Tips, Gratuities and Service Charges
A little something extra. For the effort. I’m talking about tips and tipping. Not all small businesses have any forms of gratuity associated with good service, but many do. Food businesses. Bars and clubs. Tour guides. In a nutshell, gratuities of some form or another play a part in the compensation of employees in many of these types of businesses. If your business does involve gratuities, should there be an established policy in place when it comes to tips and other forms of gratuity? I do not believe there are right nor wrong answers because every situation will probably call for its own solution, but perhaps a little discussion on the issue will be of benefit to some readers of The Small Business File.
There are many different approaches that could be taken by small business owners when it comes to how tipping should be handled. For the sake of simplicity, let’s break things down into two camps. Those that have a policy, and those that don’t. In cases where tips are an infrequent part of the compensation of an employee, there probably isn’t much of a need for a policy on tips and gratuity. If one customer in a couple hundred is simply overjoyed with his/her service received and offers a small tip out of appreciation, then there’s hardly any need for a company policy. But if tips are frequently given, perhaps it is a good idea to come up with an agreed upon framework among staff on how tips should be handled.
Most of the time tips received can be viewed in one of two ways: (1) an individual tip for a particular person’s extraordinary efforts; and, (2) a tip that could be given for a great team effort. Having a policy in place in relation to who receives what portion of a tip or gratuity should be something talked about and agreed upon in most small business settings. In many parts of the western world, servers in bars and restaurants expect to keep their tips to themselves. Sometimes there are unwritten rules like sharing a portion of your tips with the kitchen staff or those who bus the tables. In the Philippines, this form of tip-sharing may also be present in many bars/restaurants, but many other restaurants owners I talk to (both foreign and local) instead opt for the pooling of tips and sharing among all hired staff. In many ways, this latter approach to sharing tips and gratuities is probably more in line with Filipino cultural values, so this could be why this type of ‘policy’, whether written or unwritten, is more common here than in other parts of the world.
There are also a growing number of establishments in the Philippines that include a mandatory service charge to the gross sales tally of each bill. Many restaurants that engage in this practice seem to have adopted a service charge in the 10 to 15 percent range. Again, this practice is relatively new, but from what I have discovered in talking to a number of staff in such establishments, the reasons for introducing the additional charge have nothing to do with tax collectors trying to stamp out the under-reporting of tips (a main reason for such forms of legislation in many Western jurisdictions). Instead, it seems many restaurants are adding a service charge for the sake of having a service charge! In some cases, the service charge does go to the hired staff. But there are cases where owners are simply pocketing all or the lions share of proceeds gained through this added charge.
Clearly there are issues to consider when contemplating how tips, gratuities and service charges should be handled within a small business where such additional forms of compensation may be a regular occurrence. Some owners might prefer that individual staff keep their tips to help encourage outstanding service. Other owners might instead prefer to see tips pooled so as to keep all staff members equally happy and productive. And other owners who implement service charges may want to be clear with their staff and their customers why and to whom any proceeds go. There doesn’t seem to be any cut-and-dry answer on how to address this issue, but some consideration and proper communication would probably go a long way in helping alleviate any misunderstandings and possible grievances from staff and customers alike.
How about you? If you have a small business, or have experience working in this type of business environment, please feel free to leave a comment and share your philosophy on how and why you handle tips and gratuities a certain way.
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Hi Martin,
Personally i have never been in a business that has a tipping culture,so my comments are from a customer point of view.
I feel that a tip should only be given when you have had outstanding service over and above the normal.
I absolutely abhor mandatory service charges as the customer is normally expected to pay them regardless of wether he has received good,mediocre or bad service.
I would certainly avoid establishments who use mandatory service charges.
The word “tip” is widely misunderstood,it means “to insure promptness” which ideally should be given upfront to insure promptness of service.
However,its original meaning has changed in practice over the generations.
regards Chas.
Hi, Martin – I’d be glad to share my views regarding tips and tipping, but please understand that this view is from a U.S. perspective and is based strictly from my experiences and observations from having spent some time at my sister’s Samson’s Steakhouse in Keyser, West Virginia, managing the dining room and kitchen during the holidays and on weekends, as I have stated in a previous post.
While you may find some observations typical in the F&B industry regardless of size and locale, I am not advocating others that you find unrealistic and unworkable in a small F&B operation in a Philippine setting
Generally, workers in the food and beverage industry who receive tips as a part of their compensation are paid the minimum wage. They work for tips, not for the minimum wage. If tips are not good at a particular restaurant, they move on.
The pooling of cash tips to be divvied up at the end of the shift is generally frowned upon by the server staff. They prefer to keep their own tips for several reasons. The idea that a server can dictate his/her earnings in tips by providing excellent service and gets to keep it without sharing it with anyone is a great incentive for the server to perform well. Excellent service almost always begets bigger tips and a great way to ensure a return business.
Not all servers are alike. Some are good at selling in what is called in the trade as “upselling.” Upselling means that, if the customer orders a gin and tonic, for example, the well-trained pretty blonde server (from the previous post)
who is good at upselling would suggest with a smile, “Would you like a Tanqueray and tonic, sir?” Almost always, the customer would say, “Sure, why not?” Right there, the server has increased her sales by 50 cents without much effort, from $1.75 for, say, Gordon’s gin, the house brand, to $2.25, for the Tanqueray, a premium brand. If she does this all night long, her total sales for the night would be far greater than the total sales of the next server who has a cavalier attitude and does not make an attempt to upsell. The pretty blonde server, on the other hand, not only makes more tips for herself based on an average 15% of her gross sales, but she is also makes money for the house. What is good for the server is good for the house.
Another reason why servers do not like to pool their tips is because there is a possibility that some servers may not be putting all their cash tips into the pool as they should. The pooled tips might work well with credit card tips, but not with cash. But perhaps the most-feared scenario from any server’s perspective is when all is said and done at the end of the night, the server’s share of the tips falls short of his/her expectations. This is especially true for those who believed that they have provided excellent service all night long and who were particularly successful in upselling. Their disappointment can easily translate into resentment and disillusionment, and could remove further incentive to provide excellent service and attempts at upselling. The rationale is, why work my butt of if I don’t benefit from it?
Many restaurants prefer that servers and bartenders keep their own tips, rather than get involved with that part of income that really belongs to the servers. Management’s only involvement in this case is to ensure that servers are not under-reporting their tips for tax purposes. (The IRS can go after the owner if there is a pattern of under-reporting by the sales staff, based on the restaurant’s annual gross sales.)
Establishments that practice the tip-sharing system are usually small. Either that, or the seating arrangements in the dining room are such that they do not allow for an equitable distribution of customers among the various servers’ stations. Some stations are busy because they may offer a nice window view, while some stations are in the traffic area or close to the noisy kitchen.
Regarding the automatic tacking on of gratuity on a customer’s check, in many restaurants this is done on parties of 8 or more. This policy is almost universal and is so stated on the restaurant’s menu. The gratuity or any portion thereof DOES NOT go to the house; it belongs to the server.
The number of people in a party may vary, sometimes 8, sometimes 10. This policy is instituted to protect the server from getting “stiffed”; afterall, serving a party of 8 people is not an easy task. A few restaurants, and, I mean, a few, also have a policy against separate checks for large parties. Again, this policy is implemented for the protection of the server who is likely to be “undertipped” when separate checks are involved.
Lastly, for the inattentive, slightly tipsy customer, here is a caveat. Pay close attention to the credit card voucher you are signing where the automatic gratuity is already added on. Make sure you do not add your 15% or 20% tip on top of the gratuity (service charge) that’s already been added on. I’ve seen this happen more often than I can remember.
Btw, Martin, 10% tipping is no longer in vogue in many parts of the U.S. 15% is slowly going the way of the 10%. The average tipping around here nowadays ranges from 18-20%. On Capitol Hill in D.C. where many of the high-end restaurants are to be found because of the presence of legislators and high-powered lobbyists, 25%-50% tipping is not at all that unusual. But then again, these are not your ordinary small F&B in the Philippines.
A bit of trivia: the Japanese and New Yorkers are the best tippers; the French and folks from Casper, Wyoming, the worst!
In Singapore, you have the privilege of paying a government mandated 10% service charge so that the waiters can ignore you.
Hey Chris!
That’s why hawker stalls are always going to always be more popular than restaurants in Singapore and Malaysia – better food, better prices, and more friendly atmosphere. Not only that, but I can foresee the PAP soon adding the GST to restaurant bills; but hawker stalls will probably be given a reprieve.
PS – my next article coming out will be about the resort we all stayed at in Siargao.
Cheers!
Martin,
Your coffee shop probably generates tips for your workers. But, in my observation, very few Filipinos have a habit of tipping at all. When in Rome…
Foreigners in Narra routinely tip the waiters. but after a discussion with those waiters one day I find that tips are quite rare from customers in general. I have tipped some and they simply did not know what it was for. carenderrias never get tipped. Bag boys, equally rare except perhaps at gisano.
Inland Resort is of those with a mandatory tipping policy. I simply have never gone back. I asked the waiter if he got the tip and he said in reply “what is your order”.
I have brought food to restaurants and asked for plates to eat it off of. It is nice to share rare foods with friends and no restaurant can offer everything, of course there must be an extra payment for extra service.
Tipping cheats every worker in a service that it is traditional to tip in. It is under reported by workers in an effort to avoid Taxes (cheating society and his own SS retirement) and over suspected by those who hope to take a share, and his employer underpays him thinking he surely gets SOME tips, without proof of an amount. Lets face it, some employers over estimate tips in order to underpay their workers. It is time that EVERY establishment posts a sign that reads “I pay my workers a fair wage, you need not pay them more. If their service is unsatisfactory I would consider it a kindness for you to report it to me so I can address it. If the service is great, an Atta boy would be nice too”
Abufarsi
Hi Abufarsi,
Thanks for sharing your thoughts on this. I agree, tips and tipping has a checkered history in the Philippines for a variety of reasons.
I would also expect geography plays a role in shaping how tips and tipping works in the Philippines. For example, I would suspect that tips and tipping is more prevalent and structured in more tourist intensive communities like Boracay than a more resource driven and administrative center like Butuan. But I’m certainly no expert on the matter and could be misguided in this assumption.
Cheers!
Hi Chas,
Indeed, I agree with you 100%. I’ve always wondered why some servers feel as though a tip is an entitlement? In many countries, it is exactly as you state — an additional payment for exceptional service. In other countries, like the US, the cultural attachment to tips is different. It is seen as an expectation. I personally know of serving staff in the US that work for no salary at all! You heard me correct — zero base salary! Their entire compensation package is driven by tips (and in a number of cases other perks like paid taxi fares home after a late shift).
Here in SE Asia, tipping has a checkered pattern. In Malaysia and Singapore, there is no tipping at all. It’s not a part of the culture. What I’ve noticed in the Philippines is that tipping is not always done, and when it is, it rarely ever reaches the levels that seem to be the norm in places like the US. The wealthy are generally the most conservative when it comes to tipping. I’m not sure why it is so, it’s just an observation I’ve made in my business, and when I did an informal survey of serving staff in Metro Manila. Most parts of Indo-China are like the Philippines — tipping is a part of the culture, but not viewed as an expectation. I’ve only been to Indonesia 3 times, so I don’t really think I have a good understanding on how tipping works there.
Personally, I am not inclined to ever add a service charge unless I was mandated to do so. I agree with you — with a service charge, there is one less incentive for servers to practice as good a service as possible.
Cheers!
Hi John,
Your observations and reflections on tipping in the US seem very accurate to me. I have a number of friends who have worked and owned restaurants and bars in different states, and basically you’ve provided a great overview of the inner workings of how tipping works in much of the US.
One thing I found really different in the Philippines was that pooling tips is much more common than anywhere else. Perhaps it is part of the ‘bayanihan’ tradition, or something like that? Working together, sharing together, trying to be uplifting for the group. When I started our business here in the Philippines, I held a meeting before we opened on how to handle tips, and it was unanimously stipulated that tips should be pooled. I’ve also talked with owners of many of the other established businesses on how they do things, and 3/4 of the owners have also agreed that they practice tip-pooling. Perhaps the reason for this is because kitchen crew are not typically paid a considerable lot more than servers themselves. I’d be interested to know whether tips are higher in one type of system or another, but it’s hard to get that kind of data without undertaking a serious survey. But it would be an interesting research project for sure.
Thanks for your comments, John!
You’re welcome, Martin. But before I leave this topic, though, I just want to clarify my previous comment about the practice of many U.S. restaurants that automatically tack on a service charge to a check, partly in response to Chasdv’s comment, re: “I would certainly avoid establishments who use mandatory service charges”, and partly to pad up your comments statistics.
Just kidding, Martin.
Chasdv, the mandatory service charge, usually 15%, is not applied to every customer who walks in the door. If yours is a party of 6 or less, there is no mandatory service charge. It is applied only to parties of 8 or more. This is to ensure that the server is compensated for his service for working a party that large, just in case the party walks out without tipping.
However, regardless of the number of people in a party, providing excellent service is still the name of the game in any restaurant. Just because the tip is automatic, the server, by training and motivation, is expected to provide you with excellent service, and assuming that indeed excellent service was rendered, it’s only fair that the server be justly compensated.
Martin, in my view, this is not a sense of entitlement, nor is it cultural. It’s economics, plain and simple. In the U.S. setting.
You wouldn’t believe that there are actually people out there who would not think twice about walking out on a server without tipping. It is for this reason that the mandatory service charge was institutionalized. Remember that the server in a restaurant that observes the minimum wage is paid a pittance, sometimes as low as $2.50 an hour, or whatever the minimum wage is today. For the ordinary server, tips are what pay the rent.
However, although the mandatory 15% policy is publicized and understood by the customer, it is by no means etched in stone. The customer has every right to question the policy if he felt he was given bad service. Under such circumstances, management has the discretion to make adjustments or waive the mandatory 15% altogether.
As to the reason why the rich tip conservatively, that is exactly the reason why they are rich, because they are stingy. In contrast, there are poor people who tip generously. My thinking is that they do so to compensate for their lack of money, but this is all psychobabble.
Regarding pooling the tips so that it can be spread around to include the “kitchen crew who are not paid a considerable lot more than servers themselves”, isn’t it the responsibility of the restaurant owner to pay the help?
Offense not intended, but I am sensing here that Philippine F&Bs that employ tip-pooling is not really all about bayanihan afterall, but a cost-cutting measure on the part of the ownership to employ help to pay the help.
Thanks again for explaining the US version, John.
Cheers!
Walang anuman, Martin. I hope I didn’t come across as preachy, as it was never my intent. And, yes, my observations were from a U.S. point and view that may be unrealistic and unworkable in a Philippine setting.
Regards
John Reyes
Hi John,
No problem!