IRS says mandatory Tip is now a Service Charge

Just read this article in Business 1st: Forced restaurant gratuity turns into pumpkin at midnight. Starting tomorrow, January 1, 2014 the IRS now considers any mandatory tip a service charge under the new stricter definition of the rules.

So... we're three weeks into this mess and I'm wondering if it's going as badly at other restaurants as it is at ours.

Twice this week the same server got the short end of the stick on this new policy. The first time it happened, the guest left a $22 gratuity on a $1000 tab. It was made clear to the guest that gratuity was not included so it wasn't some sort of crazy misunderstanding. And it wasn't an issue of bad service. When a manager stopped him at the door to make sure everything was good with the experience, he did nothing but rave.

Tonight, a similar situation occurred. $70 on $700. Awful.

Now take into account that servers are required to tip out 5% of their sales to the support staff and that server now OWES the restaurant $28 on the first example and walks with $35 on the second. "Luckily" the first time it happened the restaurant did not require the server to tip out, so he walked with his $22. Hooray! (I don't know how to do the eye roll emoticon thingy)

Whether you agree with auto gratuity or not, it exists to protect the server from exactly this sort of thing happening. People on this site have mentioned repeatedly that the pool of quality servers in Louisville has slowly been diminishing. Well... if this trend continues you're going to see a mass exodus of servers leaving jobs that no longer have an auto grat policy for either ones that do, or an entirely different profession altogether.

Gary, those examples you showed are just ridiculous! How can any customer in their right mind consider those tips appropriate? Maybe they need math lessons?

There could be a few different reasons.

a) They're drunk. Maybe the $22 was supposed to be $220 but a few cocktails turned 20% into 2%.

b) They're foreign and don't understand American tipping culture.

c) They're @$$holes.


Either way... those of us who rely on convention business for a large part of our income are now more than a little worried about the future. The farm machinery show for example has always proved lucrative in the past but now might become nightmarish. Then there's the teacher convention, FFA, etc.

Optimism is waning.

So... we're three weeks into this mess and I'm wondering if it's going as badly at other restaurants as it is at ours.

Twice this week the same server got the short end of the stick on this new policy. The first time it happened, the guest left a $22 gratuity on a $1000 tab. It was made clear to the guest that gratuity was not included so it wasn't some sort of crazy misunderstanding. And it wasn't an issue of bad service. When a manager stopped him at the door to make sure everything was good with the experience, he did nothing but rave.

Tonight, a similar situation occurred. $70 on $700. Awful.

Now take into account that servers are required to tip out 5% of their sales to the support staff and that server now OWES the restaurant $28 on the first example and walks with $35 on the second. "Luckily" the first time it happened the restaurant did not require the server to tip out, so he walked with his $22. Hooray! (I don't know how to do the eye roll emoticon thingy)

Whether you agree with auto gratuity or not, it exists to protect the server from exactly this sort of thing happening. People on this site have mentioned repeatedly that the pool of quality servers in Louisville has slowly been diminishing. Well... if this trend continues you're going to see a mass exodus of servers leaving jobs that no longer have an auto grat policy for either ones that do, or an entirely different profession altogether.

Please explain why the service charge has to "protect the server" from the seemingly flawed policy of tipping out 5% of sales vs just changing said flawed policy to a percentage of actual tips.

So... we're three weeks into this mess and I'm wondering if it's going as badly at other restaurants as it is at ours.

Twice this week the same server got the short end of the stick on this new policy. The first time it happened, the guest left a $22 gratuity on a $1000 tab. It was made clear to the guest that gratuity was not included so it wasn't some sort of crazy misunderstanding. And it wasn't an issue of bad service. When a manager stopped him at the door to make sure everything was good with the experience, he did nothing but rave.

Tonight, a similar situation occurred. $70 on $700. Awful.

Now take into account that servers are required to tip out 5% of their sales to the support staff and that server now OWES the restaurant $28 on the first example and walks with $35 on the second. "Luckily" the first time it happened the restaurant did not require the server to tip out, so he walked with his $22. Hooray! (I don't know how to do the eye roll emoticon thingy)

Whether you agree with auto gratuity or not, it exists to protect the server from exactly this sort of thing happening. People on this site have mentioned repeatedly that the pool of quality servers in Louisville has slowly been diminishing. Well... if this trend continues you're going to see a mass exodus of servers leaving jobs that no longer have an auto grat policy for either ones that do, or an entirely different profession altogether.

Please explain why the service charge has to "protect the server" from the seemingly flawed policy of tipping out 5% of sales vs just changing said flawed policy to a percentage of actual tips.

There is no doubt that the tip out policy is beyond stupid. We have argued against it for years. Believe me, we would all rather tip out based upon what we make rather than what we sell. Unfortunately that is not an option. I'm guessing the reasoning is that if servers don't provide the extra income to the support staff then there would be no support staff. The restaurant would have to pay them more hourly and that's just not gonna happen. So their money is guaranteed and the servers' is not.

As much as we hate the system, it was tolerable when the money was guaranteed through the auto grat. Now that it is up to the guest there is no other way to look at it than servers are going to make less money. The amount of people tipping 25-30% on large parties will never compensate for those leaving 10-15% (or 2%)

I thought that Tip Out Policies were against the law here in Kentucky? Is that one of the big issues that Lynn's had?

One of the forms every new hire has to sign is an agreement to "voluntarily" enter a tip pool system.

Gary-
A bit of a tangent, but how does the income tipped out to other employees get reported to the IRS?
Thanks.

One of the forms every new hire has to sign Is an agreement to "voluntarily" enter a tip pool system.

If they have to sign it I don't think it's voluntary! It certainly sounds like that's skirting the law.

Gary-
A bit of a tangent, but how does the income tipped out to other employees get reported to the IRS?
Thanks.

I'm not exactly sure what you're asking. I'm not on the payroll side of things so I wouldn't know exactly. I do know that as servers check out at night, all numbers are put through a spreadsheet and the tipped out monies are then distributed to the support staff through bi-weekly checks.

One of the forms every new hire has to sign Is an agreement to "voluntarily" enter a tip pool system.

If they have to sign it I don't think it's voluntary! It certainly sounds like that's skirting the law.

DING! DING! DING!

Unfortunately, no one that I know of has refused to sign the agreement. I would be interested to know the repercussions of that action.

But no one believes they would have a job if they didn't sign it so at least in that aspect it is not voluntary.

Gary-
A bit of a tangent, but how does the income tipped out to other employees get reported to the IRS?
Thanks.

I'm not exactly sure what you're asking. I'm not on the payroll side of things so I wouldn't know exactly. I do know that as servers check out at night, all numbers are put through a spreadsheet and the tipped out monies are then distributed to the support staff through bi-weekly checks.

I think that answers Bill's question. If it's given to them in a check it's taxed.

One of the forms every new hire has to sign Is an agreement to "voluntarily" enter a tip pool system.

If they have to sign it I don't think it's voluntary! It certainly sounds like that's skirting the law.

MANY Years ago, OSI (Outback Steakhouse) was involved in a Class Action Lawsuit.
They were , at the time , not giving Servers the option of entering a tip pool. It was changed after and has morphed into a whole 'nother beast.

If a Server opts out of the Tip pool system, then they may be assigned less than desirable Sections. I'm not saying this happens in all cases, but experienced it being done first hand.


"I think that answers Bill's question. If it's given to them in a check it's taxed."

That's my experience. I've know Servers to withhold a portion of cash tips to avoid paying taxes.

"I think that answers Bill's question. If it's given to them in a check it's taxed."

That's my experience. I've know Servers to withhold a portion of cash tips to avoid paying taxes.

Bill's question dealt directly with the money they tip out to give to the back help. Gary's answer that as it was given to them in a check so it obviously is taxed. I know that sometimes servers with only portion of cash tips to avoid paying taxes on them, that's happened forever.