We are fortunate in a sense that we act for the good and the great in the premium dining, casual dining and grab-and-go market and thus we have reviewed lots of different approaches to the service charge. I can safely say that not one of our clients has the same approach on this issue as another. Everyone plays the game differently, but for how long will that remain the case?
The first thing that needs to be said is that the concept of the service charge is complex. No matter how much the press seeks to paint this as black and white, its all grey, and we all know now that there are at least 50 shades of that.
Some have taken the decision to gift the entire service charge and all cash tips and gratuities to their staff, 100% and no deductions. There are not many in this group if I am honest. If you are in this club, you probably have a very successful business model, have staff that are motivated and trained in the art of hospitality and may not be owned by private equity. Far more agree to give most of the service charge to the staff but hold back a modest amount to administer the operation and reimbursement of the system to the staff. The amount that I believe represents market practice for this group is between 5% to 10% of the service charge which is used to cover the cost of processing electronic tips.
Another group of clients that no one in the press appear to be talking about hold back a larger amount of the service charge, between another 20% to 40% of the amount collected which is used to supplement the wages of their back of house employees. This is because it is quite common in my experience for back of house staff to do less well when the tronc spoils are divvied up and it’s the alpha men and women of the front of house team and general manager that tend to to better out of the tronc that the toilers peeling the potatoes and washing the dishes. It is fair to say that distribution of the tronc still remains a bit of a dark art and operators claim to leave it up to the troncmeister, but using the service charge to top up back of house staff is not uncommon and, I would argue, reasonably noble. I am not talking about using the service charge to top up minimum wage – it’s about paying over minimum wage and this is crucial for many of our clients as attracting and keeping back of house talent is notoriously difficult.
Some have decided to side step the entire issue and just put a cash tips jar on the front counter and treat it as a matter between the servers and the customer.
Then come the bad boys. There are businesses in our sector that treat the service charge as cash of the business (which it legally is) and it falls straight to the bottom line and is not shared with the staff. Not a jot. I would like to think that there are not loads of these and I suspect that some of the businesses that have been maligned in the press have been unfairly treated. Others have received a roasting in the press for apparently placing recovery quotas based on the total bill on the waiting staff and then using the service charge to top up the delta.
In my mind, if taking 100% of the service charge is the difference between your restaurant business making a profit or being unable to pay its debts when they fall due, then your business model is arguably broken and it also probably means that you have a demotivated staff who may well even be helping themselves to spare cash floating around the business to top them up – let’s face it, it’s an issue for every cash business.
I would also argue that a business that withholds funds that the general public believes (not unreasonably) is going directly to the staff cannot be nurturing a great hospitality culture within the staff or endearing itself to its customers. Even this group will however defend themselves and argue that retaining the service charge for the house actually subsidises the menu and enables the business to pass those savings onto the public as well as pays for training and staff welfare. I have not seen that argument used recently, but they are again, fair points.
Thus, I am genuinely confused about who are the bad boys. If you read the evening newspaper in London you get one view. However, most of those named and (possibly unfairly) shamed have issued strongly worded rebuttals. It is difficult to know who to believe.
So do we just wait for this storm to blow over?
I think this time, it’s different. If it were just an issue raised by the politicians, I would be less concerned if I was one of the bad boys. However, I think the penny has finally dropped and the public appear to have finally realised that the service charge is nothing more than a “charge” and they are now furious; furious that they have been paying this to the house for the last twenty years. In the social media age, a business that invokes the fury of the public does so at its (and its new owner’s) peril.
I think there is definitely now a point of difference in how a restaurant or bar deals with this issue. I can certainly see it sounding positively on the balance sheet of a restaurant or bar group that can proudly state that all service charge, cash tips and gratuities go to their staff. If this social media movement kicks off, then I can certainly see the public rewarding the “good” businesses and punishing the rest. I could see a new logo on the menu decrying such virtues.
I can also see the “good” businesses winning the recruitment war for new front and back of house talent and also the “good “ businesses winning the battle for new sites as landlords on turnover rents might start preferring the “good” groups over the rest.
We have already seen some big beasts in the industry change their policies publicly for fear of the sort of backlash that social media has delivered. In the end, I kind of think that is a good result as – with my customer’s hat on for a moment – I have always felt that the discretionary service charge was non-discretionary and that many ordinary businesses just took it for granted and many, it appears, simply just took it.
If businesses are forced to either scrap the service charge or justify their position to their customers, part of me feels this will lead to an increase in service levels and hospitality as the public votes with its feet on this issue. Survival of the fittest - Sir Charles Darwin would approve … right?
By David Roberts, corporate partners at leading law firm Olswang
