Will tipping disappear as Colorado restaurant service fees rise?

Reading the fine print is always important, especially when dining at a restaurant these days.

Call them “service fees” or “living wage fees” or “creating happy people” fees, as restaurateur Frank Bonanno’s restaurants do, but they can range from 4 to 22% — and they are catching on as a way to offer stability in a volatile industry.

“It’s important for local diners to be aware that, now more than ever, restaurants are not money-makers,” Colorado Restaurant Association spokesperson Denise Mickelson said.

The fees, she said, have lasted as the COVID pandemic ebbed because they offset pay disparities between front-of-the-house workers (servers, bartenders) and back-of-the-house staff (cooks, dishwashers) and help retain people amidst the industry-wide labor shortage across the country.

While servers and customers have mixed thoughts about the use of fees (Casa Bonita is facing pushback from workers over its decision to cut tipping altogether), a recent study by the National Restaurant Association concluded that 15% of restaurants nationwide now charge one.

Service charge vs. tipping

The difference between a tip and a service charge is money from a service charge can be distributed as the owner sees fit and employers must collect sales tax on them. Tips can only be distributed to front-of-the-house employees.

“My worry is that Denver restaurants may be straddling the two worlds and not committing to solely a service-fee model without tips, and that leaves a — pun intended — bad taste in guests’ mouth,” said Edwin Zoe, owner of Dragonfly Noodle and Zoe Ma Ma restaurants.

The pandemic was just a catalyst, Zoe said, for something that many restaurateurs had been considering for a long time as a way to diffuse the inequities between guest-facing employees and dishwashers and cooks, who do a lot of the grunt work but don’t get to see a penny of the tip money unless servers share it, Zoe said.

“The cost of just paying the back of the house more has to come from somewhere,” Zoe added. “The two ways are to increase prices or add a service fee. In a competitive restaurant segment like fast-casual where consumers are more price sensitive to the front end of the transaction, it is concerning for an individual business to raise prices if competitors are making up the difference on the back end of the transaction.”

Zoe said he implemented a 15% service charge, and eliminated tipping, to avoid the unintended consequences that come with tipping, like customer bias or racial discrimination, and to create a clear and set relationship with his employees.

Every one of his restaurant’s registers has a clear “No Tipping” sign.

“Personally, I think if you have a service fee, you should have a no-tip policy,” Zoe said. “It makes it clear to our guests what we’re about. We’re not trying to have our cake and eat it too. Tipping is relatively rare around the world. It should be a thank you, not a paying for your mortgage type of relationship.”

Restaurateur Juan Padro, on the other hand, has opted to keep the tip line on the receipts at the two dozen or so restaurants he owns or runs under his Culinary Creative group, including Mister Oso, Senor Bear and Fox and the Hen. That’s on top of a 20% service charge that he first implemented in November 2020.

“I don’t think we should tell people that they can’t leave a little extra tip for a kid, but it’s not expected,” Padro said.

Padro didn’t want to raise the prices on his menu to avoid sticker shock among customers. “People just aren’t gonna pay 25 bucks for a burger and eight bucks for a taco,” he said.

But for diners like Mike Gore, not knowing the full price upfront is an irritant. Gore stopped by Milk Market, which is owned by Bonanno, in July during his lunch break, looking for a cheap option. He decided to grab a $9 burger from Ruth’s Butchery, but with the 22% “creating happy people” fee, it ended up being $17. The cashier told him about the fee beforehand, so he decided not to tip on top of it but said he probably won’t return.

“I would rather just have the price worked into the menu, so I know how much I’m spending before the bill comes,” Gore said.

Other customers, like Jorge Velasquez, said they don’t mind a service fee.

“I know restaurants don’t have huge margins, and people should have a living wage, so if this is the way to do it, I’m happy to help,” Velasquez said. “I might just tip a little less than usual on top of it, like around 5 to 10%.”

Making restaurants like other industries

Padro argued that the service-fee model is a great first step toward making restaurants similar to other industries and helping them retain staff.

He pointed out that many other industries charge fees as well. “Why are people complaining about service charges at restaurants when you pay service charges on your cable bill, on your concert ticket, on your Nuggets ticket, on your airline ticket, on your rental car?” Padro said. “And by the way, most of those service charges go to pay administrative costs. They don’t go to their employees. Our service charge goes 100% to our employees.”

He also acknowledged that some of his front-of-the-house workers, who are used to closing out the night with a pocket full of cash rather than waiting for a paycheck, didn’t like the change. Hourly workers at his restaurants make $24 to $55. Before, he said, they were typically making minimum wage, which is currently $13.65 for non-tipped workers in Colorado. Since he’s added the service charge, Padro said front-of-the-house workers make 19% more than pre-COVID, while back-of-the-house makes 25% more.

“Once we had our initial turnover with it, we started attracting a different type of kid, who saw this more as a career and wanted to grow,” Padro said. “We’ve created all those jobs for people, like our tech guy who started as a food runner. With this model, our kids are qualifying for car loans, home loans and apartment complexes.”

Keegan Labrador has worked for Culinary Creative since 2017, starting as a bartender and working his way up to more recently becoming the beverage director for Senor Bear and Mister Oso. He said he wasn’t surprised when the company tacked on the 20% service charge, since it was already happening nationally, and has been grateful for the stability it provides.

“The service charge has been great in the sense that it offers a stable and safe environment,” Labrador said. “You never have those days anymore where you come in and do a four-hour shift, where you make only $40. You’re protected from that, and there’s a lot of value in that.”

Some service industry workers see it differently, saying the charges are a detriment to their pay and create a sense of distrust between themselves and the customer.

One bartender, who asked to remain anonymous to protect their job, told The Denver Post that her downtown Denver employer added a 5% service fee, which goes straight to cooks and dishwashers. While she’s happy to help out the kitchen staff, the bartender said she’s making fewer tips now.

“Having that service charge there takes away the autonomy from customers,” she said. “And at the end of the day, tips incentivize us to do a better job and to show up even if we’re having a bad day.”

Is the end of tipping in Denver near?

Like Zoe, Chris Rippe, owner of Bierstadt Lagerhaus in RiNo, agrees that tipping and service charges can’t coexist forever. Rippe changed the brewpub’s model to bar service only, added a 20% service charge to customers’ bills last year and removed the tip line.

“There’s this false narrative that the tip model rewards good service, but your dining experience isn’t only based on the service,” Rippe said. “That’s only one element. There’s also the ambiance, how good your food looks and how quickly it arrives. Punishing the person who has no control over certain things, like timeliness or visual presentation, is ludicrous. I don’t think enough people understand what it takes to provide a good dining experience.”

Rippe believes that for all local restaurants to succeed with this service charge model, tipping needs to go quietly into the night.

“It’s deceitful to turn around and also ask for a tip,” Rippe said. “I would raise the service charge percentage before I add a tip line. The cleaner and more upfront it is to customers, the more it will be accepted by customers. The more confusing it is, the harder it is for all of us to win.”

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