Why 4 Restaurants Opt for a Service Charge Instead of Tips

Why 4 Restaurants Opt for a Service Charge Instead of Tips
Samantha Fung

By Samantha Fung

Twenty minutes east of the White House, in D.C.’s Union Market District, sits the modern Mexican restaurant Destino. Located in a market with a focus on Latin American businesses, what sets Destino apart (aside from inventive cocktails) is the note under the dessert menu:

“In lieu of tipping, we add a 20% service charge to each order to support a professional wage for our entire team. If you’d prefer not to pay the service charge, let us know and we’ll remove it.”

Photo of Destino menu that shows note about 20% service charge
Screenshot taken from Google

There aren’t many topics in the restaurant industry as hotly-debated as tipping. “iPad tipping” is growing, even in industries that don’t usually ask for them, giving consumers tipping fatigue. A Forbes survey found that 1 in 3 people feel pressured to tip, and 23% report feeling embarrassed or guilty.

It’s awkward because people are often unsure of the ‘right’ amount to tip, so tip amounts vary from person to person. Restaurant workers, who rely on tips to supplement their income, are torn on the subject. Some say they see massive earnings with tips, but others dislike the uncertainty of their paychecks.

Coming out of the pandemic, many restaurants switched to charging a service fee to compensate staff instead of relying on the tip credit. (If you’re not aware, tipped employees in many states earn a subminimum wage — a base wage lower than the minimum wage. The assumption is that the tips they earn will bring them to the full minimum wage. If they don’t earn enough tip income, their employer is supposed to pay them the difference).

What is a service charge at a restaurant?

A service charge (or service fee) is an automatic gratuity that restaurants add to the customer’s bill, typically set at 18-20% of the check. Some restaurants only add the auto-gratuity for large dining parties of 6 or more.

Restaurant owners decide where to allocate service fees, whereas tips are discretionary extras that diners leave for service staff. There are advantages and disadvantages to using each method:

Pros Cons
Service Charge
  • Guaranteed percentage for every cover
  • More control over how money is used for staff (e.g., higher kitchen wages, health insurance, benefits, PTO)
  • Not popular with some guests and front-of-house staff
  • You can’t claim the FICA tip tax credit on service charge wages
  • Less common for casual dining and other restaurants with lower ticket sizes
Tipped (Subminimum) Wage
  • Lower labor costs
  • Familiar to guests and wait staff
  • Can motivate servers and bartenders to give good service
  • May cause competition among FOH staff for better tables
  • Wage disparity between FOH and BOH
  • Biases can affect guests’ tipping habits

Why 4 restaurateurs chose to do a service charge

While service charges aren’t the conventional route for restaurants, some restaurateurs have dropped the tipped wage in favor of different ways to pay staff. Emphasis on the tipped wage — these businesses still accept tips, but their staff don’t rely on tips to make a living wage. In fact, many of the staff at these restaurants earn higher-than-average rates.

Kelly Phillips

Restaurant Group: Destination Unknown Restaurants in Washington, D.C.

Kelly Phillips in Las Gemelas

What is the service charge?
20%

What prompted the change?
Staff initially relied on tips, but when the pandemic hit and diners stopped coming in, so did the tips.
“We really wanted to take care of [staff]...we were thinking about kindness and empathy,” Phillips told us on The Pre-Shift Podcast.

What is the wage structure now?
They switched their core full-time team to a salary, based on what the highest-paid employees made annually. They then added 5% to determine their salary. The rest of the staff earn what they call a “professional wage”, which reflects their mission to create restaurant career paths.

But wait — there’s more. Staff also have the opportunity to earn bonuses for good Google and Yelp reviews. The same applies for when the restaurant gets accolades and good PR.

Can customers still leave tips?
Guests can leave cash tips, but the tip line isn’t on the credit card receipt.

How did staff initially react?
Since staff had unpredictable pay during the pandemic, there was a lot of buy-in from them to make a stable wage.

How has it impacted the team and restaurant over time?
Turnover is almost zero and staff are focused on training each other and making each other better.

Ron Hsu

Restaurants: Lazy Betty, Humble Pie, and Juniper Cafe in Atlanta, GA

Ron Hsu in Lazy Betty

What is the service charge?
20%

What prompted the change?
Hsu decided to implement a service charge before Lazy Betty opened. As a chef himself, he noticed the pay imbalance between the front and back of house.

“We're a prix fixe menu. I think we opened up with the menu at $125 five years ago when we started doing popups, and everyone's tipping 20% on top of that.
Servers came in and worked four and a half hours, [whereas] my chefs started working yesterday. That doesn't seem right to me,” says Hsu.

What is the wage structure now?
Servers have the opportunity to upsell to make more commission, like with caviar or truffles. They also receive most of the service charge from beverage sales.

Can customers still leave tips?
Yes, Hsu has said 30 to 50% of guests still tip on top of the bill.

How did staff initially react?
Hsu admitted it wasn’t easy at the start. It was a unique model, and staff needed guidance on how to explain it to guests.

How has it impacted the team and restaurant over time?
As staff saw consistent paychecks and liked how much money they were making, they ended up liking the system. That lead to lower turnover and a better team culture.

Jason Hammel

Restaurant: Lula Cafe in Chicago, IL

Jason Hammel
Photo: Paul Elledge Photography

What is the service charge?
20%

What prompted the change?
During the pandemic, Hammel and his team met weekly to discuss the business’s values and what Lula would look like post-pandemic. One thing that came out of that was using a service fee to pay staff a living wage.

Can customers still leave tips?
Yes, the gratuity line still exists on the check.

How did staff initially react?
Hammel admits that there were rougher moments at the beginning, and transparency was difficult, especially layered on top of other pandemic-era factors like limited seating and vaccination policies.

How has it impacted the team and restaurant over time?
Lula’s website notes that “adding a service fee helped us to increase the average wage of the kitchen worker by more than 25%.” It’s also allowed them to give staff paid time off.

Chad Mackay

Restaurant Group: Fire and Vine Hospitality in Washington and Oregon

Chad Mackay

What is the service charge?
20% for regular service and 22% for contracted events.

What prompted the change?
A class action lawsuit around tip pooling and Washington state laws. Previously, they used a tip out model where servers kept about 12.5% of their sales.

What is the wage structure now?
Servers have a base wage with typically 15% commission, while support teams like bussers and front desk staff are on a higher hourly rate. There’s also no deduction for credit card fees or tip outs.

“The average server is somewhere in that $60 to $90 an hour, but we have servers up into $110, $120 an hour in terms of earnings between all of those things,” says Mackay.

Can customers still leave tips?
Yes.

How has it impacted the team and restaurant over time?
Servers love it. Mackay recalls one server who told him,
“I never realized how much I prejudged tables until I didn't have to... All I got to do is practice my craft and I get paid, right? It's so much more relaxing to take care of people, not worry.”

Is a service fee right for your restaurant?

The decision ultimately depends on your finances, your staff, and your guests. Communication is key — collect feedback from staff about how they want to be compensated. Getting buy-in from FOH staff is crucial, especially servers. Reach out to restaurants in your area who successfully use service charges to hear about their experience.

One thing we observed is that higher-end, fine dining restaurants are more likely to use a service charge. Ron Hsu explained to us that at Humble Pie, their pizzeria with a lower price point, they opted for a 3.14% kitchen appreciation fee instead.

All of the restaurateurs we spoke to agree that it’s not easy to adopt something beyond the status quo. Don’t get discouraged if your first attempt doesn’t work right away. It took some experimenting for these restaurants to find a structure that worked for their business, but in the long run, they saw happier staff and happier guests.

Frequently Asked Questions

Is a service charge a tip?

Not quite. While tips are extra payments that customers leave for wait staff, restaurant owners decide how to allocate service charges. Some restaurants allow guests to tip on top of the charge.The IRS and DOL also do not consider service charges to be tips.

How do you explain a service charge to a customer?

Take inspiration from Lula Cafe in Chicago who lists their reasons on their website. They include fair and consistent wages for waitstaff and kitchen staff, and equal respect shown to servers regardless of their appearance.

Is a service charge taxable?

Yes, the IRS treats service charges the same as regular wages.

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Samantha Fung
Samantha Fung

I've taken orders at a drive-thru and a golf course. I've quit a Thai restaurant after 3 shifts. I've done marketing at a Tex-Mex franchise. Now I create content about the restaurant industry.