Latest / Restaurant Business with Fexingo: Food Service, Hospitality, and Independent Operators / Why Restaurant Tipping Is Moving to Service Fees
Transcript
- Lucas: If you've had a meal at a nice restaurant in the last year, there's a decent chance your check arrived with an automatic service fee rather than a tip line. Some places call it 'hospitality included.' Others just add 18 or 20 percent and tell you gratuity is not expected. Luna: And that trend has been picking up speed. I remember when Danny Meyer eliminated tipping at his Union Square Hospitality Group restaurants back in 2015. It felt radical then. Now it's practically a movement. Lucas: Right — Meyer was the early bellwether. At the time, he said the goal was to reduce income disparity between front of house and back of house staff. Servers typically made far more than cooks under the tip system, and he wanted to restructure pay so the whole team shared in the restaurant's success. Luna: But it didn't exactly take off overnight. A lot of those early adopters actually reversed course. Meyer's own group phased out the no-tipping model at some properties by 2018. So what's changed since then? Lucas: A few things. First, the labor market after the pandemic. Restaurants struggled to find cooks and dishwashers, and the wage gap between front and back became harder to justify. Second, there's been a wave of state-level legislation around tip credits and minimum wage for tipped workers. Seven states now require employers to pay the full minimum wage before tips, which changes the math significantly. Luna: And third — I'd add that customer behavior has shifted. Diners are more aware of how tips get distributed, and there's fatigue around tipping expectations. People are tired of the tablet screen spinning around asking for 20, 25, 30 percent. So the service fee feels cleaner to some operators. Lucas: Exactly. But here's the thing — the economics aren't simple. If a restaurant switches to a service-included model, they're effectively raising menu prices by 18 to 20 percent. That scares operators because menu price elasticity is real. A $40 entree becomes a $48 entree, and customers notice. So some restaurants split the difference: they add a line-item service fee but keep menu prices where they are, and then tell guests tipping is optional. Luna: Which can backfire. I've seen reviews where people complain they didn't notice the service fee until the check arrived and felt tricked. There's a trust issue. Lucas: And that's where the legal landscape gets messy. In 2026, the Federal Trade Commission has been looking into how service fees are disclosed. Several class-action lawsuits have been filed against restaurants that added mandatory fees without clearly stating them upfront. The guidance now is that any mandatory charge must be clearly displayed before the guest orders — ideally on the menu, not just the check. Luna: So transparency is key. But when it's done well, does the model actually work? I mean, does it improve staff retention or profitability? Lucas: The data is mixed, but leaning positive for certain segments. A 2025 study from Cornell's School of Hotel Administration looked at about 80 restaurants that had switched to service-included pricing for at least two years. They found that average staff tenure increased by about 40 percent compared to similar tipped restaurants. Turnover in the kitchen dropped even more — because cooks were finally earning a share of the service revenue. Luna: That makes intuitive sense. If I'm a line cook making $18 an hour while a server takes home $35 an hour in tips, I'm going to look for another job. But if we're all on $25 an hour with the same cut of the service fee, I'm more likely to stay. Lucas: Right. And the study also found that overall labor cost as a percentage of revenue didn't change significantly — it was about the same as before, around 32 to 35 percent. But the distribution was more equitable. The chefs and dishwashers got raises, and the servers took a slight pay cut — though in many cases the difference was small because the base wage was higher. Luna: But what about the customer side? Did those restaurants see a drop in traffic? Lucas: On average, no — but the variance was wide. Casual restaurants with average checks under $50 saw a small dip in repeat visits, maybe 3 to 5 percent. Higher-end places with checks over $100 actually saw repeat business stay flat or even increase slightly. The theory is that affluent diners prefer the predictability — they know exactly what they'll pay and don't have to do mental math on the tip. Luna: So the model works better for fine dining than for a neighborhood bistro. That aligns with what I've seen. I think of Thomas Keller's restaurants — The French Laundry, Per Se — they've been service-included for years. Nobody blinks at a 20 percent service charge on a $350 meal. Lucas: Exactly. And Keller has been vocal about it. He's said that the service charge allows him to pay his entire team a living wage and offer benefits like health insurance and paid time off — things that are rare in the industry. That's a competitive advantage in hiring. Luna: But if it's so great, why haven't more restaurants made the switch? I mean, we're in 2026, and I'd guess still less than 15 percent of full-service restaurants in the US have gone service-included. Lucas: I think the biggest barrier is customer perception and the fear of the first month. When you raise menu prices overnight, even if it's just re-labeling what the total cost was, customers perceive a price increase. And some operators have shared horror stories about Yelp reviews tanking and reservations dropping 20 percent right after the switch. It takes about six to twelve months for diners to adjust, and not every owner can stomach that dip. Luna: So it's a long game. And for independent operators with thin margins, that kind of volatility can be deadly. Lucas: Which is why we've seen a middle ground emerge: the optional service fee. Some restaurants add a 5 or 6 percent 'kitchen appreciation fee' to every check, with the option to tip extra on top. That lets the restaurant redistribute some money to the back of house without fully eliminating tips. It's a compromise. Luna: But then you're back to the transparency problem. If the fee is mandatory, it has to be disclosed. And if it's optional, customers might feel pressured to add a tip anyway, defeating the purpose. Lucas: The cleanest approach I've seen is what a group of restaurants in Portland, Oregon, did last year. They formed a cooperative and agreed to all use the same model: a 20 percent service charge that replaces tips entirely, clearly printed on every menu and at the bottom of the reservation page online. They also agreed to pool the service charge and distribute it based on hours worked, not position. So a dishwasher and a server get the same hourly service fee supplement. Luna: That's radical. And did it work? Lucas: Early data from their first year shows that staff turnover dropped by half, and customer satisfaction scores were actually higher than the city average — likely because the service was more consistent. The servers didn't resent covering side work for free, and the kitchen staff felt valued. There was less friction between front and back. Luna: I'd love to see that model scale. But it requires a level of trust and coordination that's rare in the restaurant world, which is famously competitive and independent. Lucas: Totally. And it's worth noting that there are legal hurdles. Under federal law, tip pools can only include workers who customarily receive tips — back of house staff like cooks are generally excluded unless the restaurant pays the full minimum wage without a tip credit. That's why many service-included restaurants have to restructure their entire pay system, not just the tip line. Luna: So for a restaurant that uses a tip credit — where the server's wage is, say, $2.13 an hour in some states — switching to a service fee means they have to pay the full minimum wage to everyone. That's a big jump in payroll. Lucas: Right. And that's why we've seen more movement in states that have already eliminated the tip credit. In California, where tipped workers already get the full minimum wage, the switch is easier. In Texas, where the tip credit is still common, it's a harder sell. Luna: So the geography of tipping reform is uneven. And as of mid-2026, there's talk of federal legislation to standardize tip credit rules. The Fair Labor Standards Act hasn't been updated in years, but there's a bill in Congress that would gradually phase out the tip credit over five years. Lucas: That would be a game-changer. If the tip credit goes away, every restaurant will have to re-evaluate its pay structure. And the service-included model might become the default rather than the exception. A lot of operators are watching that bill closely. Luna: And if it passes, the transition period could be messy. Restaurants that haven't built the infrastructure — clear pricing, transparent communication, revised payroll — will struggle. Lucas: But the ones that get ahead of it now, even voluntarily, are building a competitive moat. They're attracting talent who value stable pay, and they're building customer loyalty among diners who appreciate honesty in pricing. Luna: It's a bet on the long-term relationship with both staff and guests. And in an industry where margins are razor-thin, that kind of bet can feel risky. But the data suggests it pays off — if you have the stomach for the first year. Lucas: One final thought — I think the no-tipping model forces a restaurant to truly value its entire team. When a server's income doesn't depend on that night's tips, they might actually spend more time helping the busser or explaining the menu to a table that's not ordering wine. There's a shift in culture. Luna: And that culture shift might be the hardest thing to quantify, but it's probably what matters most. The economics work on paper, but the human element is what makes it stick. Lucas: Exactly. So for anyone running a restaurant or thinking about it — the question isn't just 'What do I put on the check?' It's 'How do I build a team and a reputation that lasts?' And the answer might start with that line item.