Ending Tipping and the Virtuous Cycle of Enlightened Hospitality

Danny Meyer formulated the virtuous cycle of enlightened hospitality after he opened his second restaurant, Gramercy Tavern, in 1994. It’s one of the most interesting concepts in business.

Along with the hospitality quotient, the virtuous cycle comprises a company culture in an industry where people don’t always play nice in the sandbox. By putting staff first, as opposed to the customer, it flips conventional wisdom on its head. Meyer’s book, Setting the Table, goes in to the concept in detail.

When he got rid of tipping at Union Square Hospitality in 2015, Meyer continued his streak as a pioneer in the industry. Getting rid of tipping was a bold move that coincided with his “staff first” principle.

Unfortunately, Meyer has decided to renege on his no-tipping policy. Not only does reintroducing tipping work against modern anti-racist and anti-sexist movements; it doesn’t align with Meyer’s own philosophy.

The History of the Virtuous Cycle:

While operating one restaurant, Union Square Cafe, Meyer didn’t need to create a framework for his staff. He was at the restaurant and able to control things. After opening Gramercy Tavern he had to split his time, and didn’t like what was happening when he wasn’t around.

According to Meyer, the Gramercy Tavern staff was not treating guests well because his staff was not being treated well. The way he tells it — his staff was protecting him from guests that were trying to take advantage of him.

Meyer tells a story about a manager who didn’t comp a guests overcooked salmon because he thought the guest was trying to, “get away with something.” Soon after, Meyer realized he had to, “stop leading by example and name what matters.”

An NYU student named Susan Salgado helped him come up with the concept. Susan was a fan of Union Square Cafe and studied the culture at USHG for her dissertation. The two worked together to create a company culture that allowed Meyer to, “open restaurants in different cities and eventually go on to franchise Shake Shack without worrying his core beliefs would get lost in the process.”

The virtuous cycle starts with the idea that every business has five stakeholders: guests, employees, community, purveyors, and investors.

For years, economists said, “it’s all about the investor” — act in the interest of the investor; that’s how capitalism works — that’s how you make the most money.

It wasn’t until the phrase “the customer is always right,” was coined by department stores at the turn of the century that you started to hear about service. Previously, the onus was on the customer to educate themselves before purchasing something. Over time, the balance of power shifted away from the company in favor of the customer.

Meyer said we were beyond that point, which was a new idea in the mid-90’s. When you tell employees to just do what the customer wants your staff becomes demoralized. Ultimately, you have to put the team first.

You can envision the virtuous cycle by putting the five stakeholders in the following order:

  1. Employees
  2. Guests
  3. Community
  4. Purveyors
  5. Investors

Staff is first because in order for your guests to be happy, your staff must be happy.

Photo Credit: USHG

Although Meyer recognizes the cycle is an ecosystem, he is clear that the number one job of staff is to treat each other well.

Getting Rid of Tipping at USHG

Who actually benefits from a “service included” model of payment? The reason behind switching to a service included model is that, under a tipping model, the back of house makes far less than the front of house. The more a restaurant charges for a meal, the larger the gap in pay between the front and back of house.

This was the impetus for Per Se getting rid of tipping in 2005. Servers were making so much money at Per Se that the cooks wanted to become servers. As a result, Per Se increased the price of food 20%, which eliminated the need for tipping. The extra income was theoretically distributed equally, but that was not always the case.

What getting rid of tipping means is the front of house actually makes less, and the back of house makes more, relative to a tipping system. This means that “staff” is not a monolithic category. What is good for one staff member may not be good for another. Meyer says service is, “one size fits all,” and hospitality is, “one size fits one.” This principle also applies to staff. This is actually a good reason to get rid of tipping — people can be rewarded and given raises based on the quality of their work, and the time they’ve put in at the company.

Many servers quit due to the elimination of tipping at USHG, and there was high turnover for years thereafter. To those that quit, the perceived benefits of a steady wage were not enough to keep them around. This makes sense because studies show that randomized rewards motivate people more than steady, regular rewards. I find that servers are motivated by the idea that they could make hundreds of dollars in one night, even if they make much less other nights.

Why Getting Rid of Tipping Is A Good Idea

If you’ve worked in a restaurant you will have heard an owner gripe that, “labor cost is too high.”

First, in order for the virtuous cycle to work, ownership has to accept that they may make less money for the good of the business. Which is to say, in order to see returns, they must think about the long term. I have worked for owners so concerned about food cost and labor cost, it actually cuts into revenue because guests notice stinginess. Plus, a sub-standard labor cost, which subsidizes the low cost of food in this country, is already built in to pricing. This is a nice way of saying people aren’t paid enough. For most U.S. workers, real wages haven’t increased in decades.

Second, owners are losing their minds right now because the minimum wage is increasing (the federal minimum wage for tipped workers has been frozen at $2.13 since 1991. This sub-minimum wage was the result of New Deal bargaining to get Southern segregationist members of Congress not to block the regular minimum wage). Owners see this as a bad thing because they think it will take money out of their pocket. In reality, it’s good to pay your employees more because it decreases turnover, increases productivity, and puts money back into the community. Because an increase in spending results in more paying customers for businesses, there is a feedback loop between economic growth and consumer spending. In order for economic growth to increase, employees’ wages must increase so they can spend more. By getting rid of tipping, Meyer created a more equitable system for his employees that did put his staff first, even though servers ended up making less.

Many owners think if they’re forced to pay people more, they will close. In the 1990’s, David Card and Alan Krueger studied New Jersey’s minimum wage increase. They looked at hundreds of fast-food restaurants, in New Jersey and Pennsylvania (where the minimum wage remained constant), before and after the increase. They found no indication that the wage increase reduced employment. Other studies indicate raising the minimum wage does not have a negative impact on employment. Studies also show that raising the minimum wage decreases the racial wage gap.

“Hey if I could pay you less, I would, but it’s against the law.” — Chris Rock

In addition, tips are very easily stolen (wage theft is a big problem in the hospitality industry). In a recent audit of 9,000 restaurants, the U.S. Department of Labor found 1,170 tip credit violations. Managers and expeditors also end up getting paid in tips, which is illegal. Cash is notoriously difficult to split up. How much someone makes in a given position, and who gets to decide, can be incredibly contentious. Different restaurants in the same hospitality group might split up tips differently. Working for tips also adds stress on staff in the form of emotional labor. It’s just easier to be yourself at a job where your salary is not dependent on generosity and perceived social norms.

Sexual harassment and discrimination are widespread in tipped occupations. Research has linked tipping to higher levels of sexual harassment and poverty. People of color are heavily represented in tipped occupations, and their exclusion from minimum wage protections is a major contributor to the racial wage gap. Getting rid of tipping sets a precedent that these workers are valued.

Moreover, who is served, who deserves to be served, and who does the serving is rooted in prejudice. Therefore, it is essential to understand the racial history behind tipping, which Saru Jayaraman summarizes here:

“{Tipping is} an unfair pay system — in particular, one that reinforces pay inequity for a largely female work force — but also extends an ugly, racialized history. The practice of tipping originated in the aristocratic homes of feudal Europe. Then, in the 19th century, Americans returning from travel abroad would attempt to tip workers here to show that they knew the rules of Europe.

Toward the end of that century, a powerful anti-tipping movement arose. It called the practice undemocratic and un-American, arguing that employers, not customers, should pay their workers. In turn, American restaurant owners and railway companies fought to keep the system on the grounds that tipping was a legitimate alternative to wages — especially since many of their workers were African-American, in many cases freed slaves whom these employers resented having to pay at all. One writer of the period noted that he could never feel comfortable tipping a white person, since the practice should be reserved for “Negroes.”

The racialized element of the practice continues to this day: 53 percent of tipped workers in New York State are minorities, and 21 percent live at or below the poverty line…The subminimum wage for tipped workers also enshrines pay inequity for a predominantly female work force, perpetuating the gender pay gap. For African-American female servers, the disparity is even greater: ROC United calculates that they earn only 60 percent of what male servers are paid, costing those women more than $400,000 over a lifetime.”

Saru Jayaraman recently co-authored on op-ed in Time with Danny Meyer, where she promotes One Fair Wage, which seeks to abolish the tipped minimum wage. That’s all fine and good, but there is just no reason to wait for government intervention when private businesses can eliminate tipping themselves.

It is true that USHG had trouble retaining servers who are still very much used to an industry dependent on tips. However, pivoting towards an industry standard “hospitality included” model might lead servers to see how everyone benefits. Knowledge follows action. Long term thinking has a real benefit that not just investors need to see.

Why Danny Meyer Brought Back Tipping

The reason for bringing back tipping at USHG was Covid-19. According to Meyer, he doesn’t want staff to lose out on any income (whether or not people are actually tipping more these days is up for debate).

However, it’s illegal for the back of house to share in any tipped revenue. As a result, Meyer has promised to share restaurant revenue with kitchen staff in the form of a 25% pay increase. He argues that the problem is not tipping itself, but that tips cannot be shared. Instead of taking on the problem of tipping internally, USHG will push for a change in the law so that tips can be shared amongst everyone.

This seems to be a regression in the face of the BLM and #MeToo movements. Meyer did the right thing originally by getting rid of tipping. Reintroducing tipping is a way to drum up profits that, in the short term, might increase wages for servers, but in the long term, will not do any good for the industry.

Furthermore, Covid-19 is a reason to get rid of tipping — not hold on to it. Front of house employees are now in a position where they have to enforce public safety regulations. It would be easier for servers to remind guests to wear masks if their salary didn’t depend on, “saying yes as often and as cheerfully as possible.” Recently, Pete Wells highlighted a story about a guest who wanted the doors and windows shut, despite it being a safety precaution recommended by the state to keep them open.

Customer entitlement is real. People who eat out during a pandemic may not be taking things as seriously as those staying home. It’s not a stretch to assume that customers going out in this climate have a greater sense of privilege, which makes working for tips more problematically performative.

At first, restaurant workers in New York City weren’t eligible for vaccinations. But Andrew Cuomo did an about-face when he learned the state would be getting more vaccinations than previously thought. Yet, Cuomo made it obvious that hospitality workers are second class (expendable) citizens who don’t need the same protections as other frontline workers.

Retail workers, who spend hours inside dealing with customers who may refuse to wear masks or wear them incorrectly, have had a difficult time getting hazard pay. For restaurant workers, hazard pay has barely been mentioned.

A report from One Fair Wage finds that more than 80% of workers are seeing a decline in tips, and 40% say they’re facing an increase in sexual harassment from customers. Michael Lynn, a proponent of moving away from tipping, says that the average customer is tipping 1-2% less than they did pre-pandemic. And with overall demand for dine-in services down, it’s likely that workers are taking less money home in tips. So Meyer’s premise that returning to a tipping model will lead to higher incomes for servers has been proven false. The Center for American Progress summarizes the situation for hospitality workers right now:

“Unemployment in this crisis has been concentrated among low-income workers, particularly in the restaurant and hospitality sectors, and among women and Black/Latinx workers. These workers were already hampered by the lack of an increase to the federal minimum wage since 2009, a decade in which the minimum wage lost 21 percent of its purchasing power. These cohorts were also harmed by the continued existence of the sub-minimum wage for workers who receive tips. Before the pandemic, even if they were able to schedule full-time hours, these workers could rarely count on financial stability.”

Like many businesses, USHG is trying to show solidarity with social justice movements, but any restaurant showing sensitivity has a lot of headway to make because it really is that problematic of an industry.

Meyer has an excellent track record of giving back, but the future of work is in a fundamental shift right now. I believe part of that shift is putting other people first. This means not just donating to your local food bank. This means looking at your role in an exploitative system.

Studies show black restaurant workers are especially discriminated against in fine dining environments. Fewer black workers are promoted to the position of chef, and they are paid less than white counterparts. Black women have an especially hard time in the hospitality industry.

The Alternative

One business that has it right is Ben & Jerry’s. You could say they have perfected the recipe for corporate activism. When you go to their website, there is a dashboard of blog posts with topics ranging from climate change to ending white supremacy. Importantly, what they write about isn’t just a marketing tool. They source brownies from a bakery that employs people who were previously incarcerated. They donate a portion of profits to causes they believe in. They have joined a boycott of Facebook and Instagram ads. They are unequivocal when it comes to what their social justice goals are. Every business should take their lead by paying workers a living wage, demonstrating ethical business practices, and advocating for human rights.

Successful restaurants in New York that have gotten rid of tipping include Meadowsweet, Dirt Candy and Atera. There are other examples, and though some have reverted back to tipping, this is because we have not reached a threshold where not tipping is the new norm. There are other states where the tipped minimum wage is much higher — it can be done.

One result that the “staff first” model has not produced is Meyer giving his employees a stake in his restaurants. Mark Cuban encourages all businesses to give their employees equity in their company. A lot of businesses want their employees to act as if they owned the business (as a hypothetical exercise when it comes to making decisions), but are unwilling to actually share in the profits. In a staff first model this would be the most generous thing to do, and it would mean a greater reliance on a larger number of staff. It would mean spreading out responsibility. Businesses are always trying to find ways to increase employee engagement — this would be a good place to start.

A big reason you want to give employees equity is that they are the ones interfacing with clients and guests every day. “By giving employees equity, you make them a greater partner in making sure the business succeeds. An additional advantage is that you can tap their knowledge for more ideas and potential innovation.”

Where do We Go From Here

In an interview titled, The Case for Letting the Restaurant Industry Die, Tunde Wey said:

“Restaurant owners should abandon their pursuit of a bailout specific to the industry, and focus on policy and government programs that support people generally. If everyone had access to health care, housing, leisure, education for their children, education for themselves — all these things I think are rights — and if all these things they had access to were of high quality, I’m sure some business owners wouldn’t even return to ownership. The only truly affirmative and sustainable response is a governmental response — one that’s universal, that’s agnostic of industries, at least initially, and that focuses on developing a really robust social safety net, so we don’t have to rely on unfortunate, fake safety nets like poor restaurant jobs.”

What Tunde Wey is critiquing is a concept called socialism for the rich and capitalism for the rest. This happens when government intervention does more to stimulate financial markets than the real economy, and is not targeted at those who need it most. Billionaires have increased their wealth from $1.9 trillion to $4 trillion since 2010. The federal minimum wage has not increased at all in that time. These bailouts are largely nothing but an attempt to maintain wealth for the people who already have it.

This economy has brought forth a new social class called the precariat (a portmanteau merging precarious with proletariat). This is the gig economy. This is the on-call economy. This is the economy of always having to prepare for job interviews. This is the economy of people with a four-year degree who can’t find steady work.

Scott Galloway calls it The Hunger Games economy. He refers to the widening gaps in our country (wealth, racial, density, delivery vs. in-person interactions) as the Great Dispersion. Others call it the Peloton Economy. Whatever you call it — it’s clear that the distance between the rich and poor is increasing, and the people who need help aren’t getting it.

When it comes to Covid-19, the main thing we are lacking is a unified federal response. When it comes to the hospitality industry, we cannot even rely on a progressive governor like Andrew Cuomo to do the right thing. In January, Cuomo announced he would eliminate the tipped minimum wage, but hospitality industry workers were excluded from that change. This makes no sense at all. We need better, clearer responses from leadership.

Part of the problem is restaurant workers lack a strong union. In New York City, hotel workers have an amazing union, which some restaurant employees are a part of. The New York Hotel Trades Council, as well as the Hotel Association of New York City, have been providing health benefits to workers for decades. Union members get site-specific healthcare entirely paid for by union dues. However, the restaurant industry as a whole lacks an entity that can push for policy proposals. Counting on restaurant owners and politicians to do the right thing is not cutting it.

In the decade before Covid-19, 100,000 restaurants opened in the United States. In the first six months of the pandemic, 100,000 restaurants closed. In addition to the menace of the virus, the market was oversaturated, and restaurants were cannibalizing each other’s business.

Additionally, there was, and still is, a shortage in the labor market. Theoretically, this should have given workers a bargaining chip, but wage gains made in recent years have largely left the hospitality industry untouched. As the recession continues, workers will be squeezed at a time when they need wages to increase more than ever. During a recession, wage violations increase as workers become more vulnerable and less inclined to complain. Restaurants will close, but to prevent that from happening we can’t take advantage of workers.

Showing Up for Others is Showing Up for Yourself

In the early 2000’s, a study of start-ups in Silicon Valley identified six different company cultures, among 200 companies, over ten years. The organizational models they identified were named: star, engineer, bureaucratic, autocratic, hybrid and commitment. They found that company culture is important when launching a company, as well as when the company is growing.

It was discovered that if your company culture was organized around commitment then your company was faster to go public, made more money, had less turnover, and employees were more interested in solving problems for customers. Conversely, bureaucratic and autocratic models led to the greatest failure rates and lowest growth rates. The star model, which rewards employees on the basis of their talent, was second best.

A company culture based on commitment is one where the founder convinces people they have an important mission. The clear and concise naming of that mission is essential. Employees may not have control over what the mission is (the ends), but they are given autonomy when it comes to accomplishing that mission (the means). The mission is usually “other-centric,” and employees are encouraged to create emotional bonds at work.

USGH is a commitment model company. In a commitment company, the company culture supersedes the product. In many ways, this is something Danny Meyer intuited from the start. He only had one year of management experience before opening up his first restaurant, and food and service sometimes suffered. He had to compensate in other ways. This led to the virtuous cycle, which has nothing to do with food or service. What Meyer is interested in is hospitality, which is about how you make people feel.

The study also found that businesses were more likely to fail if they altered the company culture along the way. Change is disruptive — undermining the predictable expectations among employees can lead to higher turnover and declining revenue. Changes in how employees are managed are frequently made as a cost-cutting measure.

According to Adam Grant, a strong company culture is one where values are widely shared and intensely held. When businesses have strong cultures they’re better at attracting and retaining people because they stand for something unique. It’s also helpful for motivating, connecting and coordinating people because employees feel they are in a place with strong values, and they start to identify with those values.

A weak company culture is one where you go around to different employees and you ask what the values of the company are, and everyone says something different. What is seen as a value is generally disregarded.

Usually, a strong company culture is more desirable, but there are negatives. Strong cultures can lead to homogeneity and group-think. Thus, strong cultures of commitment tend to grow at slower rates when they reach a certain size. They are just not as adaptable the larger they get. The leaders of most large organizations spend less time with customers and employees, and innovation slows. Bureaucratic and autocratic models work better for large companies, but those companies are less likely to get to that size in the first place — a bit of a Catch-22.

Looking at this study gives us some insight into what happened at USGH — in terms of why employees responded so poorly to change, and why the change was reversed.

Final Thoughts

When listening to forward thinking CEO’s like Danny Meyer, I’m reminded of spiritual thinkers and social science researchers. The question Meyer is getting at is: How can I get my staff to think about each other? How can I get my staff to become less selfish?

We do not remove selfishness by ourselves. If we try to become un-self-centered on our own, it can’t be done. After all, how would you go about becoming un-self-centered? Even if you realize all you think about is yourself, you accomplish nothing sitting around thinking about it. How is self-centeredness changed? There has to be a new center.

This idea isn’t easy to translate into a business concept, but it’s not impossible. We put other people’s wants before our needs. We focus on humans instead of customers; people instead of transactions. But can you take this concept too far? At what point do you put yourself first? Even USHG’s “staff first” model is just a roundabout way of making customers and investors happy. USHG has been called the “house of yes.” In order to have an actual staff first culture, you need to be able to set boundaries and say no.

A strong union, profit sharing, and getting rid of tipping are all good places to start. We can’t let businesses use Covid-19 as an excuse to keep us from moving forward. Work must be approached with the same empathy we approach any other endeavor, and the people who need a lesson in how to treat other people always seem to be the people at the top.

The longer we go compensating employees with tips, the more entrenched we become in an unjust and unequal system. There is opportunity in uncertainty. Now is the time for big ideas that have never been tried before. Like every other industry, hospitality is one that might have to rebuild from the ground up.

Restaurants have been pummeled by Covid, yet most seem determined to not move forward in any meaningful way. I see owners gathering to protest shutdowns, but I don’t see them organizing to advocate for minimum wage increases. In a recent article for Eater about where the industry should go as it rebuilds, Alan Sytsma said:

“My fear is that certain behavior is so ingrained in the industry that, as restaurants reopen, there will simply be a return to the way things were. In reality, I think it will be up to diners to support those businesses that have taken stock of the restaurant world’s many existing problems, and have taken actionable steps to correct them.”

Further Reading:

Ending the Tipped Minimum Wage Will Reduce Poverty and Inequality — Justin Schweitzer

What is Hospitality? The Current Answer Doesn’t Work — Tejal Rao

Mental Health Crisis Among US Workers Includes Retail Salespeople — Garett Seivold

Low pay and ‘toxic’ workplaces are driving workers away from restaurants — Alicia Wallace

Is New York’s Year of Lavish Tipping Coming to an End? — Kevin Quealy and Amanda Rosa

Restaurant Tipping and Service Quality: A Tenuous Relationship — Michael Lynn

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A writer from New Jersey // www.adamdanielbrown.com

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A writer from New Jersey // www.adamdanielbrown.com

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