Labour Market

Should it be illegal for businesses to pocket tips?

Jeremy Corbyn has had another brainwave.

The Labour leader wants to make it illegal for businesses to “pocket” tips and optional service charges.

Some restaurants and hospitality firms currently collectivise what we add to our bills or give to waiters and waitresses. They might directly pool tips to redistribute them through a common fund system or add them to general revenues.

For Corbyn, these actions amount to theft.

“It is not right that workers have their tips stolen by bosses”, Corbyn said. The next Labour government will ensure that “workers keep 100 per cent of their hard-earned tips”.

Unfortunately, the Labour leader is not alone. He is making the same mistakes as then business secretary Sajid Javid made when discussing this subject: first, assuming that social expectations about where tips go can harmlessly be enshrined in legislation; second, failing to differentiate between the flow of cash and the overall economic impact.

In fact, imposing a one-size-fits-all “tip must go to worker” regulation could adversely affect businesses and workers alike, given the different nature of restaurant models and how managers use tipping to adjust total compensation.

Restaurant-specific tipping practices can be an important way to deal with risk, manage staff morale, and ensure that customers get a good service. Though less important generally in Britain than in the US, basic tipping can play an important economic function.

Consider a set-up  in which, say, a single waiter or waitress serves a set of tables exclusively.

The purpose of tips here is to be a form of risk-sharing for the restaurant, particularly if it is not easy to observe the behaviour and competence of waiting staff.

Tips lower the underlying hourly wage a restaurant might need to offer to attract staff (lowering fixed costs), and total remuneration for a worker becomes linked to customer satisfaction. This averts the need for workplace performance assessments and controversial wage negotiations for each and every staff member.

However, even this simple example (to say nothing of larger, more complicated restaurant set-ups) highlights reasons why it might make sense to deal with tips differently.

In very small restaurants or established chains, where behaviour is observed or customer expectations simple, it could make more sense to adjust overall pay rates and put any tips into general revenue towards that. If the work is relatively homogenous, staff might resent a tipping “lottery”, where lucky workers benefit from generous tippers and other staff who work just as hard do not.

It can therefore make sense for restaurants to centralise this pot for distribution, or see it as general revenue, for the restaurant as a whole.

That is exactly what lots of restaurants do, distributing tips through formulae in many cases.

This amounts to some centralised assessment of what components of the customer experience generate the extra revenue, which is subsequently used to set a system to reward good performance, individually or collectively.

Think about it: when you go for dinner, do you really just tip based on the likeability or performance of your waiter? Or do you also take into consideration whether the manager was accommodating with your table preference, the food was good and prepared in a timely manner, the server spilled food over you, and the restaurant had your favourite dessert available?

It’s pretty obvious that lots of these things are outside the gift of the waiter or waitress. A strict version of Corbyn’s proposal would simply make it more difficult for firms to find imaginative ways to incentivise staff, and could in some cases work out as less fair than the system he is criticising.

No doubt firms would adjust in other ways: underlying pay rates and consumer prices would be tinkered with. But as there are also proposals for a significant national living wage hike, many restaurants would have to cope with both higher fixed costs and less control of potential income.

In fact, this whole proposal speaks volumes about Labour’s economic ideology in general.

Nefarious restaurant owners (for which we can read business bosses in general) are regarded as having the market power and desire to screw over their workers at every available opportunity, while any perceived injustice can supposedly be corrected without harm by central diktat.

Imposing strait-jacket regulation across a variety of businesses is the order of the day. No thought is given to how this might affect norms and conventions that businesses adopt to solve their own challenges and balance the needs and desires of staff, customers, and managers.

It starts with restaurants, and ends with the whole economy.


This article was originally published by City AM.

Ryan Bourne occupies the R. Evan Scharf Chair for the Public Understanding of Economics at Cato. He has written on a number of economic issues, including: fiscal policy, inequality, minimum wages and rent control. Before joining Cato, Bourne was Head of Public Policy at the Institute of Economic Affairs and Head of Economic Research at the Centre for Policy Studies (both in the UK).

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