Auto Gratuity Over? 1

Auto gratuity, can be a necessary evil at some establishments. It doesn’t allow people to change the tip fee to a lower amount and leaves the server free to provide any service knowing they are guaranteed a percentage of the bill. Who is to blame for this, the customer or the server?

The new rule says that automatic tips are considered regular wages and so they’ll be taxed. That means servers won’t see their tip money until they get their paycheck.

Auto gratuity was originally made up to make sure that servers were compensated for the service provided. Especially when liquor is involved it is common for a patron to forget to leave the tip and just to sign on whatever was owed. As time went on more and more servers (not all servers) took advantage of this policy and would simply underserve a patron knowng they would be guaranteed a tip.

The main issue with auto gratuity is that it is not negotiable. Since this is the case the IRS now says it is not gratuity but should be considered a service fee. We have always supported suggested tips on the bottom of receipts. Customers decide what they should leave as a gratuity.  It leaves it in the customers hands to give a proper amount of tip for services rendered.

Historically, a tip used to be an incentive reward for outstanding service provided. Unfortunately, it has become something that the servers have to count on in addition to their salary. We have friends in states that their wage are less than the minimum wage because they are expected to receive tips. Thus, the establishment gets around the minimum wage laws. A tip shouldn’t be expected as a part of salary, but an incentive reward for hard work and exceptional service. Note to employers: Pay your employees what they deserve and don’t make them rely just on gratuities.

Noteworthy, the new rule does not get rid of automatic gratuity at restaurants. Restaurants are simply doing away with automatic gratuities or service charges completely.  “Automatic gratuities” would now have to be called “service charges” and counted as income to the establishment rather than gratuity to the employee.

The difference is in the accounting of the income and how the taxes are levied by the IRS. It’s significant as a “service charge” would go through the establishment’s taxes and would not reach the employee unless the establishment paid the employee through their paycheck. That is after the establishment paid taxes upon that income as well as any withholdings for the employee’s pay.

The previously used process of an “automatic gratuity” would be paid directly to the employee and they would account for that on their personal taxes. This is no longer allowed by the IRS.

This impacts restaurants across the country and they knew it was coming.  The IRS made the rule in 2012 and gave them all of last year to prepare for the changes.

Establishments should abide by the current laws and regulation, but they should make sure the service industry professionals do not suffer.  Jordan & Marks believes in fair pay and great service for all. What are your thoughts? Let us know!


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