LA Chef issues- tipping, service charges and USHG’s Hospitality Included

(Originally published March 16, 2016 on Examiner.com).

‘Yeah, no tip” replied the Uber driver.

After using Uber for the first time last year in Denver, as I’m wont to do, I queried further. The Uber driver explained that in order to drive he needed to maintain a minimum score based on customer reviews. He was prompt, and amenable so consequently when I received a review request with my receipt via email, I gave my driver five out of five stars.

In New York City, Maple also went to a tip-less model for their food delivery service. Here too the customer responds to a request to review the delivery driver and the service when the customer receives his or her receipt. Both Uber and Maple have taken businesses where tips have historically been part of the service model and have done away with tips. So feedback about either the taxi or delivery driver’s service isn’t measured in tips but rather via a scoring system which is used to evaluate the performance of the drivers.

In restaurants, according to Sabato Sagaria Chief Restaurant Officer of Danny Meyer‘s Union Square Hospitality Group [USHG] based in New York City, guests view tipping as a way to give feedback. This is something Sagaria’s group heard repeatedly when they held town hall style meetings with different groups of guests, employees and industry people prior to implementing their “Hospitality Included” program at one of their restaurants, The Modern. Though they also found out during the meetings with guests that a disconnect existed between perception and reality since a lot of their guests knew very little about how compensation worked in restaurants. Many of their audience incorrectly thought that either the gratuity left for a server goes entirely to that server or that the back of house (kitchen staff) was included in the tip pool. USHG held these town hall meetings because they felt that education and transparency with every stakeholder was, and still is, necessary for their all-inclusive program to be successful. As Sagaria stated, “Our guests now understand the why whether or not they completely support it.”

Unlike in Seattle, San Francisco and here in Los Angeles, utilizing a service charge was never an option for USHG since in New York City and state service charges aren’t allowed and subject to stiff penalties ($500 per transaction). Plus from USHG’s perspective as well as that of many other operators, guests don’t like service charges. Again the primary reason is because guests view tipping as a way to give feedback and as a way to motivate service. Thus having to give eighteen or twenty percent as a mandatory charge takes away their discretionary power plus, in their mind, doesn’t provide an incentive for the wait staff because the wait staff will still get eighteen to twenty percent regardless of the quality of service provided. As a side note, all of the restaurants in the Sprout group that utilized services charges, except for Otium, stopped using services charges. Why? According to one of the chef owners in that group, the guests hated services charges.

The U.S. Ninth Circuit Court of Appeals recently overturned lower district court decisions allowing for tip pools to include back of house employees (kitchen staff including line cooks, dishwashers, etc) in non-tip credit states including California. Though prior to this decision very few restaurants included back of house employees in their tip pools due to the legal ambiguity caused by contradictory different state and federal labor laws. With tips only going to front of house employees (servers, runners, busboys, bartenders) to whom these tips are paid, a huge problem in the industry has been the inequity of pay between the front and back of house especially in very busy fast fine, fine casual , and fine dining restaurants where servers can make annually sixty to eighty thousand dollars. According to Steve Sansom, chef owner of Sotto, and the forthcoming Rossoblu, well paid servers turn down management positions since managers make less money and have more responsibility. Managers are excluded from participating in tips pools.

The primary advantage with service charges over tips is that service charges are the property of the owner- not the property of the employee. Thus the owner can choose how to distribute the service charge accordingly and more equitably between front and back of house employees. Though some guests are circumspect of management. These guests are concerned that service charges may not end up going to the staff. To assuage these concerns in Seattle and Washington State, restaurants that implement service charges must allocate by law specific percentages of service charges to front of house staff and clearly state how exactly service charges are being distributed on their menus. Not having the option of a service charge, USHG chose to use an all-inclusive pricing model “Hospitality Included” first at their restaurant The Modern.

USHG’s model though simply isn’t increasing pricing to offset lost tips or service charges. Their “Hospitality Included” program, looking toward Uber and Maple as precedents, allows for customer feedback and includes revenue sharing. Currently USHG has been low tech. They’ve simply expanded their use of comment cards to get ratings (filling in stars) and feedback from customers at the end of meals. Though USHG’s IT department has been looking for ways to have the transaction and feedback go together with software applications. As Sagaria noted, “We’d love to have a tech solution that takes into account the payment that ties into our point of sales and reservation systems, but these threes technologies currently don’t always play well together and have been segmented within a restaurant. Though in the next couple of years we’ll see more movement in the mobile payment space and that’s one thing our tech team is working on.” USHG is also exploring payment at the table since with new EMT credit cards a lot of liability has shifted to the restaurants including for card transactions away from the table.

Currently with tips Sagaria stated, “Whether you tip 0% or 100%, the operator rarely has any idea that has happened and if so why it did. So the operator doesn’t know how to emulate or correct that experience for others.” Using feedback cards and future IT solutions, the operator will be able to trace back comments to specific experiences. The feedback is also being used for employee evaluations. So just like with Uber, the future IT solution will provide not only a way for customer feedback, but also as an incentive to provide better service. However, with the elimination of tips, this feedback isn’t the only tool being used to incentivize good service.

Since the prior tip model meant front of house staff had a good night when the restaurant had good night, USHG felt maintaining the connection between their staff’s performance and the overall performance of the restaurant was important. Thus with their move to all-inclusive pricing, USHG created a revenue sharing model to further reward excellent service. USHG’s model allows the front of house staff to benefit from driving the restaurant’s top line. They also decided to base revenue sharing upon weekly, rather than daily, revenues. So instead of better servers getting better days, clearly defined server levels were established (server levels one, two and, the highest, three) as a way to determine distributions. Each level has certain criteria and expectations as well as pay. Plus the higher the level the higher the revenue share. By clearly defining roles and expectations, servers know exactly what they need to do to progress to the next level or transition to management opportunities.

With the all-inclusive model, without tips operators can also distribute pay more equably to the back of house. This is exactly what USHG has done raising the pay scale floor for back of house employees up with line cooks already making fourteen to eighteen dollars ahead of theminimum wage increases being phased in New York City. Danny and USHG felt it was important to lead on wage issues rather than have fast food franchises pay higher wages than wages paid to aspiring well trained cooks. Fast food operations by 2018 in NYC will be required to pay a fifteen dollar minimum wage. In establishing higher pay levels for back of house employees, USHG also mapped out how you go from fourteen to eighteen dollars. Providing such a road map for both front and back of house staff, USHG believes is essential to making the food service industry more professional.

With rising wages due to minimum wage increases, sticking with the tip model creates even more inequity between front and back of house. Why? Because to offset higher wages, to maintain the same standards, operators still have to raise menu prices. With tipping based on a percentage of higher price points, tip amounts would go up and these higher tips still can’t be distributed to the back of house staff.

Going to either a service charge or all-inclusive model does have some negatives due to higher revenues particularly foregoing federal tax credits for states with tip credits, higher payroll taxes and, due to higher revenues, higher rent for locations paying percentage rents. (Credit cards companies also profit from higher price points with all-inclusive pricing). However, USHG has had conversations with every landlord where one of their restaurants is located and has found that their landlords are willing to work with them. More importantly, thus far, USHG has seen a large increase in applications they’ve received at The Modern, plus back of house turnover is way down. Granted, they’ve had a short period for evaluating their all-inclusive model, but still they’re confident and moving forward just recently expanding ‘Hospitality Included” to another one of their concepts, Maialino at the Gramercy Park Hotel also in New York City.

USHG decided to implement their Hospitality Included program on a restaurant by restaurant basis thus far, since they’re closely monitoring their program every pay period. They’re also not just raising prices across the board. For example, chicken is not marked up the same as beef of fish. Some items have more elasticity in their price than others. Some items are more commodity like and thus may not be able to carry a higher price point. However quality and portion sizes are staying the same since USHG is not willing to compromise either quality or value. However these mark-ups pretty much offset either tips or service charges, so the perception of higher price points are just that a perception.

The key thing to remember and reiterate is that USHG’s model with its feedback and revenue sharing components finds a better way to allow for customer feedback, motivate front of house staff without tips, and more equitably compensate back of house employees. In doing this USHG is making the industry more professional and providing other operators an example to emulate.

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