Danny Meyer, head of the New York City-based Union Square Hospitality Group LLC, set off a nationwide conversation last week when he announced that he planned to do away with tipping at his 13 full-service operations.
Numerous restaurants across the country add standard service charges of around 18 percent to 20 percent, particularly for larger parties, to their checks, and a few restaurants, such as Alinea in Chicago and Lazy Bear in San Francisco, have done away with traditional reservations and have switched to all-inclusive, non-refundable tickets. Meyer is taking a different approach by raising menu prices and telling his customers that “hospitality” is included in the price.
“I’m not waging a campaign on behalf of our entire industry. I’m doing what I think is right for our company,” Meyer told Nation’s Restaurant News. However, Meyer clearly hopes to change the way full-service restaurants compensate their employees. In fact, he said for his plan to work, his staff needs to love the new system, more guests have to come through his doors, and other restaurateurs need to come on board.
Meyer’s experiment is expected to begin in November at The Modern, his fine-dining restaurant at the Museum of Modern Art, and for the first 90 days he has guaranteed that “nobody will make a penny less than they would have made had we kept tipping at a full 21 percent level.”
He plans to roll it out to his other full-service restaurants over the course of 2016.
Meyer also founded Shake Shack — a fast-casual hamburger chain that he prefers to call “fine casual” — that went public earlier this year.
There are currently 76 Shake Shack locations.
Meyer recently discussed his reasoning behind his plans to do away with tipping with Nation’s Restaurant News.
When are you going to get rid of tipping at The Modern?
We intend to do it before Thanksgiving … and the reason for that is that the restaurants traditionally after Thanksgiving heat up so much that we’d like to get a jump start on something that’s going to be this new. [But] we want to see how it works at at least one restaurant before January 1st, because at that point minimum wage goes up anyway [to $9 per hour] and every restaurant in New York City is going to have to find some way to raise their prices. We want to get some experience before that with the new system.
How did your employees react to your announcement?
I think our employees are incredibly pleased with the reason behind it because they understand that what we’re trying to do is to address a system that is broken and that is not sustainable. I’ve had too many meetings with too many people over the past year and a half where really earnest professionals, both in the kitchen and the dining room, have said, “We love this company, but it’s just not working financially. In a city with cost of living like New York City, can you please do something?”
So everybody’s completely signed up for the “why,” and everybody including me is eager to get beyond the theory and put it into practice and see how it works.
Just to clarify, you want to do this so you have more money to compensate your staff in the back of the house, right?
That’s the economic system we want to fix, but there’s another part, which is that for the entirety of my career I’ve been trying to help … servers view their work as an incredibly valid career choice, and professional. I’ve always had the sense that tipping is antithetical to feeling like a professional and feeling proud that the reason you do your work as well as you do it is for the professional joy of doing a job well. And it’s always troubled me that there’s this underlying sense that the only reason that someone’s being nice to me or delivering my food on time is in the expectation that I’m going to leave a tip. And if the table next of me doesn’t leave as a good a tip as I do they won’t be treated as nicely and they won’t have their food delivered on time, and I think that’s demeaning to the kind of people who work in our restaurants.
We’re trying to rip the Band-Aid off and do it one way the right way and do it right now and learn as much as we possibly can at The Modern — which has four different laboratories, because it’s got prix-fixe dining, à la carte dining, private dining and an active bar — and then tweak as much as we need to before we go on to the next restaurant.
Is that why you’ve decided not to add a flat service charge, as restaurants do all over the world, and instead raise menu prices?
I think that it’s certainly understandable why restaurants add a service charge, because, on the face of it, it preserves the opportunity to present a menu document whose prices at face value appears to be on an equal playing field with all those restaurants that don’t charge a mandatory service charge. My sense is that any rational human being can do the math, and by the time you get your credit card bill at the end of the month you will have paid exactly the same amount whether I mandated a service charge or I figured the amount into the menu price in the first place. I want to be transparent and say this is what it truly costs to eat in a restaurant that cares about how its ingredients are sourced and how its employees are able to make a living. And if anything goes wrong with your meal, it’s our responsibility to fix that.
Right now your menu price includes the cost of whatever you’re ordering. Let’s say you ordered grilled salmon. I’ve had people say, “Well how can you put the cost of the service into the price? What if the service is no good?” And my answer would be, What if the salmon’s no good? If the salmon’s no good we’ll fix it or it’s coming off your bill, and if you have a problem with the service, that’s part of the price. I will fix that, or it’s coming off your bill. I don’t understand the distinction that our industry feels it needs to make between the value of what got cooked and the value of how it got placed in front of you or how the [wine] cork got pulled.
Because the laws of our tipping system prevent tips from being shared throughout the entire team it has created this remarkable disparity that has only grown over time, and if one doesn’t change it now, the disparity is only going to get worse, because as minimum wage goes up, obviously menu prices are going to have to go up, and as menu prices go up restaurateurs are going to be squeezed. They will not be paying more money to the kitchen, but the disparity between what the tipped employee can make will only grow because higher menu prices, necessary to cover increased labor, multiplied by whatever tip you leave, means that it’s going to cost you even more money to eat there. I think [my approach] is just a more honest way to go to say, “Here’s what it costs to eat here, here’s the price.”
Tips can only be shared among front-of-the-house staff. Would that also be true for a mandatory service charge?
I’m not qualified to answer and I know that some of those laws vary by state. There are restaurants in New York, they tend to be smaller independent restaurants, that have applied something called an “administration fee,” and the menu will say “we don’t share any of this with our service staff.” But the Department of Consumer Affairs of New York City has told us via our lawyers that if we were to do that, and if any of those proceeds were shared with anyone other than someone who spent 80 percent of their time or more facing the guest, we would be held up as an example, as a piñata essentially, to show that that’s not acceptable in New York.
What are the tax implications for this?
The one tax burden that is the most onerous, for sure, is that the federal government subsidizes the tipping system by virtue of a federal tip tax credit. So we get, across all of our businesses in the aggregate, somewhere between $1 million and $1.5 million tax credit [annually] … that we will now forego by doing this. As far as I’m concerned the test of someone’s core values is would you still do it … if someone would pay you $1 million to change how you do things, and I believe in this so strongly that we’re going to give that up, and that’s painful.
I don’t understand how that law serves our country, to have taxpayers subsidizing restaurants’ ability, and consumers’ ability, not to pay fair wages to all employees.
It’s a broken system. There’s an article in The New York Times today about the shortage of cooks. That’s not going to get any better. There’s no way in the world, especially in the face of the growing national activist movement for a $15 minimum wage for fast food workers, that enough rational people are going to say, “What I really want to do is go train myself to work in a fine-dining restaurant,” and I don’t want to see this be the death knell of fine dining. So that’s why we’re making this move.
Peer feedback, price sensitivity, more
What feedback have you gotten from other people from the industry and from your customers?
We never expected in a million years for this story to resonate to the degree that it has. I cannot keep up with my email right now, and it’s people from all over the world saying, “Thank you for addressing this,” and it’s colleagues all over the country, all over the world saying, “Thank you for going first. We’re going to watch very carefully.” It’s guests saying, “Thank you for doing this. We intend to support your restaurants even more.” It’s even staff members saying, “Thank you so much for caring about us.”
I know that there are people who have questions, I would say mostly if you have a chance to engage with people who have questions, they listen pretty carefully. The biggest question you get is, “How can you take away my right to punish someone for bad service?” My answer is twofold: No. 1 is if you take a show of hands in a room and ask “Do you tend to tip the same amount all the time?” Almost every hand goes up. People do not, in fact, use their tip to punish bad service. And as I said earlier, to those people I would [also] say, “Would you want to eat in a restaurant whose waiters or whose bartenders were only nice to you if you gave a tip and otherwise would choose not to be?” And everyone gets that point.
I’m not waging a campaign on behalf of our entire industry, I’m doing what I think is right for our company. I’m trying to help chefs solve a problem by giving them the opportunity to have a higher hourly wage and therefor attract even better cooks. And I do realize that it’s either going to work economically or it’s not. If it doesn’t work economically, it will have failed. But I do know that doing nothing is just going to slowly degenerate into the end of fine dining as we know it.
We’ve been very clear with our staff: There’s three things that have to happen if this is going to be successful. No. 1 is that our staff members have to love working here even more, and more people have to want to work here. No. 2 is more guests have to want to dine with us. And No. 3 is we have to show to other restaurants around the country that, despite whatever economic fears that you may have — and those are all rational fears; believe me, we have them as well — that this actually works.
Aren’t your servers going to initially take a pay hit?
No, they’re not. As a matter of fact, what we’re doing, and the reason that we’ve been looking at this for a good year, is to parallel-process what our servers do make and what they would make with the new system. We found is that in 100 percent of the cases they made as much money and in 75 percent of the time they would have made actually more money.
We’ve actually guaranteed our servers that when this starts, for the first 90 days, nobody will make a penny less than they would have made had we kept tipping at a full 21 percent level. If this doesn’t work for our servers we’d be shooting ourselves, because the very reason I think people like coming to our restaurants is being taken care of by someone who’s delighted to see them be happy. How will that continue to happen if we make our servers unhappy?
So you’re going to have to either cut into your own profits or substantially increase revenue, because you’re also increasing the wages of your back-of-the-house staff.
That’s absolutely right, and I’m willing to go with my belief that we will not only increase revenue, but profitability when we do this. But it’s a leap of faith, for sure.
I also want to say that, ironically, one of the convincing moments for me was that we’ve done this already for 11 years at Shake Shack, and in an environment where we do not permit tipping, and we have always paid well beyond minimum wage, and we’ve had revenue sharing with our staff at Shake Shack. We have profitability, that is in the public domain, that exceeds many fast food restaurants on a unit basis, who have always said, “You cannot pay that way.” It just hit me one day, and I said, “Wait a minute, if we can prove to ourselves that happy employees who are paid more, who stay longer, who get better, who attract more business, who sell more, works in a fine-casual environment [like Shake Shack], are you trying to convince me that that cannot be done in a fine dining environment?”
And I’d think price sensitivity is a lot lower in fine-dining restaurants than at a place like Shake Shack.
That’s absolutely right.
That’s the other thing that nobody talks about in our business is that the tipping system has actually created an economic model where waiting is often a dead-end job…
If you’re a tipped employee and you actually want to build a professional career and go someplace in this industry you cannot afford to do so, because your first job as a manger would involve taking a steep pay cut.
Another thing nobody’s talking about is that the minimum wage for managers, starting next year, federally, is going to be $50,000 [for them to be exempt from overtime pay]. That’s not the case today. There are managers in fine-dining restaurants that are paid in the $20s and the $30s and the $40s, and they are being paid less in many cases than some of the tipped employees. So that’s going to change as well.
I’m not so worried about being competitive menu-wise, because on January 1 this industry is going to see the biggest seismic shift it has ever seen when every restaurant wakes up and finds out they’ve got to raise their prices, and the dynamic between tipped and non-tipped employees just got worse. So that’s why we’re seizing the moment and starting right now.
[Editor note: Danny Meyer called NRN back to say the following, and also sent a link to the video below.]
I’d like to add that it’s really the next ones in who are the true leaders. There’s an amazing film that I want to share with you. You’re going to look at it and say, “This is really silly,” but if you’ve got two-and-a-half minutes you’re going to see how we’re thinking about this also.
We’re actually not the leaders here. I told you candidly we’re doing this because we believe it’s right for our company, but we also know that someone has to go first, but it’s not those who go first who are the true leaders, it’s the next ones in. Otherwise you don’t have a movement.