent from the news reports and press related to the shift away from the traditional tipping model, is that the shift may actually be driven in large part as a response to the aggressive focus on the restaurant industry by plaintiffs' attorneys and the United States Department of Labor. This phenomenon is supported by statistics. According to Department of Labor ("DOL") statistics, from 2009-2013 Fair Labor Standards Act ("FLSA") investigations into hotels and restaurants increased from approximately 4,500 investigations to approximately 7,300 investigations. In 2013, investigations into restaurants and hotels made up approximately 53% of all DOL investigations. In 2014, that percentage remained above 52%. As part of the DOL's P3 initiative (Plan/Prevent/Protect), nearly 2,000 investigators have been added in the last three years. On top of DOL investigations, each state and many local municipalities regulate wage and hour violations.
So the question is, why is the industry shifting the whole model of compensation, as opposed to merely complying with the tip credit provisions and regulations? The problem is three-fold. First, compliance is not as easy as it sounds. The regulations associated with "tipping" and payment of employees are vague and unclear at best. The FLSA and DOL fail to set forth regulations that provide a restaurateur with straightforward and easily comprehensible guidelines on how to comply with its regulations. For example, restaurants have been forced to defend the "dual job" regulation by proving that servers actually spend 80% of their time waiting tables or doing other tip producing work, and less than 20% of time doing other tasks like cleaning, making coffee, and rolling silverware. It is nearly impossible to prove, and impractical to try to regulate. Further, each state and local municipality also attempts to regulate minimum wage, tipping, and enforcement of wage and hour violations. Navigating through these waters is truly a legal mine trap.
Second, the Fair Labor Standards Act provides for a plaintiffs' friendly way to get into court, to plead a violation, and to turn the case into a collective or class action. The law has evolved in this area to include allowing for violations that arguably drop servers below minimum wage (knowing that the vast majority underreport tipped earnings) because of employees being charged for walkouts or breakage, improper employees sharing in the tip pool, improper service charges, employees working dual jobs (such as servers also acting as hosts, or food runners also preparing desserts), employees being charged for uniforms, and many other violations. The Act provides for harsh penalties for employers, including liquidated damages in the amount of two times the backpay, and provides for recovery of attorneys' fees and costs. The law also provides for a mechanism to bring a quasi-class action, called a collective action, that allows notice to be sent to all employees no matter the size of the employer.
Third, many employment practices insurance liability policies actually carve out coverage for wage and hour violations because of the high frequency that restaurants are hit with lawsuits. Most insurance carriers will offer wage and hour coverage, for a substantial additional cost, and with the limitations that the insurance coverage (1) would not apply to government investigations, (2) only provides for defense costs up to a certain point, and (3) would not cover any type of monetary settlement. It is not exactly bang for your buck.
The benefit of shifting away from the traditional tipping model is that by paying "tipped" employees above minimum wage and doing away with tips, tip sharing, and tip pooling, restaurants can avoid the costs of complying with the additional regulations that come with the tip credit. There would be substantially less risk and less concern about investigation or litigation involving improper employees sharing in the tip pool, employees working dual jobs employees' wages falling under the minimum wage, the reporting requirements associated with taking the tip credit, documenting and reporting amount of tips received, and calculating the proper amount of overtime wages.
It is clear that the trend has been increased litigation, regulation, and governmental oversight in tipped occupations - with a focus on the restaurant industry. Many in the industry actually call the tip credit - a tip penalty. It is clear that the trend of switching away from tipping is, at least in part, a well-thought out reaction to these trends. The costs and risks associated with taking the tip credit outweigh the benefit of taking the tip credit for many. For this reason, without significant clarification and amendments to the Fair Labor Standards Act and its enforcement for the restaurant industry, it is likely that the industry will continue its shift away from tips.
