Tipping Tactics: Automatic Gratuity vs. Suggested Gratuity - Which Works Best?

Amidst inflation, increased costs, and rising prices, compensation is top of mind for most employees, especially front-of-house staff whose take-home pay largely depends on tips and gratuity. 

As the cost of living rises, restaurant customers, too, are keeping a closer eye on their spending when they go out to eat. As guests try to keep their spending in check, gratuity has become a hot debate for restaurant owners; how do you manage tips to keep customers happy while ensuring your hardworking staff are well compensated?

Some restaurant owners choose to add automatic gratuity to each bill to avoid ambiguity, while others prefer offering suggested amounts or percentages. While there’s no correct answer, each approach has clear pros and cons.

What to know about automatic gratuity

Automatic gratuity, sometimes called a service charge, is a fee added to each customer’s bill instead of traditional tipping. Depending on the restaurant, this fee usually ranges between 18%-20%, but the amount is ultimately up to each owner to determine. 

Pros of automatic gratuity

1. Consistent revenue. With automatic gratuity, restaurant owners can count on a certain percentage of the bill being paid as a tip, which can help with budgeting and financial planning.
2. Payroll efficiency. If gratuity is included in the bill, it eliminates the need for servers to handle and distribute cash tips. This can simplify accounting and payroll for restaurant owners.
3. Better control. With automatic gratuity, restaurant owners have greater control over how much their staff is earning and can ensure that they are being compensated fairly.
4. Guaranteed compensation. When dealing with large (often time-consuming) parties, there can be confusion regarding who is tipping or the amount to tip, especially when checks are being split multiple ways. Automatic gratuity ensures servers are fairly compensated for their time, no matter the size of the table.

Cons of automatic gratuity

1. Customer perception. Some customers may be upset about being charged a mandatory fee, even if it is clearly stated on the menu. This can result in negative feedback and reduced customer loyalty.
2. Reduced incentive. Servers may be less motivated to provide exceptional service if they know they will be receiving a tip regardless. This can lead to a decline in overall service quality. Even if servers do go above and beyond, the automatic tip amount might be less than the customer would have tipped if they had the option.
3. Accounting complexity. Automatic gratuity can complicate restaurant accounting, particularly if it needs to be distributed among multiple employees.
4. Payroll complications. The IRS considers automatic gratuity to be a service charge. Due to this designation, income from automatic gratuity is taxed as wages rather than as tipped income. Therefore, it may affect minimum wage requirements since employees would no longer receive tips.

What to know about suggested gratuity

Suggested gratuity is a common practice where the server, receipt, or point of sale terminal suggests a percentage or fixed tip amount to be added to the total bill. This option gives customers the opportunity, not the obligation to tip, but there are still some drawbacks. 

Pros of suggested gratuity

1. Increased tips. By suggesting a specific percentage for a tip, servers can increase the overall amount of tips they receive. This can benefit both the server and the restaurant, as it can improve employee morale and revenue.
2. Customer choice. Suggested gratuity allows customers to have the final say in how much they want to tip, rather than being required to pay a specific amount. This can increase customer satisfaction and loyalty.
3. Simplicity. Suggested gratuity is a simple way to remind customers to leave a tip, without the obligation that comes with automatic gratuity or the awkwardness of explicitly asking for a tip.

Cons of suggested gratuity

1. Uneven tips. Suggested gratuity may not result in consistent tips for servers, as some customers may choose to tip less or more than the recommended amount. This can make it difficult for servers to predict their earnings.
2. Misunderstandings. Some customers may misunderstand the suggestion and believe that the suggested amount is required, leading to confusion or frustration. This is especially true for guests from places where tipping is not expected or is done differently.
3. Negative perception. Suggested gratuity may be perceived as pushy or aggressive by some customers, leading to negative feedback or reduced customer loyalty.

How POS systems can help with tip management

Running a restaurant is hard. There are a million things to keep track of, and managing tips across multiple customers, servers, and bills can take up a huge amount of time. A point of sale system can offer several features and benefits to support restaurant owners with tip management. Here are just a few ways a POS system can help:

• Tip calculation. A POS system can automatically calculate tips based on the total bill and the percentage entered by the customer. This can save time and reduce errors compared to manual calculations.
• Tip reporting. A POS system can generate reports on tip amounts, enabling restaurant owners to track and analyze tip earnings across different time periods, servers, or tables. This can provide valuable insights into server performance and help with budgeting and forecasting.
• Tip distribution. A POS system can facilitate tip pooling and distribution, where tips earned by servers are shared amonst other staff, such as other servers, cooks, or bartenders. The system can automatically distribute the appropriate amount of tips to each employee based on predetermined rules or formulas.
• Gratuity options. A POS system can offer various gratuity options, such as suggested gratuity, automatic gratuity, or custom tipping amounts. This can provide flexibility and choice for customers, while also ensuring that servers receive appropriate compensation.
• Streamlined payroll. A POS system can integrate with payroll software, allowing restaurant owners to quickly calculate and process payroll for their staff, including tips earned. RPOWER point of sale even enables restaurant owners to leverage third-party integrations to send tips directly to employees’ bank accounts.
• Compliance. A POS system can help ensure compliance with labor laws related to tipping, such as ensuring that servers are paid the minimum wage after accounting for tips earned. This is especially important if using automatic gratuity which changes the way employees’ wages are structured.

Bottom line

Tipping is a hot topic in the restaurant industry these days, and for good reason. In order to remain competitive in such a competitive market, restaurant owners must strike a balance between pleasing customers and compensating their hardworking staff. Automatic and suggested gratuity are two effective methods that can help increase tips, boost sales, and improve the customer experience, but the right option will depend entirely on your restaurant, market, and approach.

At the end of the day, choosing the right POS system can unlock a range of features and benefits that support restaurant owners with tip management. From tip calculation and reporting to pooling and compliance, RPOWER POS automates and simplifies the tip management process, so that restaurant owners can save time, reduce errors, and improve their bottom line.

If you need help evaluating and finding the ideal POS for your needs, we’ve created this free buyer’s guide to help you determine which solutions are best and how you can leverage a restaurant POS to grow your business.

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