In July 2020, as the first wave of the coronavirus pandemic receded, Danny Meyer, CEO of...
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In July 2020, as the first wave of the coronavirus pandemic receded, Danny Meyer, CEO of the Union Square Hospitality Group (USHG), made plans to reopen his restaurants for outdoor dining. USHG operated 19 up- scale eateries in New York City and Washington DC, including the Union Square Café, Gramercy Tavern, and The Modern. (Meyer had also founded the popular Shake Shack chain but had spun it off from USHG in 2015.) In a social media post, Meyer announced the company's decision to reintroduce tips for its servers when its restaurants reopened. Five years earlier, USHG had shaken the industry by eliminating tips, replacing them with a "hospitality included" policy under which menu prices were raised across the board to cover increased compensation for all employees. But now, Meyer said, the company had decided to back off. "It was never easy to make the math add up for all stakeholders," he said of the no tipping policy, "even in far more robust economic times." USHG, founded by Meyer in 1985, had always seen itself as an innovator in the hospitality industry. In his book, Setting the Table: The Transforming Power of Hospitality in Business, Meyer explained his philosophy of "enlightened hospitality"-meeting the needs of all USHG's stakeholders. First among them was "one an- other"-the women and men who worked in the restaurants-and then, in descending order, "our guests, our community, our suppliers, and finally our investors." Before the pandemic, USHG had employed around 2,500 people in a variety of roles. "Front-of-the-house" workers included waitstaff and bartenders who directly served food and drinks to customers and others including hosts and bussers. "Back-of-the-house" workers in- cluded chefs, line cooks, and dishwashers. page 24 The practice of tipping-leaving a gratuity for one's server-was historically widespread in full-service restaurants in the United States, and it significantly boosted compensation for many tipped workers. Salary surveys conducted by the employment website Indeed.com found that in New York City, where most of USHG's restaurants were located, servers earned an average base pay of around $14 an hour-but this was augmented by tips of $180 a day. For many waitstaff, tips more than doubled their earnings. But tipping had its critics. One consequence of tipping was a big disparity between the earnings of front- of-the-house and back-of-the-house workers. Although servers and bartenders' median base pay was less than that of head chefs, line cooks, and even dishwashers, it was significantly higher than any of theirs because of tips, according to the compensation company PayScale. For example, after tips, bartenders earned 21 percent more than head chefs. Some argued that tipping increased racial disparities, because back-of-the-house workers were more likely to be persons of color. Labor rights groups said that tipping could lead to the sexual harassment of female servers, 80 percent of whom said they had endured offensive behavior by customers so as not to jeopardize their tips. One waitress-who was wearing a face mask because of the coronavirus-told a researcher, "A [male customer] asked me to take my mask off so they could see my face and decide how much to tip me." Tipping practices varied among restaurants. Most commonly, waiters and waitresses were permitted to keep their own tips. In some establishments, servers voluntarily shared their tips with bussers, hosts, cooks, and others who had helped them during their shifts, in a practice called "tipping out." The National Restaurant Association, an industry trade group, supported another approach, known as "pooled tipping." In this model, the employer would pool all tips and service charges at the end of a shift and then redistribute them to all em- ployees, according to an equitable formula. Tipping practices were governed by both federal and state labor laws. On the federal level, a law passed in 2018 prohibited employers from keeping tips earned by workers or sharing them with managers or supervisors. In New York, state law further prohibited any sharing of tips with workers who did not spend at least 80 percent of their time interacting with customers. New York also did not permit mandatory service charges. (If in conflict, state rules took precedence over federal rules.) Customers were sharply divided on the question of tips. In a 2018 survey conducted by the restaurant rat- ing service Zagat, 43 percent of restaurant diners said they supported inclusive pricing (like USHG's hospitali- ty-included policy), but 33 percent said flatly that they "hated" it. Some customers were aware-and con- cerned that their tips rarely rewarded the workers behind the scenes who had cooked their meal or cleaned up afterward. But others disliked losing the power to reward their server-a feeling one researcher called "blocked gratitude." One study found that such "blocked" customers were less likely to eat at that restaurant again. In a social media post, Meyer explained some of the complexities USHG had faced in implementing its hospitality-included (no tipping) policy: Without appearing onerous to guests, our menu prices needed to cover 100% of our operating costs, in- cluding an array of extended employee benefits... Dining room compensation would need to be com- petitive with other restaurants where tipping was the norm... Furthermore, guests would need to un- derstand a system that would only allow them to say "thank you" by voice, and not permit them to do so monetarily. And somehow, the equation would need to lead to profitability so that shareholders- who philosophically supported the program-would also see Hospitality Included as a sustainable business model. He added: "We've come to believe that it's the inability to share tips that is the problem, not the tips them- selves. Our ultimate goal is for your tips to be shared among our entire team, so both kitchen and dining room teams can benefit when a guest has a great experience. That will take a shift in public policy and we are ac- tively doing all we can to persuade state and federal lawmakers to make that change." Sources: "New Tipping Rules Will Help Restaurant Owners and Hurt Workers, Advocates Say The Washington Post, January 8, 2021; "Survey Finds that Pandemic Has Exacerbated Sexual Harassment of Tipped Workers, December 1, 2020, www.eater.com, Danny Meyer, "A Return to Tipping, But Let Them Be Shared," Linkedin post, July 20, 2020; Janet Rovenpor and Poonam Arora, "To Tip or Not to Tip: The Role of Pay Equity and Motivation in the Hospitality Business," case and in- structor's manual presented at the annual conference of the North American Case Research Association, October 8-10, 2020; "Gratuity (Still) Not Included," September 1, 2020, www.eater.com; "Restaurant Customers Frown on Automatic Gratuities, Particularly After Good Service, Science Daily, August 10, 2020; "Danny Meyer Restaurants Shut Down Due to Coronavirus Concerns," Food & Wine, March 13, 2020; "Zagat Releases 2018 Dining Trends Survey," January 8, 2018, https://zagat.googleblog.com; PayScale's Restaurant Report: "The Agony and Ecstasy of Food Service Workers," www.- [undated, probably 2015]; and Danny Meyer, Setting the Table: The Transforming Power of Hospitality in Business (New York: Harper Collins, 2006). The authors are grateful to Janet Rovenpor for bringing this story to our attention. payscale.com/data-packages/restaurant-report Discussion Questions 1. What is the focal organization in this case, and what decision did it make? 2. List the four kinds of tipping mentioned in this case. If you worked in a restaurant, which kind of tipping would you support, and why? If you were a customer in a restaurant, which kind of tipping would you sup- port, and why? 3. Identify the stakeholder groups that will be impacted by Meyer's decision to reintroduce tips. For each. identify its interests and power, with respect to tipping policy. (Note: Some stakeholders may have different segments, with varying interests and power.) 4. If you were in Meyer's position, what tipping policy would you support to best meet the needs of all the company's stakeholders? What steps should the USHG management team take to implement this approach? In July 2020, as the first wave of the coronavirus pandemic receded, Danny Meyer, CEO of the Union Square Hospitality Group (USHG), made plans to reopen his restaurants for outdoor dining. USHG operated 19 up- scale eateries in New York City and Washington DC, including the Union Square Café, Gramercy Tavern, and The Modern. (Meyer had also founded the popular Shake Shack chain but had spun it off from USHG in 2015.) In a social media post, Meyer announced the company's decision to reintroduce tips for its servers when its restaurants reopened. Five years earlier, USHG had shaken the industry by eliminating tips, replacing them with a "hospitality included" policy under which menu prices were raised across the board to cover increased compensation for all employees. But now, Meyer said, the company had decided to back off. "It was never easy to make the math add up for all stakeholders," he said of the no tipping policy, "even in far more robust economic times." USHG, founded by Meyer in 1985, had always seen itself as an innovator in the hospitality industry. In his book, Setting the Table: The Transforming Power of Hospitality in Business, Meyer explained his philosophy of "enlightened hospitality"-meeting the needs of all USHG's stakeholders. First among them was "one an- other"-the women and men who worked in the restaurants-and then, in descending order, "our guests, our community, our suppliers, and finally our investors." Before the pandemic, USHG had employed around 2,500 people in a variety of roles. "Front-of-the-house" workers included waitstaff and bartenders who directly served food and drinks to customers and others including hosts and bussers. "Back-of-the-house" workers in- cluded chefs, line cooks, and dishwashers. page 24 The practice of tipping-leaving a gratuity for one's server-was historically widespread in full-service restaurants in the United States, and it significantly boosted compensation for many tipped workers. Salary surveys conducted by the employment website Indeed.com found that in New York City, where most of USHG's restaurants were located, servers earned an average base pay of around $14 an hour-but this was augmented by tips of $180 a day. For many waitstaff, tips more than doubled their earnings. But tipping had its critics. One consequence of tipping was a big disparity between the earnings of front- of-the-house and back-of-the-house workers. Although servers and bartenders' median base pay was less than that of head chefs, line cooks, and even dishwashers, it was significantly higher than any of theirs because of tips, according to the compensation company PayScale. For example, after tips, bartenders earned 21 percent more than head chefs. Some argued that tipping increased racial disparities, because back-of-the-house workers were more likely to be persons of color. Labor rights groups said that tipping could lead to the sexual harassment of female servers, 80 percent of whom said they had endured offensive behavior by customers so as not to jeopardize their tips. One waitress-who was wearing a face mask because of the coronavirus-told a researcher, "A [male customer] asked me to take my mask off so they could see my face and decide how much to tip me." Tipping practices varied among restaurants. Most commonly, waiters and waitresses were permitted to keep their own tips. In some establishments, servers voluntarily shared their tips with bussers, hosts, cooks, and others who had helped them during their shifts, in a practice called "tipping out." The National Restaurant Association, an industry trade group, supported another approach, known as "pooled tipping." In this model, the employer would pool all tips and service charges at the end of a shift and then redistribute them to all em- ployees, according to an equitable formula. Tipping practices were governed by both federal and state labor laws. On the federal level, a law passed in 2018 prohibited employers from keeping tips earned by workers or sharing them with managers or supervisors. In New York, state law further prohibited any sharing of tips with workers who did not spend at least 80 percent of their time interacting with customers. New York also did not permit mandatory service charges. (If in conflict, state rules took precedence over federal rules.) Customers were sharply divided on the question of tips. In a 2018 survey conducted by the restaurant rat- ing service Zagat, 43 percent of restaurant diners said they supported inclusive pricing (like USHG's hospitali- ty-included policy), but 33 percent said flatly that they "hated" it. Some customers were aware-and con- cerned that their tips rarely rewarded the workers behind the scenes who had cooked their meal or cleaned up afterward. But others disliked losing the power to reward their server-a feeling one researcher called "blocked gratitude." One study found that such "blocked" customers were less likely to eat at that restaurant again. In a social media post, Meyer explained some of the complexities USHG had faced in implementing its hospitality-included (no tipping) policy: Without appearing onerous to guests, our menu prices needed to cover 100% of our operating costs, in- cluding an array of extended employee benefits... Dining room compensation would need to be com- petitive with other restaurants where tipping was the norm... Furthermore, guests would need to un- derstand a system that would only allow them to say "thank you" by voice, and not permit them to do so monetarily. And somehow, the equation would need to lead to profitability so that shareholders- who philosophically supported the program-would also see Hospitality Included as a sustainable business model. He added: "We've come to believe that it's the inability to share tips that is the problem, not the tips them- selves. Our ultimate goal is for your tips to be shared among our entire team, so both kitchen and dining room teams can benefit when a guest has a great experience. That will take a shift in public policy and we are ac- tively doing all we can to persuade state and federal lawmakers to make that change." Sources: "New Tipping Rules Will Help Restaurant Owners and Hurt Workers, Advocates Say The Washington Post, January 8, 2021; "Survey Finds that Pandemic Has Exacerbated Sexual Harassment of Tipped Workers, December 1, 2020, www.eater.com, Danny Meyer, "A Return to Tipping, But Let Them Be Shared," Linkedin post, July 20, 2020; Janet Rovenpor and Poonam Arora, "To Tip or Not to Tip: The Role of Pay Equity and Motivation in the Hospitality Business," case and in- structor's manual presented at the annual conference of the North American Case Research Association, October 8-10, 2020; "Gratuity (Still) Not Included," September 1, 2020, www.eater.com; "Restaurant Customers Frown on Automatic Gratuities, Particularly After Good Service, Science Daily, August 10, 2020; "Danny Meyer Restaurants Shut Down Due to Coronavirus Concerns," Food & Wine, March 13, 2020; "Zagat Releases 2018 Dining Trends Survey," January 8, 2018, https://zagat.googleblog.com; PayScale's Restaurant Report: "The Agony and Ecstasy of Food Service Workers," www.- [undated, probably 2015]; and Danny Meyer, Setting the Table: The Transforming Power of Hospitality in Business (New York: Harper Collins, 2006). The authors are grateful to Janet Rovenpor for bringing this story to our attention. payscale.com/data-packages/restaurant-report Discussion Questions 1. What is the focal organization in this case, and what decision did it make? 2. List the four kinds of tipping mentioned in this case. If you worked in a restaurant, which kind of tipping would you support, and why? If you were a customer in a restaurant, which kind of tipping would you sup- port, and why? 3. Identify the stakeholder groups that will be impacted by Meyer's decision to reintroduce tips. For each. identify its interests and power, with respect to tipping policy. (Note: Some stakeholders may have different segments, with varying interests and power.) 4. If you were in Meyer's position, what tipping policy would you support to best meet the needs of all the company's stakeholders? What steps should the USHG management team take to implement this approach?
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