The Tip of the Hospitality Iceberg

Tips. They have been the hot topic this week in the UK with major chains coming under fire for not passing on all – if any – of the discretionary service charge to the staff. There has been outrage in all quarters about this, and some dubious PR involving utilising the discretionary service charge to ensure a ‘living wage’. There have also been calls for the abolition of the tip in favour of a straight wage.

Unfortunately, there is no law on the subject of discretionary service charges, and – like it or not – even the BHA’s codes of practice say that an operator can retain some of the charge for costs.

Personally I find it unethical that some operators hide actual running costs in a discretionary charge in order to appear cheaper than their competitors – the psychological difference between £12.95 and £14.50 is significant. This furore may be what we need to precipitate an all in or all out decision on the topic of tips and service charges, and I am in favour of a pure tip-based system.

My rationale for this is that tips – equivalent to shares in this context – are a reward based on performance and seniority. The better you perform, the better your dividend. The guest can tip as much (or as little) as they like based on your performance. I am not just referring to the server here. It’s the whole team who should benefit as everybody from the pot-wash to the maître d’ contribute to the delighting of the guest and ensure the smooth operation needed to achieve it.

Tipping is then the bonus system that encourages high performance and a spirit of excellence we should all aspire to.

However, when we look at the staff shortage in the profession and the new living wage changes we start to see this debate in context as a tip of an iceberg.

Minimum Wage?

Earlier this year the UK government announced changes to the minimum wage to introduce the living wage of £7.20 from next year (for over 25s), though this is still below the actual living wage value calculated by the Living Wage Foundation of £7.85 for the UK and £9.15 for London in 2015.

It’s difficult to complain about this kind of ‘help the poor’ legislation without sounding like a Victorian mill baron.

There was a great article on Imbibe in response to the announcement about the living wage which I summarise here:

This scenario, however, is riddled with complications.

  • It’s hard to argue against an increase in raising the hourly rate of the lowest-paid in society if it makes them better off. But the 70p increase will probably be more than offset by the swingeing cuts to tax credits and housing benefit. In a year’s time, the lowest paid workers in the on-trade are probably going to be worse off, not better.
  • Most on-trade businesses operate on wafer-thin margins, and employ many people on low salaries. Raising the salaries of half a dozen of them simultaneously would equate to about £10,000. As a result, we can expect to see a good number of people being laid off over the next year. The remainder might be better paid per hour, but they’ll also be working harder to make up the difference.
  • As well as the direct impact on the lowest-paid, there is likely to be a ripple effect on other wages, too. If that pot-washer is now earning over £7 an hour, then they’re suddenly approaching the salaries of the first rung of more skilled workers who, doubtless, will want a pay rise of their own. It would be interesting to know how many hospitality businesses have that kind of spare cash lying around. Not many, I’d guess.

Broadly speaking, it means that for every £100,000 pre-tax profit your business makes, the business will be £1,000 better off, and for every person employed on the minimum wage at, say, 40 hours a week, it will be about £1,500 worse off.

The problem is that it’s difficult for a business to complain about this kind of ‘help the poor’ legislation without sounding like a Victorian mill baron, and it is easy to see why the chains are adopting the use of the service charge to top up the minimum wage to living wage levels.

Staff Shortage?

What of the chronic staff shortage in the industry that is being cited in the press? Leading restaurateurs warn of a “dire shortage” of chefs across the industry, from chefs de partie in brassieres to sous chefs in the trendiest new London ventures.

The situation is so serious that it threatens to put a stop to Britain’s “foodie boom” as restaurants report that hiring sufficient young kitchen talent is proving tougher than “baking a soufflé during an earthquake”.

According to the article on the Independent, the chef shortage has resulted in many restaurants resorting to agency chefs whom they have to pay as much as £30 an hour, double the normal rate. And the search for chefs, line cooks and prep workers isn’t just a struggle in London and the south, where top restaurants can have as many as three or four kitchen staff per paying customer.

Katie Mellor, director at Chef Jobs UK, one of the country leading interim chef agencies, said: “We are massively busy across the whole country. Restaurants just can’t find and keep permanent staff at the moment and this summer is particularly busy. The demand is huge.”

The problem extends also to the front of house, and if we increase the base wage of employees (and accommodate the ripple effect Imbibe mentions) we have a Catch 22 where operators desperately need staff to meet demand but margins are now tighter and they cannot afford to take on the necessary employees. This means more work for those who remain, potential declining standards, and the inevitable loss of more operators in the industry.

Is VAT the key?

A cut in VAT on hospitality to, say, 5% would have a huge impact. It would allow businesses simultaneously to cut prices and make better margins, encourage the public to go out more and get cash flowing through the economy.

It would also allow the industry to increase its minimum rates of pay – moving beyond £7.20 and closer to the 2020 £9/hour figure, which would put the on-trade on the right side of the argument for once.

The BHA is lobbying for a VAT cut in tourism – and is not impressed with the living wage announcement either – but sadly does not go as far as to lobby for a VAT cut in restaurants, despite being home to the Restaurant Association of which we are a member. That task lies with Jacques Borel’s VAT Club which has been successful around Europe in its campaigning.

Clarity, transparency & a desire for excellence

One thread I read on LinkedIn called for a new global union to lobby, standardise job specs and introduce licenses/certification for chefs, but I think that we also need joined-up economic solutions tailored to the industry (and country) and not try to have a one-size-fits all approach (though I can relate to the job spec issue being a recruiter having seen many-a head chef who does not know how to make a white sauce).

In other businesses – such as when we buy consumer goods – there are no hidden costs outside of the cost of the product. The price you pay funds the production of the product and includes profit margins. Why then can we not do the same in the restaurant business? Tipping is then the bonus system that encourages high performance and a spirit of excellence we should all aspire to.

Change will come, and it may take time, but you can get involved with initiatives such as the Big Hospitality Conversation aimed at encouraging 60,000 16-24 year-olds into hospitality over the next year.

What do you think about any of these topics?