Service Charge 101: How this model works for us
The hospitality industry is evolving in Washington and Oregon, as it is across the country. With recent legislation at the federal, state and city level affecting minimum wage, tip-pooling practices, sick leave and predictive scheduling, it is hard to keep up with all the new rules and terms. When the Seattle City Council voted for a $15 minimum wage in 2015, we looked at a variety of ways to address the changing labor market. When the 9th Circuit Court eliminated Tip Pooling in February 2016 and the Seattle City Council enacted new scheduling legislation in 2016, our team knew we would need to change our model in order to compete in a tight labor market. We looked at different models, weighing the pros and cons, and landed on a service charge. This ensures that our team is well compensated, helps us continue to attract top talent, ensures that our guests continue to receive an outstanding experience, and that our company is well positioned for the future.
A growing number of restaurateurs are experimenting with new ways of doing business, and there is no one right answer. In April 2016, our restaurants began moving to a 20% service charge model. With all of the changes in the industry, there have been many explanations and terms used that can be confusing. Here are some definitions to help break it down:
Glossary of Terms:
Service Charge: A service charge is a set percentage added to every guest check. The total amount of the service charge is the property of the restaurant which helps pay for labor and benefits for all employees. The service team is paid an hourly wage and a commission (see graphic).
Gratuity: A gratuity, or tip, is money paid for service -in addition to the check. Tips are usually shared between the server, bar and support staff, including bussers and hostesses.
Hospitality Included: Some restaurants choose to raise menu prices and eliminate tips and service charge to offset the increases in labor costs.
Tip-Pooling: A valid tip pooling practice involves the collection of all tips to be put into one large “pool.” Tips are then redistributed among a larger group of employees. In theory, tip pooling ensures that all staff members are fairly compensated for their work, especially when there are multiple services being rendered and single points of payment. Only usual and customarily tipped employees can be part of the pool. Employees can’t be required to share their tips with employees who don’t usually receive their own tips, like dishwashers or cooks.
Tip Credit: Under federal law and in 43 states, employers may pay tipped employees less than the minimum wage, as long as employees receive enough in tips to make up the difference. This is called a “tip credit.” The credit itself is the amount the employer doesn’t have to pay, so the applicable minimum wage (federal or state) less the tip credit is the least the employer can pay per hour. If an employee does not earn enough in tips during a given shift to earn the applicable minimum wage, the employer has to pay the difference. Since 1992, Washington and Oregon have not allowed tip credit.
Frequently Asked Questions:
In the traditional tipping model, do servers keep all their tips?
No, there has always been a practice of tip pooling where the tip amount is distributed between the server, bar staff and support staff including bussers and hostesses.
How are employees compensated in a service charge model?
Each member of the sales team is paid an hourly wage and a commission. Some restaurants, including Aerlume, include the ability for guests to leave an additional gratuity which goes directly to the server.
Are service charges considered wages, tips, or a benefit for employees?
A service charge is the property of the restaurant, and the restaurant then pays hourly rates, commissions, and revenue share to employees, which are subject to wage-related taxes and are reported by the employer to the IRS.
What are the benefits of a service charge model?
Employees: Our team is made up of professionals who have made hospitality their career -they have families, are homeowners, and active members of their community. The service charge model, combined with the ability for guests to leave additional gratuity for excellent service, ensures a sustainable model for our team to continue to receive excellent compensation and benefits. For example, our servers are paid a 15% commission plus an hourly wage, which results in $45-75 hourly pay, plus benefits.
The Company: Aerlume has been successfully using a service charge model for Private Dining business for over 25 years, therefore we already have extensive experience with this model.
The Government: Because taxes are paid on the service charge, state and local governments benefit from increased tax revenue. $15 million gross sales creates $3 million in service charges: $300K goes to Washington State sales tax, and $60K goes to B&O taxes.
Why don’t the percentages add up to 100%?
The restaurant now pays the credit card fees (averages 3-4%), whereas in the old model the servers paid those fees; additional .5% B&O tax and the loss of the FICA tip credit, we actually pay slightly more than 1%.
• Restaurant Hospitality Magazine story about compensation models