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Table of Contents
Executive Summary………………………………………………………………………………3
Introduction……………………………………………………………………………………….5
How a Service Charge Affect Restaurants Negatively……………………………………………6
Why a Tipping System is Essential for a Restaurant’s Success………………………………….7
What is a Tip?……………………………………………………………………………………………………..
How does tipping make a business successful?………………………………………………………..
Why a Price Increase is the Best Solution to
Pay for Employee Benefits………………………………………………………………………..8
Recommendations: Raise All Menu Prices to Cover
Benefits Cost and Keep Tipping System……………………………………………………….13
Appendix: Charts, Graphs and Public
Surveys………………………………………………………………………………………………………15
References………………………………………………………………………………………16
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Executive Summary
Increasing the menu price across the board for all of Diamond Enterprises’ restaurants is a minor
change. There is no extra cost associated with this change and very minimal planning, making it
the best solution to provide all employees with benefits. This change will benefit not only
Diamond Enterprises but the customers, employees, and franchisees as well.
Why keeping the tipping systems in tact is important
• Tipping benefits everyone involved in restaurant.
• Employees are motivated to work harder for their tips. This creates a healthy,
competitive work environment and; there for, benefits the employer by requiring less
feedback or direction from them.
• Tipping effects the quality of service positively, benefiting the customer.
• Receiving a tip for a service you just preformed is a form of instant gratification and
research shows that it is a high form of motivation for people today.
• Research tells us that most employees involved in the service industry, being low earners,
are trying to make ends meet. Tipping allows these servers to bring home money every
night to that bill due before they get their pay check.
Why a service charge is a bad solution
• Decreases motivation of servers and there for decrease quality of service to the
customers.
• Customers do not want to pay a service charge for bad service this will decrease repeat
business.
• Service charges become taxable income for the restaurant instead of the employee. This
would put that money in a usually higher tax bracket where it gets taxed more that it
would if it was claimed by the employee. Resulting in less money back to the employee
as a whole.
Recommendation
In order to provide benefits and increase retainment Diamond Enterprises should do the
following:
Increase menu price by 5.5% to cover the expense of providing benefits for employees.
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The change to the average bill at all three restaurants is minimal enough to go unnoticed by the
average customer. No service charge will show up on the ticket and customers will be more
inclined to tip.
Introduction
Tipping is one of the mainstays of not only the restaurant business, but the service industry as a
whole. Instead of documenting a service charge on all receipts, we have proposed a 5.5%
increase on menu items. The increase to a guests’ average bill is minimal, only adding $.50+.
This increase will cover the cost of providing benefits to all employees, as well as wage raises to
non-server positions. With increasing menu items in place of a 15% service charge, customers
are not confused on whether the service charge is their specific waiter or waitress’ tip or someone
else’s. Diamond Enterprise restaurants wants their employees to bring in as much profit as they
can, while continuing to take home as much money as they can. The majority of employees that
wait tables are people that are trying to make ends meet, feed their family, or working their
second job for an additional income. Customers at restaurants generally tip based on
performance, and taking away a guests power to tip can not only be discouraging to the
employee, but discouraging to the customer. If the wait staff is not working for a tip, then he/she
might not be providing their best possible customer service.
Diamond Enterprises option of a service charge posted on the bill can be viewed differently by
all customers. Some people are not clear if the service charge goes directly to the waiter, or to
the restaurant, resulting in no additional waiter income at all. “Restaurant owners are not legally
obligated to distribute service charges to their employees… In a lot of cases, service charges
impersonate tips from the consumer’s perspective but actually just go into the pocket of the
employer’” (Garbes, 2015). If customers were to not tip the waiter, it could make them feel
disgrace, or a lack of pride in their work. Employees would not want to do their best. Not all
people view service charges as a tip, but a majority of customers do not actually know what the
service charge is going to do. When waiters get a big tip, it is a boost of confidence to work
better, harder, and more efficiently. They know that if they are doing a great job, and the positive
attitude will more than likely get a better response and take home more money. In any industry,
when you do a good job, you want to feel rewarded for the work you have done. Taking away
tipping by replacing it with a service charge could take away that feeling of being rewarded for
the job well done.
Customers that tip well are also more likely to be repeat customers, due to the food and service
being good. As a restaurant owner, this is one of the main goals in running a successful
operation. Success can mean many things to different people, but overall, to make more money
and keep employees and customers happy, are top on any owners list.
With increasing the menu prices by 5.5%, we can increase the total daily revenue and provide
employee benefits, such as dental and health insurance, wage raises, and a profit-sharing bonus
program, based on guest satisfaction and employee performance. Service fees will have the
same effect for healthcare options, but will leave the guests second-guessing whether the fee
added to their bill was going directly to their server, who made their night extremely lovely, or to
the manager’s bonus, whom they never saw. Providing additional benefits to employees, aside
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from a nightly paycheck, can almost guarantee that an employee is going to work harder to do
their best because the job they have is one that can provide for themselves and their family. This
can further encourage an employee work a lot harder at their job. Employee benefits can also
help reduce the employers’ turnover when it comes to staff. In result, we propose a 5.5%
increase on menu items, instead of replacing tips with a service charge. We feel that taking away
tips can discourage the server’s attitude at work for all the hard work they put forward when
waiting on a customer. The 5.5% menu increase will result in higher revenue that could help the
employer provide benefits for the employees.
In this report, Alpha Consulting does the following:
• Proposes a better way to bring in enough income to provide employee benefits without
customers seeing a service charge.
• Explains how a service charge diminishes a restaurant’s appeal to customers and
employees
• Explains why tipping is important for a restaurant’s employees and customers.
How a Service Charge Affect Restaurants Negatively
Gratuity, or service charges, are the anticipated sum of money that the server will earn regardless
the customer’s choice or server’s work. The charge is dictated by the employer and mandatory
for the customer to pay. When the employees receive the service charge, they are not guaranteed
to receive the full amount.
There are several reasons why an employer would choose to use a service charge over a tipping
