Are Service Charges the Savior of the Restaurant Industry, or Legal Wage Theft?

A hustling worker at ink.EXPAND
A hustling worker at ink.
Anne FIshbein

It doesn't matter how much we, as a culture, love food. It doesn't matter how many cooking shows are on TV, or how many new restaurants open, or how many articles are written about those new restaurants. Unless something changes, the food world is about to collapse on itself.

"It's a system that, fundamentally, is broken," says Curtis Stone, chef and owner of Maude in Beverly Hills and Gwen in Hollywood. He is not the first to say so — not by a long shot. All over the country, restaurateurs and food writers and analysts have been shouting from the rooftops: This industry is doomed unless we come up with a solution, and fast. How is it that, in an era when food is more culturally relevant than ever, when more people are spending more of their incomes on eating out, we could be facing such a dire outlook?

There are a host of reasons for this pessimism, and they spring from a baseline reality that the restaurant industry was always a tricky equation. Profit margins are tiny, costs are high, and it's traditionally taken a fair amount of capital to even enter the game in the first place. The public's attention span is incredibly short, in part because of all those new restaurants opening. Restaurant ownership is not a particularly good gamble, even at the best of times. But new economic forces are making those already poor odds even worse, and they mainly come down to one word: labor.

The minimum wage is going up. By 2022 it will be $15 an hour in California. Owners are looking at the mathematics of a vastly increased payroll and wondering where the money will come from. At the same time, a long-standing malady in the restaurant industry is coming to a head: the divide between tipped front-of-house workers (servers), and non-tipped back-of-house employees (cooks, dishwashers, porters).

Stone explains the conundrum: "If you look at a city like L.A., where minimum wage is, say, $9 an hour, and you've got a dishwasher coming in for an eight-hour shift, at $9 an hour, how is he going to pay his rent? And then you've got a server coming in for a few hours, and they also get that $9, but they walk away with a few hundred dollars in tips on top of that. It leads to an industry where, eventually, no one wants to wash the pots, or cook in the kitchen for that matter, and everyone wants to carry the plates, because that's where the money is. But it's not necessarily where all the skill is, or the training, or the requirement for education."

Stone's use of the phrase "carry the plates" might sound casual, but it's an important distinction. In court cases that have decided the intricacies of labor laws as they relate to tipping, the divide between who may share in tips and who may not hinges mainly on physical interaction with customers at the table. In other words, if you put food on the plate but don't leave the kitchen, no tips for you. If you carry that plate from the kitchen to the table, you are eligible to share in tips.

Curtis Stone at MaudeEXPAND
Curtis Stone at Maude
Ray Kachatorian

This has always been a factor and a point of contention between front- and back-of-house staffs, and in recent years (as kitchen workers dwindle, due to the lack of decent pay), there's been a move by restaurateurs — most notably and vocally by New York's Danny Meyer — to move away from tipping altogether. There are a few ways to go about that, but in Los Angeles a growing number of restaurants have implemented a "service charge," meaning an automatic charge — usually 18 or 20 percent — added to your bill at the end of a meal. While consumers might think that this charge simply replaces the tip they're used to leaving, the truth of the practice is much more complicated.

A couple of months back, I wrote an article about the fact that in many restaurants where a service charge has been added, it's easy for the charge to go unnoticed by customers, leading them to mistakenly leave a full extra tip. Many restaurants work hard to make sure the diner knows a charge has already been added, but some do not, and it can feel to the customer as though the server is sneakily hoping for a double tip. Like most people, I assumed that the service charge is a tip. In fact, it is not — in Los Angeles, the money belongs 100 percent to the business itself.

"It is a total land grab," one L.A. server, who spoke on the condition of anonymity, told me the day after my service-charges story came out. "These guys are just taking the money and running. It's bullshit." The server described the experience of working in one restaurant that operated with the service-charge model. "At first it was great — we were all making a ton of money. The dishwashers were making, like, $18 an hour! It was amazing for them to have an actual living wage. Everyone was so happy. The servers were making money, the cooks were making money. And then the owners realized that there was all this cash that was legally theirs, and they were giving it away. And slowly, the money started to disappear. We weren't any less busy. But the money went away, and it went straight into the pockets of the owners."

I was told by another disgruntled employee (who asked for anonymity) that it's now becoming commonplace for owners to pocket "service charges" in some of the city's high-end sushi restaurants. Many laws have been put in place over the years to avoid the practice of owners or managers taking the tips of their service staff. In fact, that's exactly what the law excluding kitchen staff from the tip pool was meant, in part, to do. But calling the tip a "service charge" offers a way around that unless a city provides specific laws that stipulate otherwise. Santa Monica is one of those cities — it has an ordinance that "requires that employers who collect service charges from customers must pay the entirety of those charges to the workers who performed those services." That can include kitchen staff, but owners cannot keep any part of the charge.

Of course, the operators in L.A. who agreed to speak with me (there were a few who didn't respond to requests for interviews) don't see it as stealing tips — they see it as a way to more equitably pay all of their staff members. The charge allows them to distribute those funds between employees as they see fit.

Emil Eyvazoff, the owner of 71Above, opened the restaurant with a service charge in place. He is an enthusiastic advocate of the system, saying that the flexibility it allows to redistribute wages is one of the only ways restaurants will be able to stay in business as labor costs rise. But, Eyvazoff says, "One hundred percent of those charges go to the staff." Eyvazoff and his management team have figured out a formula whereby a certain percentage of the service charge goes to servers while smaller percentages go to bussers, kitchen staff, dishwashers — everyone but owners and managers.

"It is also completely transparent," he says. "If anyone on staff wants to see what money came in, where it's going, they can do that." (I independently confirmed with one of the servers at 71Above that this is indeed the system, and that he feels it is above-board.) The upshot, Eyvazoff says, is that kitchen staff make a slightly higher wage than they usually would, and service staff make a slightly lower wage. But because 71Above has high check averages, the servers still are doing well, even by fine-dining standards.

David Schlosser
David Schlosser
Anne Fishbein

Chef David Schlosser at Shibumi takes a similar approach, though because he has a much smaller operation, the math is somewhat simpler. "We are implementing an 18 percent service charge," he told me via email. "Fifteen percent goes to the front-of-house, and we are retaining 3 percent in order to pay the back-of-house a more living wage." He estimates that customers are tipping on top of the service charge about 20 percent of the time, and that extra money goes directly to the servers (as do additional tips in all of these instances, as mandated by law).

Curtis Stone takes a different approach at Gwen and Maude. There, the restaurant keeps 100 percent of the service charge, and all employees are paid an agreed-upon hourly rate. Stone says the service charge goes toward supplementing higher wages all around, as well as funding health insurance for all employees.

Stone's approach is somewhat similar to the system at Barcito, another L.A. restaurant that's trying to address the tipping issue, with a few major differences. Barcito allows no tips at all, and there is no service charge. Prices are about 22 percent higher in order to fund health care, higher wages for front- and back-of-house staff, and a revenue-sharing model. The absence of any tip or fee with the word "service" related to it leaves little room for confusion on the part of the customer about where their money is going. When I spoke to Barcito owner Andrea Borgen about her no-tipping policy, she was very upfront about her belief that owners should have control of the wages — all of the wages — of their employees. "Employees' incomes will be put back in the hands of the employers, creating a meritocracy that has never before existed in this industry," she said.

All of the operators I spoke with appear to be earnestly trying to come up with a system that will allow them to pay higher wages without damaging their business model, as well as create some equity between front- and back-of-house staff. But as the disgruntled server I spoke to will tell you, not everyone is guaranteed to play fair. Anyone who has been in the industry long enough will tell you that many owners will — and do — steal tips. This gives them a legal avenue to do so. Even Eyvazoff admits this: "From a legal standpoint, I have zero obligation to pass on those funds to my employees," he says.

Eyvazoff says he hopes that does not become the trend, for reasons that go beyond fairness. "This is maybe our one chance to save this industry," he says. "If people abuse it, it will fall apart. Maybe you'll make some extra money for a year or two, but at what long-term cost? If workers distrust it, if the public distrusts it, the model will go away. And right now it's our only hope for a restaurant industry that's economically viable."


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