Gratuity is a way to thank someone for everything they’ve done, and in a restaurant, gratuity often takes the form of cash. However, many customers think gratuity and tipping are the same, but they’re not, and the confusion can create headaches for restaurant owners.
While charging gratuity can increase revenue and ensure staff are paid fairly, gratuities require meticulous record keeping and may increase customer complaints. Before adding gratuity to any bill, you’ll need to understand how gratuity works in a restaurant and how it can impact your bottom line.
What Is Gratuity in a Restaurant?
Gratuity is used to thank an employee for their work. In restaurants, gratuities are usually monetary, like a tip or service charge. In addition to showing appreciation for a job well done, gratuities supplement an employee’s income.
Is Gratuity the Same as a Tip?
While “gratuity” is often used interchangeably with “tip” or “service charge,” gratuity, tips, and service charges, they aren’t the same. Gratuities are mandatory payments, while a tip is voluntary, and can be given in addition to gratuity.
Gratuities are usually a fixed amount, often a percentage of the total bill. While some restaurants add automatic gratuities to every bill, others only charge gratuity in certain situations, like for a large party. As a rule, customers don’t choose how much gratuity they’ll pay — the restaurant does.
Tips are also a fixed amount in that customers calculate the tip as a percentage of the total bill. However, customers are free to tip any amount they choose and they aren’t required to tip at all.
What Is Automatic Gratuity?
Automatic gratuity, also called mandatory gratuity or a service charge, is a fixed amount that’s added to a customer’s bill. The amount is usually a percentage of the total bill, before tax.
Is Automatic Gratuity Legal?
Automatic gratuities are legal but subject to local and federal regulations. While restaurants can add automatic gratuities to a bill without customer consent, the automatic gratuity policy has to be communicated to customers before the bill arrives, like having a notice on the website or menu.
Do Customers Have to Pay Automatic Gratuity?
Customers are required to pay automatic gratuities. The Internal Revenue Service (IRS) considers automatic gratuities a service charge no matter what they’re called, making them part of the overall bill.
Should Customers Tip in Addition to Automatic Gratuity?
Restaurants charge automatic gratuity to ensure servers are fairly compensated for their work. However, if a customer wants to tip on top of automatic gratuity, they can and should.
Can Restaurants Use Automatic Gratuity to Pay Employees Minimum Wage?
Restaurants that use automatic gratuity on some or all bills must pay servers the state minimum wage. This is different from restaurants that rely on tipping, which are allowed to pay the federal rate of $2.13 per hour and use employee tips to make up the difference.
Automatic Gratuity Charges: What to Consider
While adding an auto gratuity to even some bills can increase revenue, it’s important to weigh how an auto gratuity policy or adding service charges will impact your business. Not every customer wants to pay automatic gratuity, and adding service charges to bills could have repercussions for your staff.
Automatic Gratuity Laws for Tracking and Reporting Taxes
Because the IRS classifies automatic gratuities as a service charge, they are considered wages and must be tracked and reported accordingly. This is especially important if you only apply a gratuity charge to large parties but allow tipping on smaller tables because you can’t use gratuity to pay servers the tipped hourly rate, which can impact your labor costs.
Do Servers Like Automatic Gratuity?
Since customers have to pay automatic gratuities, servers may feel more loyal to the restaurant since adding an auto gratuity guarantees they’ll get at least the hourly minimum wage no matter what happens. Sometimes, patrons reduce a server’s tip for reasons the server has no control over (the meat was undercooked, the busser was slow to clear plates).
However, some servers may not like the “guaranteed income” because the hourly minimum wage is less than what they could make in tips. And because servers are generally the first and sometimes only people to interact with a customer, the server may be the person who has to handle a customer who refuses to pay an automatic gratuity.
If you enact an automatic gratuity policy at your restaurant, it’s also critical to ensure that policy is fair for every server. For example, if your auto gratuity policy only applies to large parties but only certain servers ever get those tables, staff may feel that there’s favoritism at play.
Do Customers Like Automatic Gratuity?
While some customers are fine paying auto gratuity, not all are. Some may feel that it’s a way for the restaurant to pass expenses on to customers who are already paying a lot for their meal. Others may not like the idea of the restaurant deciding how much to tip the employee.
It’s also important to note that many customers feel tipping has gotten out of control. While an automatic gratuity isn’t the same as a tip and auto gratuities for large parties have been applied to bills for a long time, these days customers are faced with tipping in almost any and every food establishment. This has led to “tip fatigue” with more and more diners opting out of tipping at all — including automatic gratuity.
How to Handle Customer Concerns or Complaints About Gratuity
If you charge an automatic gratuity, some customers will complain. To ensure the situation is resolved quickly, make sure the automatic gratuity policy is disclosed early and often. Add the auto gratuity policy to the website, menus, and receipts, and make sure it’s communicated before a customer books or confirms a reservation.
In some cases, this won’t be enough. So, train staff on how to handle questions and concerns by providing them with a script that addresses these issues. And empower them to offer an alternative or compromise, such as comping a dessert, providing a discount, or, in some cases, removing the automatic gratuity.
Should Restaurants Add Gratuity for Takeout and Delivery?
In general, tipping is not expected for takeout but is appreciated. However, many delivery drivers expect a small tip for their work.
So, should you charge automatic gratuity for takeout and delivery?
Service fees or automatic gratuities for takeout may anger customers. Since they’re coming to the restaurant, picking up the food, and not having a server wait on them, the automatic gratuity charges may upset them.
Adding an automatic gratuity for a delivery driver may be OK. After all, the driver is acting like a server in some respects. However, delivery drivers may not get the tip they were expecting if customers are charged a service fee. They may assume that fee is the same as tipping their driver.
Should Restaurants Add Gratuity for a Large Party?
While you may decide that an automatic gratuity policy for most tables isn’t the way to go, you may want to add gratuity for large parties. This can ensure staff who serve these parties receive fair pay for the extra work they have to do. And since large parties sometimes split the bill, it can simplify the tipping process.
Automatic Gratuity Policy Considerations
If you decide auto gratuities are right for your restaurant, it’s critical to design an automatic gratuity policy that clearly explains what the fees are and how they are applied. Here are the basic elements to include in your gratuity policy:
- Percent. Choose an auto gratuity percent (usually 15-20%).
- When it’s applied. Decide if you’re adding automatic gratuity to all tables or just large parties.
- Opting out. In some cases, you can allow patrons to opt out of paying automatic gratuity charges. If that’s not an option, clearly explain it’s a required fee and why customers have to pay.
Alternatives to Gratuity
After weighing the pros and cons, you may decide that automatic gratuities are not right for your restaurant, but you may want something more than “just tips.” Fortunately, there are two options that can help ensure your staff are paid fairly.
Tip Sharing
While tipping is very common in U.S. restaurants, not every server makes the same amount of tips, and not every customer tips well. To ensure staff are compensated for their work, consider using a tip-sharing or tip-pooling system.
In this model, employees pool all their tips at the end of their shift, then distribute them to the entire team. While this could include only the serving staff, some restaurants include back-of-house staff in the tip pooling.
Service-Included Model
In a service-included model, the restaurant doesn’t charge a service fee or have tipped employees. Instead, the pricing strategy includes a service charge in food costs. This approach makes billing customers simple, ensures service staff are paid fairly and equitably, and makes taxes and recordkeeping simpler for the accountant.
