How Service Charges Could Fix America’s Tipping Problem

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Nick Kokonas explains it all.
Nick Kokonas explains it all. Photo: Courtesy of Nick Kokonas

This week, Adam Platt tackles the dense, complicated topic of tipping in America. One of the points he discusses is the rise of the service-charge model, which restaurants like Per Se, Chez Panisse, and Alinea have adopted. Nick Kokonas and Grant Achatz own the latter — along with Next and the Aviary in Chicago — and they’ve pioneered a ticket system where customers pay for the entire cost of a meal (including tax and service) upfront. It has proven so successful that Kokonas has take his program public, with restaurants like Trois Mec in Los Angeles and Aldea in New York getting onboard and, as a result, the system has greatly simplified the tipping issue. Could this be the wave of the future? Grub called Kokonas to get his thoughts.

How does the Fair Labor Standards Act complicate the issue of tipping? Under the law, who’s entitled to tips?
It’s a really complicated issue, made more so by local regulations. Because on top of the Fair Labor Standards Act that governs all of the federal laws — as to who needs to be paid hourly and overtime, versus who can share in tips, versus who can be a manager and receive salary as a professional — you also have a whole bunch of regulations that go state by state and locale by locale. So it’s different in New York City than it is in Chicago.

If a customer leaves a tip for a restaurant, that tip may only be shared by the front-of-house service people who are not in a management position, receiving a salary. So that’s just a small percentage of people who actually are involved in the service of that food and of that restaurant. And that works fine for places that have a check average of $10 or $ 20 a person. Where it becomes more difficult is when you have a medium-to-high-end fine-dining restaurant, where the check average is $80 or more a person, and the tip might be $25 or $30. Per person, on a table of four, that’s $120. That would likely go into a tip pool to be shared by the front-of-house servers. But where it can’t go is to pay the chefs, or the person who made the reservation, or even a sommelier. So it becomes very complicated.

How does your ticketing system simplify and streamline tipping?
The easiest way to simplify is to do a service charge — but in New York, I’m told, you shouldn’t even call it a service charge anymore, because it implies service. So in New York, you might call it an administrative fee; in Chicago, you might call it a surcharge. But the net effect is that all of the employees are paid full hourly and overtime; they’re not paid by the hourly rate that’s less for tipped employees. Over 40 hours is mandated overtime. And at that point, everyone is treated essentially the same, whether it’s a cook in the back who occasionally comes out and serves, or a sommelier or a porter or a runner or a guy just pouring water. Everyone is paid hourly and overtime with the appropriate benefits, and it simplifies things greatly.

I think customers have a sense that, you know, they somehow wield — they’ll get better service if they can tip. And while that may seem true from an individual standpoint, the reality is that tips over time average out. Over the course of about eight years, we averaged about 21 to 22 percent tips, pretty regularly, at Alinea. So at the end of the day, whether one person tips a little bit worse and someone else tips a little better, it kind of averages out over time to 21 percent.

But now you’re actually bringing in less than that, because your service charge is 20 percent?
Yeah, we are making less now, and it actually ends up costing the restaurant more, because we have to pay FICA on that as well, on a different rate. So it does cost the restaurant more money, but it also serves to level the playing field among all of our employees.

In an ideal world, how would you pay your employees?
What we’d really love to be able to do is treat employees as professionals, no different than lawyers or doctors or accountants, and pay them an annualized salary and a bonus, and give them markers and performance reviews and goals, and all of those things that professionals get in other fields. Unfortunately, the FLSA does not allow you to do that for servers, and I understand that they’re trying to protect the waitress or waiter at a small restaurant from an unscrupulous owner or manager who’s going to take the tips and take advantage of them. But at high-end restaurants, it’s so different and creates far greater inequalities. I think the government has sort of lagged in that regard, in terms of making the choices flexible enough, depending on the type of restaurant it is.

Some restaurants have opted to get rid of it altogether and billed it into the price of the food, which I’m all for, but then it puts you at a competitive disadvantage, because people don’t do the math in their head the way you’d think they would. So if one restaurant is charging $20 for a dish, and the other one’s charging $24 for the same thing, but you never tip and the service is included, it’s the same exact thing. But one menu will seem, to the diner, more expensive than the other.

What do you do to ensure that your staffers meet their yearly goals?
We know how many hours a week our servers, or any of our staff, are going to work, within a range. And so we’ve sort of worked backward from there, and we might have a salary goal at a certain position of $55,000 for the year. And so we can figure out what that equates to on an hourly rate, and say, “If we pay you X per hour, then you’ll make about this much per year.” Then we adjust as we go, just based on the performance of the individual, their tenure, how long they’ve been with us, and how well they’re doing, just like you would in another business.

As high-end restaurants digest the consequences of the FLSA, will we see more places move to a ticketing system?
As reservations change and as payment options change, you’ll see a lot of innovation in this regard. It’s an opportunity for restaurants to really change the way in which their cash flow works, and labor is a part of that. Our biggest expense at the restaurant is labor, as a percentage of our gross income … What has changed is that we’re able to plan better, and we’re better able to pay a good wage to people who are not directly in touching the customer directly, but are a part of what makes the restaurant magic happen. I think you’ll see that more and more restaurants are going to move to this.

What do you think about all the class-action lawsuits that have affected restaurants?
I think that a lot of restaurants do not understand the law fully. It’s very, very difficult, and the best way to comply isn’t obvious. With some of the guidelines and the lawsuits and the case studies, I look at it and think that I can walk into any restaurant in America that’s an individually owned restaurant — not a restaurant group, but a single restaurant — and find a violation, somehow. And that’s partly because they try to do everything right, and they can’t afford to hire a labor attorney to craft a plan. But once you grow and you get two or four restaurants on up, that’s very different. You probably have a human resources department at that point.

I urge you to look at the lawsuits that happened in New York and tell me if you think that the owners of those restaurants were stealing money. It’s my impression that in almost every case, the restaurants were giving money to the wrong employees. And they were wrong — they’ve admitted that they were wrong. But I don’t think that they were necessarily malicious. Certainly, I’m making a gross generalization, but in a few of the cases that I read in detail, I don’t think that the ownership was benefiting in any way.

You think it’s more likely that an owner was just trying to help the cook in the back who’s working insane hours, and not benefiting in the same way?
Yeah. You know, restaurants are very traditional places in many ways, and so you have a practice that’s been going on for 15 years, and then the law and guidelines change. Some of the restaurants haven’t adapted to the changes quickly enough. I think that it’s a very touchy subject with restaurants, but it’s also a touchy subject with the public because the public just wants the best service possible and they don’t want to be taken advantage of. They don’t feel like the service should be mandatory, because the tradition in this country is to tip, because it results in better service. And certainly, that might be true at a small, inexpensive restaurant. But I really, really doubt that if you go into a Michelin-three-starred restaurant, whether they’re doing tips or service charge, you’re going to notice any difference in service.

How does the customer benefit from this system?
In the case of Next or Alinea, people buy a ticket online, eat, and then just get up and leave. It’s liberating to get away from that whole dance of waiting for the check to come and splitting a check among your guests and all that. It all goes away, and it all feels pretty good.

What do you think of businesses like Resy and Cover?
I will say that I like Cover because it’s essentially mobile payments for restaurants. So something like our ticketing system and Cover could work well together because, ultimately, you could buy extra stuff when you’re at the restaurant and pay with Cover, and it’s very smooth … and as for Resy, to me, paying to get in is kind of like slipping the maître d’ a $20. It doesn’t really solve the biggest problems for restaurants or customers. It solves a very, very narrow problem, which is, at peak times on the busiest days in the biggest cities, some customers can’t get in, and they’re willing to pay more. But that problem is probably only a problem for a few percent of the restaurants in the world, and 5 percent of the customers at those restaurants. What we really need is variable and dynamic pricing. We need to be able to shift the demand from busy Saturdays to Wednesday at 10 p.m., and to have pricing work in two directions, not just one. It should be less expensive for a customer on a Wednesday at a non-peak time.

What’s next for your ticketing system?
We sold just under a million dollars’ worth of tickets last week for the restaurants on our beta program. We saved them money, and we saved the customers money. We’re launching Aldea, and we have four other restaurants in New York. We’ll be announcing the investors and the chef-collaborators and whatnot in just a couple weeks, which I’m really, really excited about because we’ve had the whole thing under wraps for a long time. I think people are gonna be really surprised with the people that were involved.

Related: Is It Time to Topple Tipping? Adam Platt Tries (and Fails) to Go Gratuity-Free
We Are the 20%: What Tips Mean to Servers, Bartenders, Doormen, and Baristas

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