The tipping point: Tip or tax?

That a gratuity or tip is meant to be given voluntarily is a notion as old as the hospitality. The word's etymological origin is probably from the Latin word gratuitus meaning "freely given". In most parts of the US it is considered de rigueur to tip and a gratuity is typically slapped on to the total for any group of 6 or more diners at a restaurant. But its seldom done across the board, as some operators in New York who have begun doing, thereby, adding to the ever-expanding tax woes of the consumer.

The Wall Street Journal reports on a slew of edgy New York hotels like the Dream Downtown, the Ace Hotel  and the Paramount charging upto 20%.  These levies are more likely to set the customers' teeth on edge if not push them over it. One of the establishments, without a hint of irony, has the words stamped in red  on the bill "18% suggested gratuities included". Another, somewhat disingenuously, suggests that it was done for "your convenience". 

The Journal notes that "by law, restaurants and bars in the city are allowed to include gratuity so long as they conspicuously post any mandatory policy prior to the consumer ordering." The article also quotes another bar owner who scrapped the "auto-gratuity" idea after imposing it saying that "staffers were averaging tips of 19% without auto gratuities." There was no mention if patronage – and tips – went up with a reversion to a voluntary practice.

Tipping has always been a contentious and at times illegal issue particularly in the US. In the early part of the last century several US states banned tipping with some like Georgia requiring a prison term of ten days and a fine of $25 to violators of the provisions of Article 57 that governed the "giving and receiving of gratuities and tips". Those laws were repealed by the late Twenties.

Even today, due to divergent state and federal laws, banquet employees and employers have not settled upon what portion, if not all, of a gratuity should go to the line workers. In the case of "regular" tips, customers, particularly from European countries, seem unaware of the fact that wait staff are not salaried and that their  wages are below the minimum wage; tips form an essential component of their expected income stream. That has been overcome by some with "suggested" gratuity levels prominently displayed on the tab. 

While there has been a lot of formal research done on consumer behavior with regard to tipping what is less clear is whether or not the levying of a mandatory tip will be viewed as a tax by customers. Also left unsettled is the direction of employee performance and motivation when gratuities are mandatory. It is unclear why a living wage/salary, as is the case for virtually all others, cannot be considered. 

Published by

Vijay Dandapani

Co-founder and president of a New York based hotel company for 24 years. Grew the firm to five hotels in Manhattan and also developed a greenfield project at MacArthur airport, New York. Speaker at numerous prestigious forums including Economy Hotels World Asia, Lodging Conference, NYU, Columbia University Real Estate Roundtable, Baruch College's Zicklin School and ALIS. President and ceo of New York City Hotel Association since January 2017.

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