MSU Extension

Tipping waiters and bartenders is a long established tradition in the U.S. but has increasingly come under attack as failing to adequately compensate lower paid workers. Specifically, tipping opponents suggest replacing tipping with a “living wage”, which is usually described as the wage required to lift the employee above the poverty line. Proponents of tipping often cite evidence that tipping rewards quality service and it determined by the customer based upon knowledge of the interaction between server and customer. Michigan State University Extension, suggests that answers to a few questions can assist in determining one’s attitude about the controversy.

One of the first questions to ask is “Are restaurant servers underpaid”?

The federal minimum wage for non-tipped workers is $7.25 per hour. However the federal minimum wage for tipped workers is only $2.31 per hour; this is the required hourly pay so long as servers reported total hourly pay (tips reported per hour plus $2.31 is at or above $7.25 per hour). If a servers total hourly pay is less than $7.25, the employer (business) must make up the difference.

In a recent study, from the New York Times, of restaurant workers in New York State, the median pay was $9.43 per hour, significantly above the federal minimum wage. However, this may be below the level of a living wage. However, this data included workers at fast food restaurants who typically receive few tips. Only including workers at sit down restaurants would significantly boost that average.

The second question is “What wage would be required for servers to forgo tips”?

A recent informal survey of 40 servers in moderately priced sit-down restaurants in Orange County, California suggests that if they had to forgo tips, they would expect their hourly wage rate to be $18-$50 per hour with the median wage of $30 per hour. For these servers, any non-tipping wage would have to be more than five times the federal minimum wage. In addition, all these servers indicated that if tipping were replaced with a fixed hourly wage, the level of service would suffer.

The third question is “What is the function of tips”?

So what is tipping? Tipping is a mechanism that provides an incentive to servers to make people’s restaurant experience positive. Through tipping, servers effectively become commissioned salespeople, enticed to add to the customers experience and the company’s sales. By adding to a customer’s experience, the server is able to increase the probability of return visits and increase the server’s income. In addition, servers are often able to assist customers in selecting additional items (e.g. appetizers, deserts, etc.) thus boosting the restaurant's income.

The fourth question is “What would be the effect on customers”?

Interviews with servers and customers generally suggest that lower levels of service generate lower tips. Servers in one informal study indicated that without the incentive of tips, they would likely not provide as high a level of service, especially when there is congestion. This would be consistent with the idea of “minimize effort-maximize reward”.

The fifth question is “What would be the impact upon a restaurant”?

A case study of eliminating tipping was conducted in San Francisco in 2015 where the owner of two restaurants eliminated tipping, raised prices 20 percent and provided higher hourly wages to servers and kitchen staffers. During the experiment, the restaurants lost 70 percent of their servers although they were paid a much higher hourly wage. The reason, servers actually experienced an hourly wage drop from an average of $35-45 per hour down to $20-35 per hour. This certainly would have an impact upon the businesses cost of hiring and training new employees even if the new employees provide the same level of service as the previous servers. This might also impact repeat business as customers react to the lack of continuity of servers.

The sixth question is “Should legislation mandate a “living wage” for restaurant servers?

Behind this issue is the very large diversity in the industry. Already discussed is the difference between no-tip restaurants and tip restaurants (e.g. fast food versus sit down). So, at the same mandated wage, fast food workers might receive a windfall while servers in sit down restaurants at the same wage without tips might experience a decrease in income. In addition is the wide variation in the cost of living in various locales. It is certainly much more expensive to live in heavily urbanized areas (e.g. New York City or Seattle) than in rural areas. So a consistently mandated wage that covered all restaurant workers in any geographic locale would not affect all workers the same, some would win and some would lose.

While calls for a living wage for restaurant workers are usually made as a means of improving the welfare of these workers, the evidence is clear that mandated wage hikes for these workers would not benefit all of them. Some might benefit while others may have their income reduced. It is also unclear that the impact upon restaurant owners/managers would be positive or that such a mandate would benefit consumers.