Ithaca, NY, Although voluntary tipping seems to be the rule for service businesses, several operators have shaken up their industries by dropping voluntary tipping. For instance, the restaurant business took notice last year when Thomas Keller instituted an automatic 20-percent service charge at his Per Se restaurant in New York. One year earlier, Holland America rocked the boat by eliminating its longstanding tipping policy in favor of daily service charges.
“The lesson from those decisions is that tipping should not automatically be the default policy for service businesses,” suggests Michael Lynn, a professor at the Cornell University School of Hotel Administration. In a new report from the Center for Hospitality Research, Lynn compares the advantages and disadvantages of voluntary tipping with those of service charges and service-inclusive pricing. The report is available at no charge at .
“Tipping may not be as advantageous as managers seem to believe,” Lynn said. “What I’ve done is to identify nine factors to consider in determining what is the best way to cover the cost of service employees. I cannot advise an operator which policy is best, but I can frame the analysis.”
The report suggests that the principal benefits to hospitality firms of voluntary tipping are that it lowers nominal prices, increases profits through price discrimination, motivates up-selling and service, and lowers FICA tax payments. However, tipping also motivates discrimination in service delivery, gives servers surplus income that could go to the firms’ bottom line, increases the risk of income-tax audits, and opens firms up to adverse-impact lawsuits. The alternatives to tipping (i.e., service charges and service-inclusive pricing) have their own sets of costs and benefits.
Lynn suggests that the decision of whether to permit tipping or not is worthy of reconsideration, contrary to what hospitality operators might believe. “Consumers say that they prefer guaranteed server wages over tipping, and that they prefer tipping over added mandatory service charges,” he said. “But those preferences do not always seem to translate into actions. In other words, operators should not worry that their customers will end their patronage due to one policy or another. Instead, they can base their tipping policies on considerations of the issues discussed in this report.”
About The Center for Hospitality Research | A unit of the Cornell School of Hotel Administration, The Center for Hospitality Research (CHR) sponsors research designed to improve practices in the hospitality industry. Under the lead of the Center’s 46 corporate affiliates, experienced scholars work closely with business executives to discover new insights into strategic, managerial and operating practices. The Center also publishes the award-winning hospitality journal, the Cornell Hotel and Restaurant Administration Quarterly. To learn more about CHR and its projects, visit .
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Joe Strodel
CHR
