Service charges at restaurants are here to stay. Here's what to expect.
By late 2020, just before the minimum wage in Denver rose to $14.77 an hour and the tipped minimum wage increased to $11.75, restaurant owners searched for a way to make up the difference, even as their businesses in the pandemic stayed shuttered.
“I did the math, and if we were to keep the same exact staffing, our labor cost was going to go up basically by $100,000,” said Tommy Lee, who owns the restaurants Hop Alley and Uncle, the latter with two Denver locations.
Lee pored over his business’ financials looking for efficiencies. His labor costs account for around 35% of sales, while food costs are just under 30%. And the price for ingredients was also rising.
“Fryer oil is like twice as much as it was a year ago; chicken costs 30% more than a few weeks ago; and beef prices have jumped $2 a pound in the last two months,” Lee said. “At some point, it has to get passed down to the customer.”
The answer for Lee and many others was not to raise menu prices; he doesn’t think customers would be very happy paying $25 for a bowl of ramen, for example.
Instead, a single line item was added to the bottom of all carryout bills while dining rooms were still shuttered: a 15% service charge that mimics gratuity but acts as revenue, and can legally be used to also pay kitchen, or “back-of-house,” workers.
“We divvied it up among the whole staff to try to make everyone’s pay what they were used to making,” Lee said. “I think some form of that is the future of restaurants if we’re going to survive and people are going to make closer to a living wage.”
Of course, a living wage is the reason for raising pay for hospitality workers in a city where housing costs over the last decade have skyrocketed.
But restaurant owners like Lee blame the traditional tipping system for their untenable business models. They say it creates inequities between their front- and back-of-house workers, which the current increase to tipped minimum wage only exacerbates.
“Our biggest issue in hospitality is how the hell you bridge the gap between front and ‘heart,’ or what we used to call ‘back of the house,’ ” said Juan Padro, who co-owns multiple Denver-area restaurants including Tap & Burger, Bar Dough and Señor Bear. “The way these businesses are set up and the way this legislation was written really cripple the back of house, which are our most vulnerable employees.”
Because gratuity can only legally go to workers who come in direct contact with customers, restaurant owners now are using the “service charge” as a way to bump up pay for those who can’t share in tips, such as line cooks and dishwashers.
In November, Padro and his partners introduced a 20% fee on customers’ bills, explaining to diners that the restaurants had switched to a “service-included” model.
Since then, he says, back-of-house employees across the restaurants make on average $23-$28 per hour under a point system, while customer-facing staff still make around $40 an hour between their wages, tips and service fee.
“We’re just playing by the rules,” Padro said, adding, “All of it goes to the employees, bottom line. The service-charge model gives you tremendous flexibility to take care of your people.”
And while some customers have been confused and even complained about the switchover, Lee and Padro emphasize transparency in their approaches. They communicate that any gratuity on top of the 15 or 20% charge that’s included in the bill is appreciated but by no means expected.
More than 50% of customers continue to leave some tip on top of the service fee, Padro said of his restaurants. Meanwhile, at Lee’s businesses, sit-down diners can still decide their entire gratuity amount; there’s no automatic service charge for those dine-in customers.
“I think in the U.S. there’s this perception that the customer is in charge of their experience based on how much they tip,” Lee said. “In other parts of the world, I love the model where the price on the menu is the (true) price, and that’s all you pay. That’s what the pricing of a restaurant needs to be, but I know people have sticker shock … .
“It’s just funny to think that someone who would normally tip 20% sees 15% added to their bill (and gets upset),” he added. “If you’re complaining about 15%, you probably shouldn’t be eating out now.”
Lee saw the writing on the wall eight years ago, when he first opened Uncle in Denver’s Highland and created a tip pooling system for his whole staff that has evolved to the current model. Now more and more restaurants are opening with a service charge in place as a way to balance rising business costs with customers’ expectations for the price of a meal out.
They’re also getting creative in how they present it.
At Noble Riot, a wine bar that was just recognized by Esquire magazine as one of the best bars in the country, co-owner Nicole Mattson and her team over the last three years increased their included service charge from 18-20%. To show appreciation for their customers’ support of this endeavor, the bar doesn’t allow tips on top of the fee, under any circumstances.
“We let customers know that we aim to take great care of them,” Mattson said of her policy. “If they ever feel like they didn’t experience that care for any reason, we remove the service fee — that’s pretty rare though.
“The large majority of guests are eager to give more,” she explained, “and we suggest a positive review online or that they refer a friend to us instead, as that will help just as much if not more than the extra 5% they were thinking about leaving.”
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