Should Tips Be Based Entirely On Merit?

I recently read an article in the New York Post, suggesting that the average person in New York City pays more than $3,300 each year in tips.  …read the article

I don’t have data on average New York salaries.  But is a New Yorker, who’s making $45,000 per year, and paying income taxes amounting to $12,000 actually giving 10% of their salary away on tips?

As far as I understand, tipping became prevalent in England, first, during the 1700s.  But since then, it has become much more quintessentially American.  Here in Singapore, if I tried to give a taxi driver $5, he’d look at me in confusion.  I tried it once with a $2 bill, and the driver refused it…not because it was a small amount, but because it was such a large amount.

North American tipping is no longer based on a meritocracy, and I find it annoying, especially in the United States, where tips are socially mandatory.  If a waiter does a great job, I have no problem shelling out 10-15% of my bill.  But when they’re rude and ineffective, I don’t think they deserve a penny.  Paying them, out of custom, doesn’t promote better service.  And in tipping cultures where it’s nearly socially mandatory, few people “stiff” others for lousy service.

I did read Barbara Ehrenreich’s Nickel and Dimed, about the plight of low-wage Americans.  And I sympathize with anyone having to work so hard for $8 an hour.  But a tipping culture, rather than a tipping meritocracy, will weaken a country, not strengthen it.  It will weaken the service industry from a desire to strive and perform.  It will serve as a mindless tax for the masses, shelling out double digit percentages of their annual salary each year, and it will breed complacency with employers who ought to be paying higher wages in the first place.

Outside North America, wages aren’t necessarily higher.  But tipping is based more on merit than custom.  Do you agree that North America (especially the U.S.), needs to change?  Have you had any bizarre experiences, related to tipping?





Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I’m happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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27 Responses

  1. I am not a huge tipper. I do tip but I have my upper limit of 10% and it goes down with mediocre service. There is already a hefty profit in the cost of eating out for the restaurant, and when I hear crazy salary for waitresses at restaurant like The Keg, I don't find there is merit to give more. I also don't over spend on wine and such because I want to go and enjoy a dinner without breaking the bank (tip included in my Scrooge behavior).

  2. Hey Passive,

    When you refer to crazy salaries at the Keg, is that including tips? I know that a 10% tip in many U.S. social circles would be considered inadequate, but I'm with you, 100%. I am curious about those Keg salaries though. Can you share what you know about that?

  3. Friends were telling me that the waiter at The Keg make some really good money with the tips compared with other restaurants in town (I did not inquire further at the time) and since most of them don't declare all of the tips, it's quite a chunk of change at the end of the day. I don't have numbers but from what I hear it's a sought after position for waiter/waitresses. It's not like they make executive salary but for the work and expertise required, it's a good job for them.

    Let's just say that I don't feel bad about my 10% tip and sometimes I give it on the before tax price.

  4. Jason says:

    Cue Steve Buscemi's rant about tipping from Reservoir Dogs…

  5. Barry says:

    As someone who has been both a server and bartender, I have some strong feelings on tips, but I'll try and keep this short. Also please note these are my experiences in bars and restaurants and does not apply to different people and different industries.

    For start, tipping for servers and bartenders in the US is a MUST. Many people do not know this, but in the US it is legal to pay them much less than the minimum wage. Where I live, $2.83 an hour is the prevailing wage. After taxes, most paychecks are void, so most restaurant and bar workers rely solely on tips.

    With that said, I do believe the tipping culture is out of control. When you work at expensive and popular restaurants and bars, it is not uncommon to make 400-500 a night in cash, though 150-250 a night is a more realistic expectation. So while I do believe in tipping, I also think that the profession is grossly overpaid.

  6. Marco says:

    Hi Andrew,

    Have to agree with what you wrote. What irks me is when the tip is already included in the bill when you have a large group for dinner. Let me be the one to determine what the tip should be not the restaurant! I have no issue with tipping as long as it's earned and not "expected". Just because you bring my dinner to me does not mean you automatically get the 10-15% tip. How about coming by a few times and checking up on how things are with the meal or filling my glass with water without having me call you over? It's these little things that I look for to justify a tip. Just my two cents…

    Marco

  7. @The Passive Income Earner

    Hey Passive,

    I guess every kind of profession has a coveted workplace. It sounds like The Keg might be one of them, for servers. When I was a kid, I worked at a Supermarket (in 1986) and got paid $10.35 an hour and $12 an hour on Sundays. Plenty of kids I went to school with would have given their big toe to pack bags there, rather stock shelves or pack bags elswhere for half that. The Keg might be that kind of place. I also remember that if you flipped burgers, while working for the British Columbia Ferry corporation, you could make $18 an hour. At McDonalds, you could do the same job for $4 an hour.

  8. @Jason

    Thanks Jason,

    I just had a look. The guy on there did have a point: why do we not tip at McDonalds but we'll tip heavily elsewhere?

    I know that breakfast servers don't typically get the same kinds of tips that evening servers make. For that reason, when I do tip generously, it's often for breakfast servers. I think that if we're going to go heavier on the gatuity, that's probably where it's well served. What do you think?

  9. @Barry

    Thanks Barry. It's great that you've had experience on both ends, so you can comment on this with more authority than I can. I didn't know that people can be paid less than $3 an hour today. That's a huge problem. But surely, it can't be legal, can it? Can a state's minimum wage really be $2.83 an hour? Whoever approved that policy should be forced to try it for a few months, after having all of their assets inaccessible during the special trial. Approving such a low minimum wage borders on criminal.

  10. @Marco

    I've seen tips automatically included in the bill too Marco, and it's pretty irritating. I wonder how honest it is? I mean, here in Singapore, I see service fees on the bill. So I sometimes ask the servers if they get it. Sometimes they do, sometimes they don't. I had one server explain that the service charge is there to help the employer pay their wages.

  11. 101 Centavos says:

    I must say, that's one of the great things about living in Asia. The service I've found to be absolutely impeccable, and no tipping expected.

  12. @101 Centavos

    Hey Centavos,

    I'd agree with you when it comes to Asian Airlines, most definitely. But Singaporean restaurant service tends to be rather poor. It might be a regional thing. Where were you living?

  13. Barry says:

    Andrew,

    As I understand it, in the US, there are different classes of employees, and for tipped employees, tips are considered part of their wages. Employers can pay whatever hourly rate they choose, but if an employee's tips and hourly do not add up to the minimum wage, the employer is "supposed" to make up the difference. Whether this has ever happened though, I do not know.

  14. Rick Barrett says:

    Mean household income in Manhattan in 2007 was $121,594. Even in the Bronx (the poorest area of NYC) it was $46,289. With the record $144B the Wall Street guys made last year I doubt it has decreased a penny. It may even be up. If so, $3,300 is 2.7% in Manhattan (which often times is the only New York City people are talking about when you hear statistics like this.)

    Restaurants report the "expected" tips at 15% of sales that the server has to the IRS and they pay taxes on that amount. This was done to stop cheating. So, if you have a $300 check and decide to stiff the server… the server gets credited for a $45 tip and the IRS will consider that income for their taxes (now assume a 20% tax rate) that there will be tax due of $9.00 and that is what the server will pay out of pocket for the privilege of serving your party for an hour. Servers get $2.83 per hour to pay Social security and Medicare taxes that have to be withheld…. otherwise they would have to pay the employer out of tips for these taxes, too. McDonald's and fast food places that typically do not tip have to pay minimum wage and often actually pay better.

    If you really look at it the 10% service, it is an enforced tip. In the UK service is frequently included in the bill as is the VAT. So if the price for a hamburger at "Barons in Kensington" is 10 GBP that includes the service and the TAX. In the US the price for the burger is $7.95 and the tax $0.80 and the tip $1.50 for a total of $10.25. You can have the hamburger with the service and tax included in the UK for $15.41 and avoid tipping.

    In the end you do have some way of addressing your frustration if you have the "option to tip" and the servers do know this … so you are likely to get at least decent service. In the UK I had one server tell me that they were just too busy to take care of us…. but, they did have time to chat with their co-worker.

    So as they say in Texas… If it aint broke don't try to fix it.

  15. Sri says:

    According to this link, the US Federal minimum wage is $7.25, though some states set theirs higher:
    http://en.wikipedia.org/wiki/List_of_U.S._minimum

    However, as mentioned above, employees who get tips just need to have their wage+tips >= than then minimum wage, to the actual wage (paid by the employer rather than tips which are paid by the customer) is lower.

    See this link:
    http://en.wikipedia.org/wiki/Minimum_wage_in_the_
    In 2006, the median wage for waitstaff was $3.14! (minimum wage was $5.15 at the time)

  16. @Barry

    That's interesting. I read Nickel and Dimed a few years ago, and although I can't recall this part exactly, I was under the impression that, by law, every employer in each state had to pay a minimum wage–and that the wage was set by the state and fully paid by the employer. I honestly can't recall it well enough though. And I could be wrong. Does anyone else know?

  17. Barry says:

    Rick,

    I've worked at many different restaurants and bars, and that is definitely sometimes the case. I've also worked at places that only declare credit card tips…so any tips a server gets in cash are pretty much untaxed, unless the server claims them (which many don't). I do know a few servers and bartenders who have been audited by the IRS for never declaring anything. If the restaurants leave the option up to the server, an industry standard is 10% of total sales.

    Andrew,

    I've also read Nickel and Dimed, but I didn't much care for it. In my personal experience (high end restaurants and bars in major east coast cities, including NY) minimum wage is NOT a concern for waitstaff. Many make anywhere from 50,000-80,000 a year. I've even heard stories of waitstaff in Las Vegas that cleared the 100,000 a year mark. I'm sure it's a very different story for rural or suburban casual establishments though.

  18. @Sri

    Thanks for those links Sri. Very interesting! What's your opinion on that? Do you think the minimum wage should be standard, regardless?

  19. @Rick Barrett

    That's fascinating Rick. I had no idea that it actually cost servers money in the U.S. if they get stiffed by customers (because they have to pay 15% tax on money they may/may not have received)

    It sounds like you're saying that the system, as is, is reasonably fair. I guess there's no perfect system, but perhaps the tipping system in the U.S. is fairer than I thought. It makes me think of the tipping done in the U.S. for a growing number of services though. Will other service providers soon be hit with the same tax–like taxi drivers, and hair dressers, for instance?

  20. Sri says:

    To me – ideally – people should be paid straight up for their work by their employers. Everyone assuming that X% in tips will be made on average by each worker in a given profession is unfair. Tips are bonuses paid directly to the staff by the customer, and not through the employer, so they should be considered separately & (ideally) not counted towards that minimum wage. Obviously employers would be against it for obvious reasons.

    Of course, tax collectors see things differently, and will worry about all this unreported/undocumented income that isn't taxed, at least as long as tipping service staff is such a cultural imperative in some countries.

    Ultimately, for any of this to change, it would have to be led by a cultural shift (as opposed to legislative change) in society at large, which I don't see happening.

  21. Neat post. A tip is a luxury, not a right 🙂

    Good service = good tip. I've had poor service and I haven't left a tip sometimes.

    I can't believe how much New Yorkers tip!!?? Yikes, like a tithe to the Manhattan service industry!

  22. @Sri

    Hey Sri,

    I agree entirely. The system, I think, is unfair, considering that certain employers are able to get away with paying fewer wages–and those are probably higher margin businesses as well.

  23. @My Own Advisor

    Hey Mark,

    It sure sound different in New York, doesn't it? I had a friend once who was bullied into giving a $5 tip by a taxi driver there who refused to give enough change. I like to think it was a "one-off", but it might not be. Anyone experience something similar?

  24. Davo says:

    In Singapore service is at times is less ordinary — in 5 years here where we eat out several times a week, I can only recall the meals arriving at the table simultaneously for everyone twice — and one of those was just two people! It's not uncommon to have a meal finished by one person before the other arrives. I have been to a dinner once when the service was so appalling we asked for the manager and requested the compulsory 10% service be removed.

    In Australia I have found the service to be pretty good, (but certainly nothing near as good as the US) but a server gets a decent wage and it's supplemented by tips. http://www.payscale.com/research/AU/Job=Waiter%2F

    I know in certain establishments the tips are pooled and distributed amongst all the service staff… after all if the barman is tardy or the people behind the scenes aren't doing their job it’s pretty hard for the server to make it right

    But in Australia as well as wages, the employer is responsible for overtime, workers compensation insurance, & superannuation applies for all workers whether professional, vocational, seasonal, part time etc.

    Whatever the custom may be. I do find it seriously disturbing that in the US, employers are able to get away with paying less than a livable wage so that ultimately some employees have to ultimately rely on the generosity of the client. (I also find it sad that customers discriminate against servers… why is it that McDonald's staff is not suitable to receive tips?)

    Surely, whatever the industry, there is an obligation on an employer to pay a living wage?

    Imagine a policeman having to rely on tips for a living wage or a judge — (I guess they'd be called bribes) — or other professions such teachers relying on a tip from the parents…

    For a moment put yourself the server's position. How would it work for you in your profession to get paid a few dollars an hour and then have to rely on a gratuity to survive?

  25. @Davo

    Hey Davo,

    Needing a gratuity to survive is absolutely wrong. Agreed!

  26. cynical investor says:

    http://travel.usatoday.com/hotels/legacy/2010/03/

    "As a longtime customer of luxury hotels, hotel developer David Pisor grew to dislike the pressure and hassle of tipping, whether a $5 for the valet who retrieved his car, a $10 for the bellman who took his luggage and $5 for the concierge who recommended a restaurant.

    So when Pisor recently opened the 188-room, luxury Elysian Hotel in Chicago – half a block away from rival Four Seasons, he adopted a no-tipping-necessary policy. "

  27. @cynical investor

    Hey Cynical,

    After reading the article you linked to (thank you for that, by the way!) I think that policy is going to attract plenty of overseas travelers to his hotels. Honestly, overseas travelers don't tip like Americans typically do. Personally, I feel so uncomfortable in the U.S. when going to a hotel. I can carry my own bag, and when somebody grabs it for me, does that mean I need to tip him/her? Am I impolite to suggest that I can carry my own bag? It's not a cost savings thing for me; it's somewhat embarrassing when somebody wants to carry my backpack like a hotel sherpa.

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