Serious question: why add a "service charge" instead of just adjusting the price of dishes accordingly?

I suspect the reason business owners don't opt for a service charge in lieu of gratuity for front of house employees is due to payroll taxes. "Adjusting prices accordingly" vs adding a service charge would, in most cases, screw the employee and reward the business owner, who might give a slightly higher wage to his employees, but would be tempted to pocket the difference as profit.

Under the current system, so much gratuity is left unreported/underreported due to cash tipping. Business owners have no incentive to keep track of employee tips paid in cash; otherwise, they would be required to pay payroll taxes on the tips going into their employees' pockets. This is changing, as more and more transactions are conducted via credit instead of cash, so tracking is easier.

Under a service charge model, everything would have to be tracked and reported, resulting in a higher tax burden to the business owner. In the food service industry where profit margins are thin and reputations can be shattered overnight, it's tough to find a comfortable space between tax law, ethical employment practices, and keeping your business afloat.

Going into a fixed service charge model will force staff to pay more taxes, lowering their take home pay, which in turn forces businesses to either up their pay, or up the % of service charge.

Ultimately, it means more taxes for the government, primarily from people who dine out a lot.

Somewhat serious answer: Because in the US they don't like to give you real prices.

They give you an artificially low price and then expect you, under social pressure, to give a little more through tip or service charge.

Ditto for sales tax. In some countries, sales tax is expected or required to be included in the listed price. This makes cash transactions significantly simpler.

Wow, isn't it in USA? Do I understand you correctly: I see a "price" on a product, and have to manually multiply it by 1.2 (or whatever taxes are in USA) to know, what it actually will cost me?

Yes. Sales tax is levied by the state, not federally, so in every state sales tax is different and which items are subject to sales tax changes.

For example, in Massachusetts, the sales tax on most products is 6.25% so when purchasing most things you must multiply by 1.0625 to figure out how much it will cost. Most uncooked food does not have sales tax, but food served by restaurants does.

When eating at a restaurant, you're supposed to tip 15-20% on the total bill pre-tax, though a lot of people tip on the post-tax price depending on how cheap/generous they are. Many restaurants calculate the tip for you, but certainly not most.

Oh it's worse than that, in the USA it vary by state (even by city I think) and by type of products so you have to apply a different multiplier each time

In Minnesota for example, there's a state tax, and starting in 2000 additional optional taxes for the county and city. People don't bother calculating it, they just wait for the bill and look to see what percentage was applied if they're curious.

Yes.

In the US if you go out for dinner and order the caesar salad (listed at $6), the skirt steak (listed at $15), and a glass of the house red (listed at $8) you will be presented a bill for $29 + sales tax, in NYC for example the bill would come to $31.58. Then you will be expected to leave between 15% and 20% on top of that as a tip, so generally you would be expected to pay $36-$38 for that meal.

Yes. In addition, the tax rate varies by state, by county, by city, and also by sub-city zones (1 mall in the city I went to college has an additional city tax that only applies to that mall).

In theory the merchant can include taxes in his advertised price, nothing prevents him from doing this but it is quite rare.

It also makes raising sales taxes more opaque, and reduces the political accountability (and cost) for doing it.

In Germany sales tax changed once in the past 20 years. Everyone noticed it.

In the US it's set at the state and city levels. It varies so widely from city to city that unless you're a resident you'd never notice a change.

The changes are frequent, too. Since they're so localized, they're often heavily involved in local politics. Recently my city was very divided over a half-cent tax hike to build a better high school.

In Michigan, the sales tax rate is specified in the state constitution and can only be changed by holding a statewide vote. The rate last changed in 1994 and 1963 (1963/1964 was when the modern constitution was put in place). A proposal to increase it failed this month, with no votes from 80% of people that bothered to vote (~20% turnout).

It would be interesting to see a survey of what it takes to change the rate in various states.

Michigan has a single tax jurisdiction, which specifies the tax rate.

In other States, like WA for example, sales tax is a composite of jurisdictions: State, County or City, Special Tax Jurisdiction.

There is a graphical representation of Tax Jurisidictions in the US: http://www.taxrates.com/calculator/

Note: I work for the company.

It's far better than having no idea what your items will actually cost at the checkout.

I remember walking into a McDonalds somewhere in the US deserts, and ordering three mcchickens off the $1 menu. A cheap way to get lots of biomass when travelling on a shoestring. "Certainly sir, that'll be $3.24". But it's 3 items... off the $1 menu... which should be $3. I honestly think that half the hot air around taxes in the US is because the mechanisms for actually handling them are irritating. Lots of loose change, ridiculously complex tax environments for accountants, inability to know beforehand the final price of something...

Back here in Australia, if something costs $5, that's it. It doesn't matter to you whose cut goes where. You want the object, it's $5. Not $5.40, discoverable later in the chain. The tax in this system is less opaque, because it's right there, included in the price. It's not something that suprises you at the end as an irritating thing making the process more complex.

In any case, when you buy something, no-one complains that the retailer made 20%, the distributors made 30%, and the wholesaler made 40%. People only whine about they government's 10%. Most people are utterly clueless about which business parties get what sort of cut (witness the endless complaints about online app stores 'stealing' 30%...), so why should specifying how much the government makes be special? If your receipt instead told you how much the wholesaler made, or your system added on the wholesaler cut after the sticker price, everyone would be complaining about those greedy wholesalers.

And, as others have said, sales tax certainly has accountability. Australia's GST has been 10% since it was introduced in the mid-90s (replacing a confusing hodge-podge of existing sales taxes). It hasn't changed, and the political parties fear changing it because it is a huge political negative to do so.

I was, frankly, shocked when I went to Dallas and discovered I had to pay 30% more than the price on the menu due to a combination of tax and tip.

Ditto for phone plans. Base price + unknowable amount of fees

Amen. In Italy and France (probably elsewhere as well), you maybe tip a percent or two if you really think it's deserved; albeit, tourists are ruining that to some extent. But fair salaries are baked (or cooked) into the prices on the menu and it's considered a respectable long-term career to be in the food industry.

I'm not for worshiping everything Europe does, but this is the way it should work.

Here in Sweden tipping is virtually nonexistent. I have never tipped in my life.

Funny. I'm also in Sweden and most people I know tend to either leave the small change on the bar or round up to the nearest reasonable round number when paying by card.

Not to be confused with "Swedish rounding" (http://en.wikipedia.org/wiki/Swedish_rounding) which is the result of low denomination coins being taken out of circulation.

I live in Sweden and I usually tip between 4-10% (dinner in real restaurants with table service). Nothing if it's bad, or during lunch. At a bar, I'll probably just leave the change or I might tip up to 10% if I had a really good time.

I think that is the argument the article makes, although you don't get to it until the last paragraph: It's the responsibility of business owners to keep their kitchen talent out of the cold. In other words, just pay workers what they are worth and don't pretend it's a tip or anything extra. It might indirectly make dishes more expensive.

Service charges can be adequately split between all employees, whereas an increase to the price of a dish will typically just result in a larger tip to the server that is not split to other parts of the restaurant. Tipping in general relies on a lot of "good actors," between customers determining what they really want to pay for a meal to servers correctly reporting what they receive and tipping out accordingly. A better model is to tell you directly what you're going to pay, and you shouldn't feel compelled to pay any more than that amount.

Uber makes a big deal of this, drivers have always protested when I offer a tip. Taxi drivers, on the other hand, occasionally make noise if I just pay the amount on the meter.

So you have to tip taxi drivers in US?

Canada. You don't have to, but it often seems to be expected.

EDIT: if you fail to tip a driver, it's unlikely that there will be consequences for you. Failing to tip at a restaurant you frequent could affect your service in the future.

Well, It's twisted in my opinion. I get a service, but I can't know exactly how much it costs pre-service, and the outcome would be based on "how both parties feels after".

If I don't feel the service is good, I pay less. But this means, I will not be able to get better service ever again.

Tipping should be a reward, an incentive. I'm not the employer. Waiter/waitress is not on my payroll, I should not be the one thinking about their take home pay.

Exactly, especially considering that tipped positions are payed drastically different depending on what state you're in. You shouldn't have to know the employee compensation laws of the state to know whether someone is making a decent wage by serving you.

Psychology. If you adjust the prices, people will maybe perceive the dishes as being too expensive. However, if you keep the prices low and add a "hidden" (as in people need to calculate themselves before ordering) service charge, as soon as the service charge is accepted in general, you'll be profiting more off it than otherwise.

It makes you uncompetitive with restaurants who hide the true cost of the meal and service.

I used to be a cook in a former life. I think I was making something near that in the 90s (maybe $13.50, definitely > $11). I suspect he's being dicked.

The waitrons we're bringing home upwards of $200 cash nightly, which inspired my career change.

I cooked for a little over a decade all said and told. Eight of those ten years I made less then $10 bucks/hour. Food is a difficult thing to make money on in the USA. Without margin, wages cannot increase. Last time I checked margin in the food business was less then 3% of total revenue. let me say that again, 3%. It MAY be worse now. Mass production is the ONLY way to stay afloat for a food business. Thus employees that are not a part of the service portion of the business, feel the squeeze.

To fix the problem, look no further then COGS.

1. Smaller menus (less margin in the trash)

2. Aggressively seasonal selections (cheaper then any other food)

3. Be a part of the community you are serving (intangible but sticky customer base)

4. Pair down customer capacity (smaller team = more hours per employee)

5. Salaries instead of hourly (cheaper, longer term employees)

6. Add the frickin 5% to that $30 plate of food

7. Consider limited hours (staying open 16 hours is stupid and wasteful)

I think that to open a restaurant you either have to be naive or incredibly passionate. Most restaurants fail, and many of those that "succeed" are just getting by. That seems a pretty clear signal that the market does not want me to open a restaurant, and I'm happy to oblige.

To think that I could succeed without doing something fundamentally different than those who have failed before me would certainly be naive, unless I am truly a culinary prodigy.

That is simply not true. People eat out more today then ever before in the past 100 years in the USA based on income.

http://www.forbes.com/2006/07/19/spending-income-level_cx_lh...

Food carts are a perfect example of COGS in action. Coffee places are also an example (SBUX, stumptown, etc). Highly specialized businesses selling items at the best balance of COGS and quality.

Food carts and small specialized brick and mortar businnesses are succeeding because their COGS are far lower then your average place.

Most resturants fail because of their initial COGS at startup and because their food/service/merketing research generally sucks for where they are. Remove the service aspect, specialize, reduce cogs, make a living wage.

This is great advice!

I assume you mean this? http://en.wikipedia.org/wiki/Cost_of_goods_sold

Yep!

I suspect he's just working in the wrong restaurants. According to indeed.com, the average salary of an executive chef in Seattle is $54k, with a high of $83k. Time to look for a new job, and either negotiate a huge payrise or tell them to stick their $15/hr job.

Me too, I cooked for a little under 10 years never broke $14 an hour (east coast near philly this was 3 years ago) while a 19 year old waitress would complain that they only made $100 for 3 hours of work.

Because they knew that the night they made $100 in 3 hours was the night they would receive the largest tips. The other nights of the week would be even less if not a fraction of it.

No, because they normally made $200 for 3 hours.

The tipping customs in the US mean that table service restaurants are a strangely inflexible business where you need to pay one class of employees -- waiters -- 13-17% of gross revenue no matter what. And in some senses they aren't even your employees because you don't fully control their compensation.

There's nothing necessarily wrong with that model, but it'd be nice if restaurants could experiment with other choices.

There are a bunch of US restaurants that do service charges instead of tips. Alinea and Next, two of the best restaurants in the country, do this.

Are you at all familiar with the compensation model for employees at those restaurants? In particular, for front of house is it flat or percent of sales based?

I seem to remember an article when the Next website was launched, but can't seem to find it now ...

I do take your point though that things are getting somewhat more flexible at the very top of the industry. Hopefully that will filter down.

Living in a country where tipping is not a big part of the culture, I must admit I've always found it one of the stranger customs in the USA.

I found the series of articles, "Observations From A Tipless Restaurant" was a really interesting analysis.

http://jayporter.com/dispatches/observations-from-a-tipless-...

As a software engineer with the same career length as the author, it really hurts to read things like this and realize our respective pay is so different for what feels like arbitrary reasons.

I'm a part owner (one of hundreds!) of a brewpub in Austin called Black Star. It's cooperatively run, both the restaurant side and the organization itself. One of our core principles is to pay each member of the staff a livable wage, and to not allow tipping in the brewpub. It's been very successful, and I hope something that will spread.

A bit about it here: http://www.blackstar.coop/blog/2015/5/4/black-star-co-op-ups...

You can get involved with Restaurants Advancing Industry Standards in Employment (RAISE) here: http://rocunited.org/our-work/high-road/raise/

Is it just me or does this guy never give anything close to a coherent explanation of his point? Why does he want us to keep our tips?

The existence of people with more (money, cars, sex, name it) is a great consternation to some people.

"And Affordable Care Act or not, the annual tax penalty is far more affordable than buying health insurance."

Doesn't anyone else find this to be a concern? I wonder how prevalent this is?

I read "I'm Tim Cook" and I thought this was going to be about Apple Pay at restaurants... ok.