
Service charges were widely adopted during the pandemic to offset what tipped workers lost while dining rooms were closed. But that was a mere dusting compared with the blizzard that hit Washington, D.C., after residents voted to kill the tip credit last year.
As operators groped for a way to offset the bump in servers’ pay, the service fee became the response of choice. By conservative estimates, more than 250 restaurants in the 7-square-mile market have opted to tack on a surcharge to fund direct payment of the minimum wage to servers, and the count continues to climb.
About 70% of local restaurants will have adopted a service charge when all is said and done, according to the Employment Policy Institute (EPI), an employer-friendly lobbying and research group. They hope the proceeds will cover a 40% bump in the wages they’re mandated to pay servers directly, or a minimum of $6 an hour.
“It’s been a shit show,” says Jason Berry, a principal of Knead Hospitality & Design, an operator of nine full-service restaurants in the area.
The company is still formulating what sort of fee it will tack onto guest tabs as a surcharge. Meanwhile, Berry says, he’s paying each server about $80 more per week.
He notes that Knead’s labor costs will go up again when the minimum employer contribution to a server’s income rises on July 1 to $8 an hour. It then climbs by $2 every July until it reaches parity with the across-the-board minimum of $16 per hour in 2027.
A big part of the adjustment challenge, say operators in the District, is the ready-shoot-aim aspect of the new regulations. The general public approved a ballot initiative on Nov. 9 to raise the minimum wage and phase out the tip credit. The changes began less than six months later, on May 1. There were no hearings, no public-comment period, no task-force assessment of the potential impact.
“There probably should have been more collaboration with us,” wryly notes Sean Townsend, CEO of the Restaurant Association of Metropolitan Washington (RAMW).
The biggest piece of guidance from the city was an admonition from the District’s attorney general that any service charge tacked onto bills had to be brought to guests’ attention before they asked for the check; that the reason for the surcharge be expressly stated; and that the money only be used for that stated purpose.
Saying the fee was necessary to offset rising overhead costs is too vague to meet the attorney general’s guidelines. If it’s levied to pay servers’ higher wages, that has to be specified, and the funds can’t be used for anything else. If the money is used to add health insurance or some other benefit, that’s where the funds have to be spent.
Although the money must be used for an express purpose, the generated funds are treated in other key computations as routine revenue. Percentage-of-revenue rents are routine in D.C. With a service fee, revenues technically rise, lifting rents at the same time.
“When consumers see something in one restaurant, they expect to see the same thing in another.”
The proceeds also increase sales tax assessments and revenue-based charges such as workers’ comp insurance rates.
Simultaneously, restaurants’ heavy reliance on service fees exposed customers to an entirely new and unfamiliar fee structure and etiquette.
“The one thing that we’ve noticed is confusion,” says Townsend. “When consumers see something in one restaurant, they expect to see the same thing in another. Right now, they’ll see a 3% service charge one place, a 5% service charge someplace else, and another charge in a third place.”
That’s not the only effect that’s perplexed customers. Says Townsend: “’Am I allowed to tip on this? Should I tip more? Can I be charged a service charge in the first place?”
The RAMW and local operators are pushing hard to temper the impact of the unforeseen effects through legislation. One of the asks is that Washington Mayor Muriel Bowser define what a service fee is, for the benefit of guests and operators alike.
The local restaurant community wants a definition that permits funds to be used for expenses in general, instead of being limited to one narrow purpose. If rent is the margin killer one month, the proceeds go there. If labor is taking the big bite, then that’s where the money flows. The operator decides how to allocate the proceeds.
The industry also wants the city to define “service fees” as part of a public education campaign. An official definition would enlighten guests on the reasons for the kicker charge. It would also reassure customers that the restaurant isn’t merely trying to con them out of more money.
“This notion that restaurant operators are taking this money and putting it in their pockets at the end of the night, it’s just not true or realistic,” says Townsend.
“The expression we use is ‘ripping off the Band-Aid.’”
In addition, the restaurant community is asking the city to address some of the unforeseen side effects of the fees, like the proceeds counting toward rent or other costs based on dollar intake.
It would also like to condense the four-year phase-out of the tip credit into 24 months—essentially accepting a faster escalation of labor costs to avoid lurching from a payroll reset and the collateral chaos every July 1 through 2027.
“The expression we use is ‘ripping off the Band-Aid,’” says Gavin Coleman, a second-generation Washington restaurateur who runs a number of restaurants in and around the District. He is also the current chairman of the RAMW.
One thing that the operators don’t want to do is raise menu prices to cover the increased costs and risk a fallout from customers. They say prices are already sky high because of inflation, and that the last thing the local industry needs is yet another disincentive for locals to dine out.
The trade is already wheezing because employees of the government, the biggest local employer by far, have yet to resume working daily in their downtown offices. Lunch business has disappeared, as have post-work drinks and a few noshes with colleagues.
According to an EPI survey, 98% of local operators believe another hike in their prices will cost them an immediate drop in traffic.
The industry points out that addressing the tip-credit and service-fees issues is paramount for the city as a whole, not just its restaurants. Why are places going to open and enrich the local culture when they could find a site with equal or lower occupancy costs in Virginia or Maryland, states a short bridge span away? Neither of those jurisdictions have dumped their tip credit.
“I’m certainly not signing any more downtown leases,” says Coleman.
He’s hardly alone in that sentiment. Nearly one of every two D.C. operators (46%) intend to open their next local venture in Virginia or Maryland, according to the EPI’s survey.
The industry doesn’t harbor any delusions about rolling back the new wage rules—ironically, something it did just a few years ago.
An initiative to kill the tip credit was passed by voters in 2018, but District lawmakers were convinced via an intense lobbying effort to overturn the ballot initiative through legislation. Much of that pressure came from servers, who feared their incomes would drop because guests would tip less. They calculated that a change in consumer habits would leave them with a lower income, even with a higher base wage.
“The voters made a statement loud and clear. They want to eliminate the tip-credit model.”
This time around, the resistance didn’t materialize. Organized labor and other proponents, in contrast, pushed with considerable might and resources for voter approval. Essentially, they posed the initiative as, “Don’t you want servers to make a living wage?” Never mind that a server in an established fine-dining restaurant might be making $40 an hour.
“We are where we are,” laments Townsend. “The voters made a statement loud and clear. They want to eliminate the tip-credit model.”
“The voice that gets missed in this is the employee’s voice,” says Michael Saltsman, a principal of the lobbying firm Berman & Co., which runs the EPI. “The general sense is this is not something the employees are asking for.”
Local operators are aware they’re test subjects of sorts for the rest of the industry. The Service Employees International Union (SEIU) has created an affiliate called One Fair Wage specifically to shoot down the tip credit at every level of government. And the union has found ready allies in high-profile politicians, including President Joe Biden.
The transformation of Washington, D.C. into a service-fee hotbed
Here are the wage changes that are prompting an abundance of local restaurants to add a surcharge.
A push to kill the employer concession is expected to begin next in Arizona and Illinois, possibly through ballot initiatives like the one that succeeded in Washington, D.C.
“Get out in front of this with your legislators,” Coleman advises operators in any area where the tip credit is in danger. “Get involved. And educate, educate, educate.”
“Educating the public is the number one priority, especially if it’s a referendum or a ballot initiative,” says Townsend, who became CEO of the RAMW after the D.C. measure had passed. “The message in those situations is, ‘Hey, don’t you want restaurant workers to have a living wage?’
“The answer is yes, 100% yes. Everyone should have a livable wage. But the context to the situation is much more difficult. It’s far more difficult than the question itself.”