Ethics Quiz: The Tip-Sharing Plan

Last year the Trump administration announced a proposal to amend a 2011 regulation prohibiting employers from collecting server tips and distributing them to anyone other than servers. If the new proposal is adopted, employers could theoretically use workers’ tips for  any purpose, as long as the workers who received the tips were directly paid at least the federal minimum wage of $7.25 an hour. The restaurant industry opposed the Obama regulation, and argues that more freedom would allow employers to share the tips of waiters and waitresses with other workers like busboys, greeters, cooks and dishwashers.

Labor advocacy groups and former Obama administration officials counter that the regulation would legalize employers stealing income from workers, since they could theoretically pocket the tips.

Your Ethics Alarms Economics/Labor/Human Nature Quiz of the Day…..

Is the proposed regulation fair, responsible and ethical, or not?

How hard is it to write into the regulation that the restaurants must distribute tips to  non-management employees? As a diner, I have often felt that my server was getting a large tip because the food was well prepared, attractively presented and the silverware and china shined. Why are the critics so alarmed by this proposed regulation change? From what I’ve read, it sounds like anti-management bias to me.

“There is a lot of wage theft, tip stealing in restaurants and other sectors where workers depend on tips,” the New York Times quotes Christine Owens of the National Employment Law Project as saying. This would be one more reason for employers to take workers’ tips and do whatever they want to do with them.”  One response to the proposal was a study by the Economic Policy Institute, a progressive think tank,  that estimated that the change would cost current tipped workers $5.8 billion a year in employer snagged tips, and used “standard economic theory” to predict that if the regulation took effect, and employers that share tips with the untipped workers, they would then reduce the base pay. I don’t know how something using “theory” to make a prediction can be called a study. What’s being studied?

“To estimate the transfer from workers to employers, we first estimate the total amount of tips earned in the U.S. economy, and then we estimate the total amount of potentially transferred tips (the amount of tips that employers could legally take as a result of the rule). Finally, we estimate how much will actually be transferred to employers by estimating the share of potentially transferred tips that would be pocketed by employers as opposed to being redistributed among workers (either workers who received the tips or other workers in a tip pool),” says the Institute. That’s a lot of estimating, more than enough to guarantee a worthless number built by biases and given false validity by the illusion of detail. I’d call the “study” an ideological exercise in bootstrapping a political agenda. I’d estimate that if customers find out that their tips are going to the owners, they not only stop tipping, the consider eating somewhere else. I’d estimate that establishments that cheat their workers out of tips end up with less desirable workers.

I remember how before going to a four -star restaurant D.C. for the first time, I researched what was expected regarding tips. One source I consulted said that I needed to tip at least four employees. Tipping is inherently chaotic and unfair, but this seems like a classic dispute over whether businesses should be allowed to work out better systems that include all workers through experimentation and the marketplace, or whether the government should dictate tipping policies under the assumption that business owners are crooks, using the kinds of rigged “studies” that make climate change models seem persuasive by comparison.


32 thoughts on “Ethics Quiz: The Tip-Sharing Plan

  1. My understanding is that, in some places, servers collect the tips and “tip-out” to the others (kitchen staff, etc.) at certain rates. If that is the culture (I have never been a server; not my skill set), why is a server trusted more than the employer to be fairer than the employer in tipping out?

    • With the rise in restaurant prices I have seen in the past six months, I had just assumed that management had already started to build-in higher prices in part so that their revenues would pay more to the non-server staff.

      Maybe it would be more fair if the check showed not only the itemized list of food and beverages ordered, and the server’s name, but also the name of the chef, plus the names of additional staff who were instrumental in delivering the customer’s dining experience. Then, the customer could write his or her choice of designated tips to the appropriate staff…

      But yeah, I don’t like that idea, either, and I’m pretty good at math.

    • I used to work at a fancy restaurant and that was the system. The percentage of tip out was based on total food sales, so you couldn’t cheat. And, if I received really generous tips, I was incentivized to tip more because I wanted the hostess to seat good customers at my table, my drinks up first, my tables bussed quickly, etc. I would never work at a place that pooled tips because I was quite frankly better than most servers. I was quick, friendly, and rarely made a mistake. I could up sell my customers on liquor and food which meant more $ for me at the end of the night. And you people think I am anti-capitalist! Chefs aren’t tipped and they make a lot more than $3/hr., and although it is a hard job, at least their revenue is consistent. Many managers are well-paid too and often double as hosts or bartenders. I would be pissed if they had the ability to collect my tips. The real solution to this problem is to pay servers a living wage and just have it incorporated into the price of food.

      • I worked as a dishwasher at a fairly upscale restaurant in Louisville many years ago. The waitresses tipped out the busboys but not dishwashers. On the other hand, we could usually snag the partially full bottles of wine while the busboys were unloading their trays.

      • “which meant more $ for me at the end of the night. And you people think I am anti-capitalist!”

        I don’t think *you* are *necessarily* anti-capitalist.

        I do think this sentiment is shared by MANY anti-capitalists who become remarkably pro-private-property and pro-keeping-their-wages just as soon as anti-capitalist policies start touching THEIR earnings.

      • I worked as a bus girl when I was 15. My waiters and waitresses tipped me out and tipped me well! That’s because I worked my tail off. They could trust me to be polite to their diners, and turn their tables over in a flash. I’d put in a 5 hour night and walk home with a major wad of cash in my pocket.

      • My experience as waiter in college was similar to yours but led me to the opposite conclusion. I worked really hard to provide the best service I could and I WORKED all night; no hanging out in the smoking area or sneaking free drinks from the bar for me. If I had nothing to do, I would stand in the vicinity of my tables in case a customer needed anything. I made really good tips which, according to some of my fellow employees, was because I was a man. Paying all servers a “living wage” would just mean that people who wanted to work harder and be rewarded for it would be unable to do so.

        • I don’t know. If people were paid a living wage, it would attract better people to the industry. Under-performers would be let go by management.

          Look at the problem with education. Sure there are a lot of dedicated, wonderful teachers, but many of them have a spouse that covers the bills. But we have a great many who are teachers because it was the best job they could get. I would have been a teacher if it paid more.

          • Totally agree, Spartan.

            My father was a teacher in Texas for 30 odd years, at a time when Texas teachers were paid poverty wages. He had a bad teacher growing up, and decided he could do better. The financial cost was staggering, but he enjoyed what he did (for the most part) and figured that was the trade off.

            He sometimes made more driving oil hauling trucks 2 and a half months during the summer than during 6 months teaching.

            My wife is a teacher: the hours versus income make her pay less than minimum wage. Without my income she could not afford a car, a house or our kids. With hers we provide little ‘extras’ (the occasional movie, dinner out, summer camp for kids, etc.)

            Our son is looking at teaching music in public schools, as his talents and interest lie there. He also has a somewhat serious girlfriend, and I have given him the heads up that he cannot raise a family on the going rate for such teachers.

            My dad actually threatened me during high school: I could be anything but a teacher. ‘They just don’t make enough’

    • Because we all know that employers are evil capitalists that hate their employees…

      They have NO incentive to be good managers and take care of their people to ensure they keep quality and dedicated workers around…they ultimately just want to screw the consumer out of money anyway and don’t care about their experience either…

    • This is common system in strip clubs. Customers pay the dancers in tips, and the dancers pay a house fee to cover the club’s costs and they tip-out the DJ, bouncers, house mom, etc. to cover their services. Restaurant service is not as personal, but it still might make sense in some restaurants. E.g. servers might want to tip the person who buses their tables, or tip the kitchen staff for a fast, well-presented meal.

  2. Unrelated: I read where a couple of agents are exhorting MLB players to boycott the spring camps. Evidently there is a glut of free agents – which of course, means the owners are colluding AGAIN (I’m being sarcastic).

    How I wish there was an effective MLB Spectators’ Union! (And the owners were the agents for that union.) It makes no sense for free agents’ salaries to escalate faster than spectators’ wages. What do the disgruntled free agents expect? To make more money, faster, every year, than anyone and everyone else makes who brings revenues for the players to be paid?

  3. Last December I had this very discussion with my son’s brother in law who owns and operates two successful restaurants in Phoenix and Scottsdale, respectively. He said he’s having a problem compensating line chefs when they make fifteen dollars an hour for ten or so years of effective, loyal service while servers may multiples of that right out of the box. I asked him why tips couldn’t be pooled and he said redistribution of tips would be considered taxable events. He said he was considering increasing menu prices by twenty percent and posting a “No Tipping” policy on his menus. He said it was a major industry problem.

    My reaction what what the hell is the IRS doing?

    As usual, thanks for posting on this, Jack. Who else is bringing this sort of thing to the fore? No one.

    • Tips are taxable income. And if they are redistributed, they are still taxable. The IRS principally focuses on credit card tips, but sometimes they go after servers at high end restaurants generally. Cash tips are harder to trace and rely on self-reporting.

      • Of course they are. But should the waiter have to pay tax even if he or she turns around and hands part of it on to other people on the team? That’s just crazy. You can’t pool tips and then have them distributed and deemed taxable income by the ultimate recipient. That’s just dumb.

        What’s the IRS’s position on tips at a car wash that are put into a box at the point where you walk to your car? Income to the car wash at that point and then income to the workers once it’s distributed? I wouldn’t be surprised. Greedy overkill.

        This is why pols are so blase about spending money. They know that as soon as a dollar changes hands five or so times, they, the government, have latched onto that entire dollar.

      • Is there a place where I can research IRS cases? Like just how often the IRS dedicates a highly paid government employee to prosecute a waiter for ostensibly failing to pay what is probably less than a $1000 in taxes?

        It may be purely anecdotal, but I’ve only ever seen IRS cases pursuing the mid-range to high-range tax payers, who may not have their ducks in a row on taxes, and when they make mistakes, end up being “profitable” pursuits for expensive IRS agents.

        Latest numbers I saw on a google search indicate that for incomes less that $200k, the IRS audits less than .8% of filers.

        • Good question, but another factor is the compliance burden faced by conscientious people. Would a restaurant operator really want all her employees not reporting tips or want to face an audit if she was pooling tips and ended up paying taxes and fines and everything else? Just not very prudent. And stressful. I think a lot of small businesses make a genuine effort to run above board, compliant operations.

  4. My wife worked as a server (many moons ago) and tip sharing was verboten. The hourly salary for a server was a couple of bucks, as they were exempt from minimum wage laws. Tips paid the bills.

    New laws have altered that dynamic in the decades since then. However, this latest one seems a bit out of order to me. The wait staff is the tip of the spear, so to speak. Yes, like any army, they need the support staff, the cooks, and so forth. Any competent eatery will have those positions, and will pay what the market will bear. Servers make or break the night, though.

    They take the blame for ANY problem, even those only existing in the fevered imaginations of their guests. They deal with the public, who can be ‘less than polite’ and sometimes downright rude. Certain establishments can even involve physical harassment (the butt pinching has always been rude, but in a bar that serves food, can still happen.) If the server is off that night, the customer experience (and return visits) will suffer.

    The reason a server puts up with all this? The ability to make great tips!

    A winning personality, a warm heart, and agile mind may not help in many low paying jobs these days, but in a server they make the customer experience one that can overcome mediocre food and other negatives in an establishment. Once extra money no longer incentivises this sort of person, ANYONE can work that job, with predictable results. What do we think about the minimum wage fast food worker who obviously couldn’t care less about the customer? Everyone has experiences with such.

    This type of person can take a low skill job and make a living, pay for college, or raise a child. Tips make that possible. Take that away, and one more avenue of self reliance will be gone in our country.

    The law is unethical and stupid to boot, IMHO.

  5. I would be opposed to tips going to anyone but the employees. Tip-sharing is allowed, and I know a lot of bars utilize that arrangement for obvious reasons. The best restaurants I go to allow the servers to retain their tips for the simple reason that such policies attract the best servers, who enhance the experience for the customers. I have never really heard of “tipping out” that Spartan described above mentioned, but I have always suspected it existed. It makes perfect sense.

    I tip the server. I don’t tip the chef, I reckon that his skill set is worthy of a higher pay grade, and if not, he should seek work at a place where his skills are valued. I don’t tip bus boys, theirs is an entry-level job that they should be doing well in order to get out of that job and get a better one. I don’t tip host/hostesses/matre’ d generally because of a brief interaction with little opportunity. I don’t think bribing such people to get a good seat is ethical.

    So in sum, my tips are for the server(s) who attend to me. My desire is for every penny of said tip to go to them. If they want to share a la Spartan above, I’m totally fine with that. But if I patronize a restaurant that confiscates all or part of the employee’s tips, then I’m not tipping in that place, not one red cent.

    • I’m not sure tip sharing is allowed, Glenn, in the sense it can’t be done without complicated tax implications. I think the server would have to declare the income and then deduct the portion “shared” with other employees and then those back of the house people would have to declare it as income. Who knows, the servers might be deemed by the IRS to be employers of back of the house people and have to withhold and insure them, etc. The operator I spoke to had no interest in skimming tips. He just wanted to be able to use part of tips to compensate back of the house people. Which seems equitable to me. Servers would have nothing to serve if it weren’t for the back of the house people.

      • I think, outside of a company mandated protocol, convention is that tips are pay directly to the waiter and the waiter only. In this case, duty to pay taxes on ALL received tips, falls on them. If the waiter then chooses to share, on their own, those tips, that would fall under gift tax regulations, which are still the responsibility of the giver (the waiter).

        In the exceptions, where a company mandates some other tip-disbursing system, I would think the onus on paying taxes then falls on each individual who receive that money as well as any applicable regulations for the company.

  6. Before I started workin in theatrical supply,I spent from 1979-1988 working as Waiter head waiter and bartender the first restaurant I work for which the Officers Club on one of the bases my family was station we weren’t required to tip out there, I suspect the reason for this was racism as the waiters were all white at the time and the bus Stoff and back of house staff was not. I hope things of changed the second restaurant they started working for 1982 I had kept the hostess and the busboys the next one they added the food runner and bartender it was always a percentage of my tips based on sales I always did it based on the tips I actually had as I need a lot more then then my sales indicated then my sales indicated. That Said My tables were always filled first, bused first, food Run out my section 1st and my drinks were up first funny how that works ! The thing is not all waiters were able to juggle their tables as well when I worked for Chi chi’s there were three of us given one dining room the corporate insisted needed 5 waiters. Susan, Maria, and I could handle more then the four tables that the chain allotted each waiter and the manager bent the rules to keep us happy! The problem with it not being in the waiters control is then there is no motivation for the waiter to be in control of their section. Restaurants with tip pools notoriously have bad service on average because of this. Having worked as a head waiter I had seen the differing levels in skills and the best waiters were always the highest in sales and tips, as well as the happiest guests. As art waiter is happy to tip out the support staff as it increases their revenue, I have watched a waiter stingy at tip out, only clear 8 tables in a night my average was 21. The concept of tipping is capitalism at it’s finest. I kept moving up to finer dinning establishments to increase my take, the last place I worked, fired me because I was gay, stupid move. I was their highest selling waiter. I have seen places that do tip pooling it never works.

  7. I’d rather tipping be abolished, server wages raised, and the prices of meals raised. Why are customers expected to pay the wages of any of the restaurant’s employees by tipping? It’s the restaurant manager’s responsibility to make sure the employees are remunerated adequately for their labor, not mine, and I shouldn’t be expected (as I am now) to pay a tip in addition to the stated price of the food plus tax. It also doesn’t make sense that a customer should tip the server $2 on a $10 sandwich and $4 on a $20 steak, when there is little appreciable difference in the server’s labor.

    • Great points.

      “I’d rather tipping be abolished, server wages raised, and the prices of meals raised.” Where the industry may be heading. A little scary for the pioneers though, competition-wise.

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