Published in the San Diego Union-Tribune, October 3, 2016
OK, time for a game. What is the connection between stock options, the minimum wage, equity (fairness) and a no-tip pooling policy for “heart of house” (cooks and dishwashers) in a restaurant? I wanted to explore this from an entrepreneurial perspective, namely how do you retain talent, incentivize the team and fairly reward effort and results?
I recently spent an hour with four restaurateurs — David Cohn from the Cohn Group, Tracy Borkum from Urban Kitchen, Susan Baumann from the Bali Hai and Tom Ham’s Lighthouse, and Arturo Kassel of Whisknladle Hospitality — all seasoned and successful veterans of the food wars. The topic was broad, but the theme was simple. In an effort to bring more parity between the wait staff and the back of house, would the paying public accept a “service charge” on the bill instead of a placing their own discretionary tip?
Be careful here — words matter. As I learned, a service charge is automatic, and it belongs to the business, which may then distribute it in a manner that it deems equitable. While the idea that operators will have discretion over how those tips are distributed is relatively new, a service charge is technically no different than an automatic gratuity that restaurants have been adding to parties of six or more for a long time.
I also talked to folks who are concerned that the owner might act badly and keep it all in his pocket, but my counter is that talent leaves when management acts badly. And what I have learned from my group is that it has become increasingly harder to get back-of-house staff. Lots of people like the idea of being a server at fine dining restaurants where tips can be $10-$40 per hour plus minimum wage, but it is much harder to find experienced and talented cooks for $13-$14 per hour — going up to at least $15 per hour as our state minimum wage rises.
Who designed this mess? Don’t ask — but in essence, the U.S. Department of Labor has ruled against tip sharing with the back of house. And the California Legislature has ruled against a “tip credit” — where the owner gets to pay a lower fixed wage to the server, because the tips bring the person up past the minimum wage. The theory is that since the owner can pay less up front, he has more to share with the back of the house. I am an entrepreneur, and I understand the difference between fixed and variable costs. But let’s agree on this. If the food is lousy, it doesn’t matter how good the service is, I am not going back. So there appears to be a deep intertwined co-dependency.
So the conundrum is this — will the paying public accept the service charge concept (essentially an automatic tip) with the understanding that the owner is going to “do the right thing”? Meet Arturo Kassel, who in January is going to institute that exact policy. In an effort to retain talent and properly reward them, Kassel is going to institute a service charge that he is going to use to increase the wages of the back-of-house staff as well as add benefits to his service staff.
The other folks at the table applauded him loudly and are rooting for him to succeed. It is a risky move. The margins in the restaurant business are narrow. And the last thing a diner wants is a two-page explanation of the nuances of sales tax, tipping and minimum wage. Other restaurateurs are considering surcharges and other ways of dealing with increased costs.
I examined data that shows that in some major cities between 10 percent and 15 percent of workers claimed that the owners “stole” some of their rightly earned compensation.
Look, I understand that there are bad actors — check out Wells Fargo and their opening of 2 million accounts for people who did not know it was happening — but I am an optimist, and I want to believe in the goodness of most people. And to that end, my response has been that the fact that an owner could act badly should not legally forbid the majority of owners from acting graciously and properly. I am a believer in the concept of innocent until proven guilty.
From my entrepreneurial perspective, I am all about team building, and I know that if I treat my intellectual property (the people who walk out of the building every evening) badly, then they will leave and my company will fail. Retaining and nurturing talent is the No. 1 CEO job.
And it does seem that there rationally needs to be a distinction between McDonald’s, where people do not tip, and finer dining, where they do. Seems obvious doesn’t it?
The tip credit puzzle is now in the Ninth Circuit Court of Appeals.