Will New IRS Ruling Spell "The End" of Automatic Gratuity?

More about Restaurant Tipping & Automatic Gratuity

In the future, more restaurant debit/credit slips will look more like this,
to meet IRS regs ensuring that customers can choose how much to tip,
so that the restaurant does not have to deal with the new
"Service Charge" definition of auto-gratuities.
Image: Flicker & Manny Hernandez

Well just in time to interrupt the publishing of this "tippng series" as a book, I should report to those of you who are still (despite my best efforts ;) 100% opposed to seeing an automatic gratuity added to your bills, that you may indeed get your way after all.

Compliments of your friendly Internal Revenue Service.

There's a new IRS ruling that I'm not happy about at all. Now, I'm not grumbling as if this new rule will somehow mean that I/we owe MORE taxes on our tips and gratuities, as you might suspect. It doesn't mean that at all. It's an intense new cluster of paperwork that I can clearly see will make many restaurants drop the practice of auto-gratting, solely to avoid the hassle.

I can already see where all of this will result in less taxable income to me overall, which is why I don't like it.

The gory details are spelled out in many recent articles, like "Restaurants May Have to Change Tip Reporting Systems," "IRS Says Auto Gratuities Are Treated as Wages, Not Tips,"  and most telling of all "Say Goodbye to Automatic Gratuities."

These articles are rather technical, so boiling things down for you, as I see it the new ruling creates at least two distinct sets of problems for restaurants with an auto-grat policy, in order to remain compliant with the new IRS regulations:

1) The ruling means that the IRS is forcing restaurants to create new (as in extra, not merely different) classifications for reporting servers' income. The new and different columns will revolve around instances of whether the gratuity you pay still fits the old definition of a "tip" or the newer one of a "service charge." If you the customer did not solely determine the specific amount of the tip (as is the case with an auto-grat, which again started as the servers' protection mostly against exceptionally huge losses on large parties) then it is deemed to be a service charge, not a tip.

Which does make sense, I realize. It's kind of like the "labor" you pay for when you get your car worked on - it's a fixed amount that the establishment sets. However, being that it's an actual charge, many states are going to collect sales tax on it, meaning the customer loses out because of higher prices. Oh, and since it's now a charge that's paid to the restaurant (not a tip paid to the server) the restaurant can legally KEEP all of it they want to, and pay their employees whatever they deem appropriate, so long as it's above minimum wage. I can't help but see greedy corporations and dishonest business owners skimming portions of the "service charge" right out of the servers' pockets and into their own. Adding insult to injury, many servers will get their share of these "service charges" on our paychecks now, not on the night you dined. So the waiters lose in this new math as well as the customers.

"The State," meanwhile, will now require separate and additional types of accounting to make the restaurant compliant with FICA laws. I'm always taxed on all tips already, and it's not clear whether this would mean even more taxes owed by me or not (not the point), but it will require much more complicated and headache-inspiring diligence by the restaurant's accountant or accounting firm to keep straight. This obviously will cost them time and probably money to sort out.

2) The auto-grat - now called a service charge - creates all sorts of implications for payroll purposes, requiring near-incomprehensible micro-divisions and sub-categories of wage and taxation classification. This ruling creates new and difficult calculations of what our true "hourly pay" actually is - which could now change on any given day or shift! This creates additional complications in regards to computation of our over-time pay (which we rarely are allowed) becoming even more costly for the restaurant.

The worst part is that if a server has one or two auto-gratted tables on a given night, then three or four which are not, he or she would in effect be working at two different pay-scales simultaneously! This would be a nightmare to keep straight, and downright impossible for a restaurant to correctly track and report, thus inviting the IRS to get on their backs and all up in their business in new and creative ways. And who wants that?

Net result of these factors being the probable elimination the auto-grat entirely by many small businesses and large chains alike. They'll just naturally wish to avoid the paperwork headaches, additional accounting and taxation costs, and probable fines for getting it wrong (because it looks really hard to ever get this new system right).

The only other way to avoid the confusion would be for a restaurant to auto-grat EVERY table, regardless of size. It's possible that only this method could guarantee complete consistency and elimination of errors in their payroll. This would be simple, but definitely not popular, as I'm sure you can agree. That's the way things are done in Europe, and Americans customers don't like the service we get from most European waiters any more than American waiters like the way European customers tip.

Am I right, or am I right?

The losers are many in this system, and the only clear winner I can see is big government. The restaurants lose as operating costs increase and good help goes elsewhere, if they don't both keep the auto-grat and comply with confusing and costly procedures. The servers lose personal income at the places that drop the auto-grat just to avoid dealing with the whole mess. The customers especially lose as the additional labor and accounting costs increase and get incorporated into meal prices.

What I don't think the I.R.S. sees coming however, is that they are just creating anew the very problem they've been trying to solve for decades ... Many, many years ago you see, the I.R.S. became aware that many waiters and waitresses weren't reporting all of their cash tips as income at the end of each shift. Since the 1990's (in my experience), I've witnessed restaurant owners and managers increasingly "tighten the nut" on making sure their waitstaff claims their tips by stricter and stricter policies, to avoid being open to I.R.S. audits and intense scrutiny on their business practices.

This problem has all but gone away in fact, with the rise of Debit Cards however - 95% plus of tables I wait on today pay via debit or credit, and how much they tip is recorded in writing and entered into the computer. All that meaning that the numbers of servers who are accurately and honestly reporting their tips is probably higher today than it has ever been. Not to sound all Ron Paul on you, but this occurred because "the market" itself created the solution (debit cards), not big government or legislation and paperwork.

But these new rules on auto-grat and service charges, I think, are going to have unforeseen results. How so?

Simple - I think more and more people are going to return to tipping in cash. As word spreads, and it becomes common knowledge that the restaurants you eat it are possibly keeping a portion of the service charges and credit card tips to line their own coffers, and that your servers aren't even taking home much of what you *thought* you tipped them, but are now having to wait on their paychecks and hope the employer actually gives it all to them ... I simply think that a new generation of former restaurant people and sophisticated diners who know such details are going to respond with sympathy, and with cash tips, to make sure that the person who actually waited on them actually receives the tip they actually left. My personal thanks to you if this is your choice. I'll still claim it like I always do anyways, but under this new way of doing things, the service charge has a lonnnnnng way to travel before it hits my bank account, and tipping in cash really will again become the best way to reward good service.

So how did these new rules get started anyways? I can only guess, but I'm willing to bet that some IRS agents went out to eat somewhere as a group, their table got auto-gratted, and they were miffed about it.

Perhaps they vowed revenge, and secretly plotted the best way to make sure it would never happen again.

Whatever the case, the IRS may well have succeeded in bringing a near-end to the auto-grat as we know it, as restaurants deal with the practical repercussions of this new legislation, effective January 2013.

So, have my labors of these past few months been in vain? Is this book obsolete before it even sees print?

Nah. For one, many of you readers are becoming better tippers to your servers, or so I'm hearing from you. I do additionally hope that you'll take the time to perhaps be more scrutinizing over your choices of where to eat as well. I hope that you'll reward (with your presence, and discretionary dollars) the places that keep their auto-gratuity, despite the hassles they're going through to be fully IRS compliant.

And just if and when you actually do have a choice of where to eat, it's still my personal opinion that you will generally receive a much higher level of service and professionalism from the waiters and waitresses qualified to obtain, and keep, jobs in restaurants that include auto-gratuity, largely because they want to retain long-term skilled servers.

The old addage says "you get what you pay for..." I believe that the distinction in service levels will become even more apparent to you, both as this new ruling plays out, and as corporations and chains make their choices as to whether or not to include an auto-gratuity in their billing.

What Time Do You Close?

Not MY face - I'm thinking "YES! Party of 10 equals BANK!!"

Some fellow servers and I are just going to have to part ways on this one, as today's post does not reflect the opinions of most restaurant people.

No doubt most waiters and waitresses will tell you that one of the top most annoying things a customer can ever do, is to walk in five minutes before the restaurant closes for the night expecting to be served.

I saw the question posed on an online forum recently, which read "How long before closing is it acceptable to come into a restaurant for dinner?"

Service (and I'm using the term loosely here) Industry people had definitely taken over the conversation, many arguing that "about an hour" before the posted time is the "appropriate cut-off time" to be seated in a full-service establishment.

I chimed in, and basically told them to get over themselves.

At five to fifteen minutes before closing time all across America, things are definitely being cleaned up and put away. The cooks are breaking down the grill and taking their pots and pans to the dishwasher. Servers have taken apart and cleaned the cappuccino machine, the tea machine, and polished their silverware. Bartenders are pouring hot water over the ice bins and wiping everything else down. The manager is waiting for the last table to pay so that their closing paperwork can begin. Everybody's just counting off the final seconds before they can clock out and go home. I know this all too well my fellow restaurant people, and whilst you or I might never walk into a restaurant five minutes before closing ...

The truth is, we're still open.

No doubt, servers absolutely hate it when they think they're about to leave, then two people stroll in asking "What time do you close?" (... as if the sign out front didn't already answer that question. You're not fooling us with that one, you do realize?)

Anyhow, allow me to be the bad guy who tells these servers that "In five minutes..." is not the correct answer.

I know you've worked a double and have been on your feet for twelve hours. I also know what time you have to be here the next morning. And I know you're pretty sure that your chances of getting drunk or laid are diminishing the later you stay here tonight. I know. The customers don't know this though, and - Newsflash! - they don't want to know either. All they know is that they're hungry, this is a restaurant, and your lights are on.

Unless your restaurant's policy clearly states otherwise (via a sign or consistently observed policy) the only correct answer to these nice hungry people's question is "We don't stop seating for another five minutes, so you made it! Right this way..."

Sorry, I know you were thinking how nice it might be to get off "early" for once, but alas, such is not your fate tonight. Your fate is to work a little harder on that degree (or whatever your thing is) so that one day, when you own a business, you get to decide when it's okay to turn people away. Until then, you're in the "Hospitality Business" which requires one thing of you above all else - some hospitality!

If you really need to get off at a specific time each night, you can always take your people skills and go work at Wal-Mart. We both know good and well however, that your significant other knows by now that you don't get off (or home) at the same time every night - "It all depends on how busy we are" right? Well guess what? You just got busier. So hate me if you want, but I'm just telling you that right now you've got people to wait on. You need to suck it up, be appreciative that they're spending their hard-earned money in your section, and get ready to maybe wash that coffeepot out one more time.

You can argue that "one does not simply walk into" an auto mechanic's business or a dentist's office five minutes before closing, and expect them to stay an hour later for you. You'd be quite correct in that argument. But you're not a dentist, you're a waiter.

In some businesses, the posted closing time is indeed when the last person has to leave the building. Not true in American culture, in the restaurant business however. Here, the cultural norm is that people can come in - and be seated - up until the posted closing time. That's just the way things are, so if you can't play by those rules, then quit asking your boss to give you the money-making closing shifts anymore, and go back to getting "cut" when the newbies do, okay?

Now I am reasonable, and there are limits. The guests need to know this as well. It's okay to politely convey that "Because the kitchen is closing, I do need to get your order in to them in about five minutes." Or two, whatever the case is. That absolutely should be made clear. This is not a case where they're going to be able to enjoy two cocktails and appetizers before ordering. No, not this late. The kitchen staff is already going ballistic in fact, but this should not be conveyed. Nor should it be compounded.

The food will probably come out pretty darn quickly too. They need to eat it, and pay fairly promptly. I don't think the guests in this situation need to feel that it's okay for them to linger, either. I'll gladly take any table that comes in five minutes before closing (or five minutes after, if management is agreeable and the kitchen has not already been broken down) BUT there's a huge difference between closing a place down, and thinking it's alright to still be there when it opens again.

People can come in at the last minute, and I will feed them. They are not permitted to order a third bottle of wine and make out in the booth however, while the waiter, busser, bartender and manager are waiting for them to leave. Nope, that's expecting just a little too much, Romeo and Juliet. I will cordially feed you a great dinner (I will not offer desert), and I'll give you "about an hour" - tops - after the posted closing time before bringing the check.

I will then politely but kinda firmly say "Hey folks, I'm glad we got you in just under the wire, but my manager has to have the books closed out now, before the computer something something something..."

So that's my take on it. When there's still time to be seated, we need to wait on you, and not complain about it. And because we did, when your food is gone and the restaurant really is closed, you need to go.

Fair enough?


Hard to tell just who's side I'm on sometimes, isn't it?

Stereotypes, and Why I Didn't AutoGrat tonight

Image - PBS Documentary "Black Folk Don't : Tip"

Hey, I've got a joke for ya :

"What's the difference between canoes and lesbians?"

"Canoes tip."

If that offends you, sorry, but it was told to me by a male gay server... which makes it okay, right?

All that was just my way of saying "So, let's talk stereotypes!"

You know, like "Black people don't tip..."

Because just when I think I've successfully argued the rationale and my right to autograt every table I can, along comes a group which gives me pause. Much to the chagrin of my co-worker (and financial partner in tip-sharing for the evening) and after much deliberation, I finally chose not to autograt a party for the first time in memory.

Stereotypes played a large role in this decision.

Late on a slow night, I'm alerted by the manager-on-duty of a new 5-top whom she's just seated in my section. Any optimistic hopes I may have had that this will be the table that "makes my night" (financially) dwindle as I walk into the main dining room and notice that it's a table of five black guys.

I'm sure that sounds quite racist, but it's not. It's common knowledge in the restaurant business that black people - on average - don't tip as well as white people do, on average. Am I stereotyping? Yes I am. We all do, but it's a stereotype supported by my years of experience, and the experiences of many other servers.

Today, there are published studies which explore the statistics behind this stereotype, and even a PBS documentary entitled "Black Folk Don't Tip" by Angela Tucker (who is black, btw). Turner interviews several black people in her video, who generally affirm the truth of the stereotype, and cite possible reasons. One posits that black people have less "tipping history" to draw from, because they were denied entry into restaurants for so long in American history. Another, saying it's perhaps "a throwback to slavery" where black people were forced to work for white people for nothing, and so today when we work for them, we get nothing in return. However, Cornell University's study says that black people "tip less than whites even when the server is black" so maybe that's not it.

Ask any black server if you don't believe me. They will affirm that their experience is the same. As Lawrence (whom I worked with years ago at The Prime Cut) liked to say "I love my people. But I don't like waiting on them."

Now many problems come into play when servers respond to this stereotype as if it were an insoluable fact, the largest perhaps being that servers (black and white) don't really want to wait on black parties. It would be correct to say that our optimism of getting a huge tip wanes, and we walk over to the table hoping we'll make maybe 15% anyways, secretly dreading that we might get stiffed. The black server who wasn't seated this group smiles knowingly and says "Good luck with that" as we go to greet the table. However, in certain cases of being seated a black party, a more unprofessional server will withdraw entirely, purposely giving inferior service because they're not expecting to make much money. This of course creates a truly vicious cycle - or a self-fulling prophecy, if you will - of the black people tipping poorly not because they're black, but because they got poor service, and the stereotype continuing.

I learned my lesson years and years ago on this topic. As a newbie waiter at Ruby Tuesday's (in Knoxville Tennessee, where not a lot of black people live) I was seated a black couple on a Friday night. I was still developing into a server who could handle a busy station at that time, but wasn't quite there yet, and was somewhat aware of the mantra "black people don't tip." Because of the volume levels, I came to one or two points in the hour where I had more to do than I could really execute, and made an internal decision to give worse service to the black couple so that I could give better service to my other three tables, who were all white and presumably would tip me better. Yes, I'm admitting this.

By "worse service" I mean that they didn't get re-filled on their drinks as often or as timely as my other tables. They sat there with empty, dirty plates a bit longer as well, until I was "caught up" enough to take them away. I didn't chit-chat with them as much as I did with my other tables either.

So when all was said and done and I'm picking up my books from the empty tables, guess what? The black couple left me $5. That's five 1980's dollars. Five 1980's dollars at a Ruby Tuesday no less. That equates to about twenty-five modern dollars at the more expensive type of restaurants I work at now, and it was well over 20% of their tab. In fact, going by percentage, they tipped me better than any of the other three tables of white rednecks whom I'd given the preferential treatment to.

I felt shame. I realized that I was a lousy human being, and definitely not a professional server either. Like I said, I learned my lesson that day, and then and there resolved to give the best service I can to everybody, because you really don't know - plus it's my job so I need to just do it as best I can. That day, I experienced what others in Turner's video point out, that some black people actually over-tip in order to make up for the stereotype. They are in effect purposely "buying" a better reputation for their entire race, and sacrificing personally to make things better for other black people and their own children, perhaps. Over the years I have received some truly awful tips from black people (and of course white as well), yet I've also been blatantly over-tipped several times as well, from certain black guests.

(Up until now, I've really not wanted to tackle the "black people don't tip" idea in this blog because I know it's controversial. As evidence of my intent and attitude however, I remind you of "Miss Virginia" from my "Worst Day Ever" entry, where I quite purposefully mentioned that she tipped me 30% that day, as my subtle yet intentional effort of not perpetuating the more common attitude. Did ya even notice I did that?)

So anyways, five black guys, right?

Our restaurant's website encourages guests to dress in "business casual" attire, but apparently these guys didn't get that memo. Not a problem, as not everybody that comes in here dresses up, but all I'm saying is that their outfits weren't chosen to help me feel like they were big tippers. There were many bright colors, some loose jeans which were showcasing some really stylish underwear, and not all of their jeans were blue for that matter. Whether these guys were looking "gangster," "ghetto," "styling and profiling" for going to a nice club later or for shooting a hip new music video was not immediately apparent to me. At this point in my life, I'm just too uncool to tell the difference anymore. So maybe I'm generalizing, but the idea that these guys are the "over-tipping type" of black folk doesn't exactly enter my head.

Now, judging solely by their voices and speech patterns, something else becomes apparent as I'm greeting the guys and getting their drink orders. These guys are gay. Well call me sheltered, but the thought occurs to me that "Hey... I don't think I've ever been in the company of five gay black men before..."

Then another thought immediately creeps into my head. "Hey, gay men are usually fantastic tippers. This could turn out well!" It's just another stereo-type I know, but also one that proves to be true when averaged out in the long term.

So while I'm waiting on the guys (and giving them my normal friendly, efficient service I might add) I can't help but wondering how these stereo-types will work together. Will they cancel each other out, or will one trump the other?

"If racial stereotype equals matter, and orientation stereotype equals anti-matter......?" I'm pondering.

Wait, the plot thickens. Another friend joins them, and then another, making seven gay black men that I'm waiting on now. Gay, black, or not, that's seven people Bucco, and our menu states that 20% gratuity will be added to parties of 7 or more.

My tip-pool partner and I raise our eyebrows optimistically and with a hint of relief, knowing that all elements of chance and universe-shattering paradoxes have disappeared, because now we can auto-grat. And if there's any question, even James (a fellow waiter, who is black) says "Do it."

Not that there's any question whatsoever, if you know me.

But then A SNAG comes up. One of the "joiners" isn't eating. Or drinking anything. He's really just there to meet up with his friends before they all move on to somewhere more exciting than this place. I did bring him water, but he didn't ask me to.

So how does that figure in to the auto-grat equation? The number is right, but one's not eating. In fact, two others aren't eating either, they're just having drinks while their friends eat, before all going out together.

I know what you're thinking .. "Well of course you can't auto-grat if one of them didn't even order anything!" I'm sure you're thinking this, right?

But that's just you, and this is probably the first time you've ever pondered the situation. Plus, if your income has never depended upon how you answer such questions, then you might even call me biased (or other, more choice words) but this ain't my first rodeo. I've made this call a dozen times easily, and even had to answer for it a couple of times.

Once, I had some customers (white folk) "call me" on auto-gratting them when one of their party was an infant who didn't order an entree, but that little baby made the table reach the magic number. The menu doesn't say how many entrees result in an auto-grat, it says people. Your little tyke is a person whether he orders from our menu or not, and that counts. Even though little tykes usually graciously tip by leaving 20% of their Cheerios behind for me, I can't spend Cheerios, and the fact that you brought him or her out took up space that I had to clean up afterwards, and they count as a person. Every time.

Black, White, Hispanic, Foreigners, Christians (I love my people, but I don't like waiting on them) - doesn't matter, I will auto-grat when the restaurant's policy says so, and you know this about me, right? And you still love me...

But this... tonight... this table launches me into some truly new territory. This one I have to really think about, and I now appreciate them coming in for that reason alone. They've turned my otherwise mundane night into one of exciting mental gymnastics and ethical and moral dilemmas and stuff, that require me to actually THINK about what I'm doing, for the first time in Oh so long!

All they had was appetizers and a few drinks. My partner expects me to auto-grat them, and it's his income on the line as well as mine if I don't, if the group doesn't tip. The restaurant's policy is to auto-grat. So why am I hesitating?

Well, because they're black. That, and I have a soul. There's a chance they'll challenge the auto-grat based on the fact that one of them didn't eat. I've politely stood my ground on that one before but in this case, I feel like they'll think I'm pushing the policy beyond what is reasonable simply because they're black, not because of my personal policy on people and numbers. Maybe they'd make a scene (no more or less of one than pissed-off white people would, I mean) but whether they would or not, in my heart I just know... they'll be offended.

I'm not in the business of offending people, but I do expect to be paid for what I do. My partner for the evening makes it known that he expects me to grat them, and the manager (white girl, who dates a black guy) has already told me that she will authorize doing so, based on the number of people at the table.

I'd be "in the right" but only in a very debatable way.

Oh, decisions, decisions...

"Black people don't tip."

"Gay men are great tippers."

The moment of truth arrives, and I go to James (the black waiter, and our "senior server" that night) for one last opinion. I have every confidence that what James will say will match what he'd do if it were his money - and his personal integrity - at stake. He asks me "How much is the tab up to?" I show it to him - just $74. His words echo what I've already decided, but man it's good to get a second opinion from a server more professional than my snot-nosed young partner for the evening.

"Don't grat that shit," he says, and I don't. I can't. Acting within my rights somehow doesn't feel right this time. $14 ($7 to me) just isn't worth offending people over.

So for the first time in over a decade, I don't grat a table that I could have, and decide to earn my money (or not) the old-fashioned way this time - by leaving it up to the customer.

I split the checks up as they've directed me, and spin the wheel to see what happens.


Curious? Admit it. You are...


Well, if it were a poker hand, I just hit a straight - of stereotypes.

One guy stiffed me on his beer. The two that ate left me $3 on $42, for about a 7% tip. One left me $2 on a $10 cocktail. And the one that had an appetizer and a coke left a ten-dollar tip on his $16 check.

Every so-called "black stereotype" possible, all at one table.. the stiff, the crap tip, the industry standard one, and the over-tipper who evens out the bad ones.

The auto-grat would have been about $14.80. Without it, we made $15, kept the peace, and I slept well. If not for the over-tipper though, Id've owed my partner a few bucks - and would have gladly paid it because part of being a grown-up means that every now and then you just have to take one for the team.

The human team, that is.



If you're like me, one question remains however :

If they were seven heterosexual black men, would I have taken the same risk, or would I have gratted them?

Well, I can't honestly say off the top of my head. Every situation's different, and you never know what you're going to do sometimes. All I can say for sure, is that if having a bisexual roommate in college who dragged me along to Academy Award winning movies by Spike Lee taught me anything, it would have to be

"Always do the right thing."