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You know that charge you've been paying for parties of six or more, the automatic 18% gratuity? Chances are, you won't be seeing it anymore. Restaurants are changing their policies to allow diners to decide their tip amount for any size group, due to a change in IRS law: As of Jan. 1, automatic service charges must be considered wages, not tips.

Why would that cause extinction for the automatic 18% service charge for large parties? The new rule might seem like a semantic difference — tips are basically wages anyway. But it does actually make a big difference, mainly because “wages” relate to hourly pay. So if a restaurant counts that 18% service charge for parties of six or more as wages, as the IRS now says it must, that becomes part of the hourly pay of the server rather than a tip, which is in addition to hourly pay. It also gets taxed like wages and must come on a paycheck after the end of the pay period, unlike tips, which are usually paid out in cash at the end of the night.

The general consensus is that this will be so unpopular with servers that most restaurants will abandon the practice of adding automatic gratuities for any size party. It may not seem like that big a difference, but if you set up your life based on a daily payout, it can throw a huge wrench into your plans to unexpectedly have to wait up to two weeks for a night's pay (and a large party can easily take up much of a night's time and therefore pay).

The few L.A. restaurateurs I've spoken to about it say they will be giving up service charges.

See also: Should Tipping Be Abolished?

Service charges for large parties were put in place to protect servers against lousy tips from tables that take up an inordinate amount of time, but part of the IRS' rules have to do with the very basic premise of the word “tip.” The new rule states that:

(1) The payment must be made free from compulsion; (2) the customer must have the unrestricted right to determine the amount; (3) the payment should not be the subject of negotiation or dictated by employer policy; and (4) generally, the customer has the right to determine who receives the payment.

In other words, you can charge someone a “service charge” but you can't call it a tip. A tip must be made because you decided to give someone a tip.

When I waited tables, this was generally the very issue customers complained about when a service charge was added to a bill: If it's a tip, shouldn't I get to decide the amount? Many customers claimed they would have tipped more, and though that is always an option, the unpleasantness of being told what to tip generally turned them off enough to resist doing that. As a fine-dining server, I hated the automatic service charge, believing I'd make more money without it, given that most people tip 20% or more at upscale restaurants. For those servers, this change will likely make very little difference.

See also: Are Tipping Percentages Going Up?

The people it will hurt is servers at cheaper chain restaurants. The automatic gratuity is a godsend for people who regularly wait on large groups of teenagers or family parties at midpriced restaurants, the types of groups likely to demand all of your attention for hours at a time and then forget to tip at all.

Of course, the other thing this rule could do is bring us inching one step closer to a restaurant culture that gives up tipping in favor of wages. But that's a whole other debate.


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