The trouble with tips

Tips have been a very delicate subject in our industry over a number of years. They are the lifeblood of a minimum-wage service industry. The better people are the more they can earn, as long as they are given the opportunity to do so. They have a massive incentive to deliver great service and delight the guests with their friendly hello, their smiles, their conversation and their knowledge. When they do it is a win-win-win situation for the guest, the team member and the operator.

But several things undermine this dream. Firstly, the tax rules make it difficult for companies to know what's going on. If the company even gets a sniff of cash tips the tax rules change, so cash tips necessarily stay at arm's length. This means the tip-sharing arrangement is also at arm's length, and in the end the sharing arrangement is everything.

Secondly, while credit-card tips don't attract national insurance, many companies are confused, and slightly worried, by what they can and can't do, so they ignore tips, either to the extent that they don't do it or don't get near it.

Of course, the big danger is actually ignoring it from a legal perspective, as many companies put their heads in the tax man's jaws by allowing credit-card tips to be taken out as cash. The sharing arrangement itself is often fascinating. More often than not designed by the old-timers who want a bigger share for themselves, the newcomers get less than they deserve and the old-timers don't feel the need to work hard because they get the newcomers' money.

And to top it all is the service charge. The service charge is becoming more and more common as a result of the change in the minimum-wage rules. But who gets the service charge? Some chains give none of it to their staff, and it all goes to management. A disaster for the customer and the staff, in my opinion.

Others give a proportion to the front-of-house team. Either way the staff often get less, and it is simply a more discreet form of pricing for the operator.

So overall we have conspired to make a brilliantly simple objective complicated in the extreme, and we are in mortal danger of losing what makes our industry great.

Case Study​

Imagine the following arrangement. A new team member arrives at a busy operation and they are very excited because they have been working for a company where they keep 100% of their tips, whether they are cash, credit card, or service charge. They normally work all the busy shifts because they like to earn the most money. They are told that the arrangements are as follows:

¦ Cash tips​ The tips are shared out among the team equally, based on hours worked. At the end of the first night the team member puts £40 in cash into the tip jar, and gets back £12. This continues for the eight shifts a week they work.

¦ Credit card​. The company takes a 20% admin fee and then tips are shared out equally based on hours worked over the month. In this

case the team member earns £600 over the month and then gets £77 in his/her wage packet.

¦ Service charge​. The company takes half and shares out the rest. The restaurant uses service charge for tables over five people so the team member earns £400 in service charge in the month. They get £40.

So after working 160 hours for four weeks they have earned £1,280 in cash, £600 in credit-card tips, and £400 in service charge, a total of £2,280. In theory they have earned £14 an hour in tips.

A few years ago this would have been a reasonable expectation in a good restaurant, but they would have been paid £2 an hour basic. Overall, though, £16 an hour is a good wage that most people would be very happy with.

But in the new world they would earn £6 an hour in basic wages and then £3 an hour in extras, a total of £9 an hour. Still a decent wage, but we need to look at what happened to their motivation.

At every step in the process their motivation decreased. They know how much they have earned; they know how much the company has taken from them; they know how much others who aren't pulling their weight are earning.

The net result? They don't work as hard, service is worse, the customer loses out, and we all have to work harder at motivating and managing our team in other ways.

So, which system was right? The old one where the politicians abused us and told us we were taking advantage of our staff by paying them nothing, or the new one where they earn £5 an hour less. Clearly very obvious. But we lost that PR battle and we need to move on.

The Solution​

But what can we do to make it better? Find the right balance between the use of service charge (a given — try not paying it) and tips (to be earned).

Find the right way to share tips that motivates the heroes and rewards the supporting players. Find the right way to balance credit card and cash so that the team want the right solution for the guest, rather than driving for the solution that best fits themselves.

At the heart of this debate are two critical parties — our team and our guests. And the risk is the guest gets worse service for the host of motivational reasons described earlier.

Then our team suffers because we haven't thought through our tip-sharing arrangement, and we end up in a lose-lose-lose situation.

The Government may have started this, but we need to finish it. And just because tips aren't recorded on the P&L doesn't mean they aren't important. I was in a pub at the close of play recently and one of the first questions I heard from one of the team was: "How much is in the jar?"

And he was one of the best team members, with a very friendly hello, great smiles, confident conversation and clearly developing pretty decent knowledge.