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Tag Archives: autograt

New IRS ruling explained by David Hayden

From David Hayden’s most excellent site, “The Hospitality Network”. David is also the author of a valuable book, “Tips2: Tips For Improving Your Tips“. The book is worth its weight in gold for servers who want to give themselves a raise.

David’s article is about a new IRS ruling regarding automatic gratuities (autograts).

The story about Lehigh students arrested for refusal to pay service charge

My fellow WordPress blogger, Jonathan Turley has posted the story, a story that places like Waiter’s Rant have already covered:

There are some interesting comments on both sites. I’ve added my own at the bottom on the Turley blog which are still awaiting moderation which has to do with the difference between gratuities, tips, service charges and autograts (which is a bit arcane).

My thoughts on this? From my admittedly biased view of this, I think that the students were acting like spoiled rich students with a sense of entitlement (not to say that they didn’t have cause for complaint). IF, and this is a big IF, they turned down getting part or all of their meal comped by the manager, and then turned around an refused to pay the autograt, their passive-aggressive behavior merited some sort of consequence (“No I don’t WANT you to take $30 off off for the bad service. WHAT??!! You expect me to pay $16 for service I didn’t receive??!!!) Hopefully they’ll learn that it’s not always a zero sum game in life.

Now we turn to the idiot management and restaurant employees. Starting with the poor service, continuing with allegedly poor food quality, proceeding to a management that couldn’t communicate their remorse in not providing decent service and ending with the arrest of the participants, the restaurant violated just about every tenent of customer service possible. Having been on the other side of arrogant, entitled and unreasonable guests, I can understand how this could have spiralled downward. Yes, I’m calling out these students as “unreasonable” even though they might have gotten the worst service imaginable (if it’s true tha tthey were offered comps on their bill). And yet, if the management sent hostile, non-apologetic, defensive and passive-aggressive signals themselves when offering said discounts, they deserve the huge hit in business and the national scorn that they’re facing now.

Hopefully both parties have learned something from this. Perhaps the students will get the message that sometimes you accept an accomodation, not necessarly “stand on principles” when it’s counter-productive to their own interests and the owners of the pub will have a better shot at success in their next restaurant after they are forced out of business with this one.  

From Photo credited to Daniel H.

BTW, for those confused as to how a $16 tip on a $74 bill goes from 18% to 22%, Max, who responded to this story in a different blog seems to have nailed it down:

“Please note that other sources state the owner said “some” of the food was comped. I suspect that their bill was $105 ($89 + $16 gratuity), then when the customers complained, the idiot bartender comped them $16 dollars worth of food instead of removing the gratuity. This would reduce the bill to $89 ($73 + $16 gratuity), which would still look like they were being forced to give a tip. So they paid the $73 as was stated in the news story, and fought the rest”.

The thing is, most POS systems don’t let the service charge ‘track” purchases. In other words, when you add the service charge, it takes a snapshot of the bill and computes the service charge at that point. It doesn’t change, even if the server has forgotten to ring something in and has to add it after the service charge has been added (which means that the percentage would actually fall in relation to the bill). The only thing a manager can do is remove the service charge and start again. If the bartender comped the amount of the service charge from the food portion of the bill, the service charge would remain the same. This is where the students should have said, “It’s a wash” and just paid the darn bill. Instead, they “stood on principle” even though legally, they were still on the hook for the service charge. Not reasonable in my opinion. If they really wanted to stand on principle, they should have called the manager over, said that they wanted to pay the whole bill but have the service charge itself removed.

Just my 2¢.

Tip definitions

Tips– voluntary but expected payments for services rendered. Also inaccurately called gratuities. Inaccurate in the sense that they aren’t considered gratuities in the usual sense for tax purposes. Even the IRS confuses this on occasion.  True gratuities are not considered taxable income (subject to limits) in any other area other than in the “tipped employee” realm. It is my opinion that the IRS needs to address this and eliminate the term gratuities whenever it’s discussing tips.

Tip Pool– any arrangement where all employees throw their tips into the hat. Tips are then redistributed according to pre-agreed to terms.  In the case of bartenders, this redistribution can occur as a percentage of the number of hours worked as shifts can vary. In the case of servers, this redistribution can follow the same guidelines as a traditional tipout (see below). 

Tipout – an arrangement where each individual server is responsible for distributing a portion of their individual tips to other tipped employees in payment for services rendered. this is usually expressed as a percentage of either total sales or total tips.

Autogratuity (autograt) – a specialized service charge added directly to the bill in lieu of a voluntary tip. Usually noted on the menu as something added for specific circumstances such as a table exceeding a certain number of people. Normally computed on the pre-tax total.

Service charge – an extra charge in lieu of tips. This is usually applied to the entire bill for every table in the restaurant regardless of size. Occasionally, this is a charge imposed for a booked private party. Normally computed on the pre-tax total.

Credit card fee deduction from tips – exactly what it means. The fee that a business pays the credit card processor. Not allowed to be deducted in all locales. Check your local state regulations.

Things to know – employers are not allowed to take any portion of a tipped employee’s tips with the exception of credit card fees. In some states, employers are allowed to deduct for walk outs or breakage, but in some states, this is expressly forbidden. Tips are considered to be the “sole property” of the tipped employees except that tipouts are allowed as long as it’s a prior agreed to arrangement by all employees affected. Service charges and autogratuities are not considered tips and are therefore the property of the employer. In the case of autogratuities, these are normally treated as tips by employers although employers aren’t bound by law to do so. In the case of service charges, in some cases, they are used in toto to pay all wages of tipped and non-tipped employees. In some cases they are treated as simple tips and in some cases, they are used to “tip out” kitchen employees and private party booking managers. This is totally legal.

I hope this clears up the distinctions between these different terms. They are sometimes confused and misunderstood.