Prairie Dog was founded on the principle of the triple bottom line, which aims to make companies accountable for not only their profits and losses, but for their environmental impact and their effect on people and the community. Our experience with the restaurant industry has unfortunately revealed that restaurants often sacrifice people (their own employees), in favour of profits, by asking staff to do things like clock out and continue working after their scheduled shifts have ended, or “benching” staff when they arrive for a shift and making them wait until the restaurant gets busy enough to justify their labour cost, sometimes sending them home after hours of waiting without paying a dime for their time waiting or their wasted commutes. These are practices that our founders find extremely distasteful and disrespectful of staff, and clear violations of the principles of the triple bottom line (not to mention labour code, but we won’t go there).
For a long time, the idea of paying a token sum of money To Insure Prompt Service (TIPS) has existed, and we in Western society have bought whole-heartedly into the notion that a customer paying a commission to a server somehow ensures that the best servers earn the most income and acts as a direct feedback loop for performance. But this entire idea only makes sense in an environment where the typical people-management practices and labour conditions that we employ in every other industry are non-existent — where good servers don’t already receive fair compensation for their work, and bad servers don’t get let go or receive retraining, and where restaurants don’t provide their staff with incentives for improving their lifestyle like better working hours, benefits, and other perks. Further, the idealistic notion of tipping falls apart when the average consumer is conditioned to believe that they need to leave a minimum 15-20% tip, even for bad service. Think about it, the only situation in which that makes sense is if the restaurant underpays their staff by the equivalent of 15-20% of their revenue — oh wait, that’s exactly what they do!
It is hard to imagine a dental office where the hygenists are paid below minimum wage and have to receive tips directly from customers to Ensure Painless Cleanings (EPC – sounds like a good idea, no?), so why should we treat servers that way? Our governments have been complicit in this delusion for decades, creating a separate, lower minimum wage for people in hospitality industries, and they have generally turned a blind eye to income earned as tips, which has perpetuated this flawed experiment and acted as encouragement for restaurants and other hospitality-focused business to take advantage of their staff, leading many in our society to treat restaurant staff like a lower class of human being.
Tipping Creates Problems
While tipping may be one way to show a server or bartender that you think they are performing a good job, here are some other situations it creates:
- Statistics have repeatedly shown that the more attractive a person is, the more tips they receive in service roles (and the higher average guest cheque), regardless of the skill level of those people; so those with a desire to work a career in hospitality often find themselves the subject of discrimination, with several Calgary restaurant groups going so far as requiring a modelling portfolio along with job applications (seriously).
- Servers quickly learn that people are looser with their wallet after they’ve gotten tipsy or drunk; so the incentives are in place for servers to encourage over-drinking in order to receive the best tips.
- The higher a guest’s tab is, the more tips a server is likely to receive, which encourages servers to recommend the most expensive items on the menu or find other ways to inflate the guest cheque rather than tailoring the service to the guest’s individual means/taste.
- The most tips are generated on the busiest days/hours of the week, so staff compete for a relatively small number of shifts, and it is often hard to find good staff that will work the slower days of the week (like Sundays).
- In an environment where tips are the primary source of income, the most senior, experienced servers have to continue working the most difficult/lucrative shifts to receive “fair” compensation for their skills rather than stepping back and letting fresh blood come in to take on those shifts and learn to improve their skills.
- Experienced servers face challenges when training new ones, because they are slowed down by trainees and may lose out on tips, or have to split tips with a trainee.
- Bringing in tips at the front-of-house can create a wage disparity with the back-of-house (kitchen), where people often train for years to become journeymen cooks, but make a smaller effective hourly wage than the servers do, at least on the busier shifts, so restaurants usually find ways to collect all the tips and redistribute them to the entire staff, which can lead to all sorts of ripple-effects and most of all, drama.
- Tips give restaurant owners justification for failing to treat their staff like human beings.
At Prairie Dog, we do things completely differently. We believe in treating people the way we expect to be treated. First of all, that means that we give people a fair wage in exchange for their labour. We discourage tipping to the point of removing the option from our payment terminals. We are gradually building a modern performance management program that includes regular performance reviews, and most importantly, we are constantly working to establish honest dialog with our staff that allows both staff and ownership to voice concerns and work together to improve things. Our founding team work out on the floor with our staff on a daily basis and observe their behaviour, which gives more opportunities for performance management. When we hire, we don’t fixate on physical attractiveness, instead we focus on personality – we want people who learn quickly and are friendly and fun, people who will grow with us and be here for the long term. Further, we don’t bench our staff, and we often find ourselves asking staff members to stop working for free before and after their shifts, which some do simply because they love working here. On top of treating staff like human beings, we do the following:
- All full-time staff who have passed their probationary periods receive full benefits including medical, dental, and vision care
- Staff receive discounts on their meals
- Staff are entitled to a free beer (or other beverage of their choice) at the end of their shift
- Staff are entitled to a free growler fill to take home each week
- Staff often receive 2-day weekends as part of their usual schedule
Earlier, we touched on the fact that, if the current expectation is that customers should tip a minimum of 15-20% on top of their bills, that means that, on average, restaurant staff are receiving the equivalent of 15-20% of a restaurant’s top-line sales revenue off the books. Knowing that, restaurants correspondingly set the base income of their staff that much lower. Now, if all the sudden the base compensation for those employees goes up by several dollars per hour, a greater portion of that restaurant’s revenue is being diverted towards staff while the consumer continues to tip staff on top of the new wage. To compensate, ownership have to respond by raising menu prices in order to maintain profitability. Now that the menu price has gone up, average guest cheques are higher, and the “expected” 15-20% tip is equally inflated. A vicious cycle is created that oscillates between the minimum wage falling behind and being raised, and the “expected” tip amount gradually cycling, but generally going up. It doesn’t take a genius to realize that this type of system is unsustainable, at some point customers will balk at prices and find somewhere else to go that applies a different model.
If you listen to the media lately, you’ve probably heard a lot of fuss from restaurants about how their businesses have been impacted by minimum wage hikes (up to $15/hr recently), with many complaining that their model is no longer viable in this market. Small businesses are currently facing unprecedented levels of taxation and government interference, cost increases in raw materials across the board, difficult labour regulation changes, and to add insult to injury, business owners are often vilified by our current Federal Government and face increasing levels of personal taxation and undue hardship placed on them by those who apparently don’t understand the harsh realities faced by most business owners/entrepreneurs (no income for the first several years building a business, no benefits, no EI or CPP to fall back on, massive personal debt with punitive interest rates, difficulty maintaining a mortgage when bank finds out you are self-employed, just to name a few). All of these factors create an environment of fear among owners – one where it would be almost unthinkable to consider giving staff the benefits and perks that we do.
How We Do It
We should preface the following by making it plainly clear that we are a very young business with only four months of public-facing operations under our belt, so this experiment is still in its early stages. With that said, here is our approach.
Let’s make an example restaurant, FooPubs Ltd., with an annual revenue of $4M. FooPubs has 40 staff, and pays a typical hospitality-industry minimum wage (prior to the recent hikes), $12/hr, for its 30 front-of-house staff. Of the $4M in revenue, about 35% goes to cost of goods and 20% goes to general expenses (marketing, rent, utilities, insurance, etc). At a $12/hr wage, the restaurant pays about 20% of its revenue out in labour, about $800k/yr. That leaves 25% of the $4M ($1M) to go to taxes and the rest as profits to be distributed amongst the owners and shareholders, or reinvested back into the business for things like renovations and rainy-day funds. FooPubs is a typical establishment, and guests tip an average of 14% on top of their bills, for a total of $560k annually. For the sake of simplicity, assume FooPubs doesn’t redistribute tips between FOH and BOH staff, and that the 30 FOH servers/bartenders worked about 50,000 hours in the year. Those 30 staff members that made $12/hr on paper actually made $23.20/hour, half of which was untaxed.
Now suppose that FooPubs decided to refuse tips and instead raised menu prices by 15%. At first, customers might be put off by the 15% menu price change, but it is relatively insignificant and the shock is tempered by the fact that tips are no longer expected, in fact, FooPubs might even see some increased occupancy based on the media attention involved. Revenues grow from $4M to $4.6M based on the price change. Since ingredient costs and other overhead don’t change between our examples, that’s $600k more income available to pay to staff, which over the same 50,000 hour labour outlay increases wages from $12/hr to $24/hr. Labour costs go from 20% to 30.4%. The customer doesn’t pay more, the quality of food doesn’t have to drop, staff don’t need to be laid off, etc. The only downsides are that the restaurant had more income and may pay slightly more tax (remember than the increased labour expenses help offset income tax), and the servers that were getting untaxed tips now have to pay taxes on those earnings. But that also has a silver lining, because servers can use that reported income justify getting a car loan or mortgage, and finally able to feel like an equal to those who work in other fields and make a similar wage.
Of course, the example above is very simple and contrived, and the revenue numbers are quite a bit higher than we are expecting anytime soon. So far at Prairie Dog, labour has consisted of 40% of our top-line revenue. If we are able to raise revenue without having to add a lot of labour hours (through better staff training, mainly), that number might drop down to between 30 and 35%, but we believe that paying an excess of 30% of top-line revenue for labour is the ultimate reality of running this type of business in a sustainable, future-proof manner that doesn’t rely on tipping as a crutch.
One thing that sometimes bothers us is when people say that the “tip is included in the price” of our food and drink. The way we look at it is that the servers’ total compensation is included in the menu price. The two things may seem only subtly different, but it is a difference that matters to us, because saying that the tip is included implies that we take a portion of each bill and pay it out to the staff at the end of each night as a tip, as some places do with auto-gratuity, but those places typically take the same approach as everyone else with ultra-low wages and poor treatment of staff. That is not our approach, we pay fair wages and give benefits, and first and foremost, treat our staff with the respect and humanity that they deserve.