Tipping Point at Union Square

Hospitality Group

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 upscale 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 another"-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 included chefs, line cooks, and dishwashers.

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
employees, 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 rating service Zagat, 43 percent of restaurant diners said they supported
inclusive pricing (like USHG's hospitality-included policy), but 33 percent said flatly that
they "hated" it. Some customers were aware-and concerned-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, including an array of extended employee benefits... Dining room
compensation would need to be competitive with other restaurants where tipping was the
norm... Furthermore, guests would need to understand a system that would only allow
them to say "thank you" by voice, and not permit them to do so monetarily. And some-how,
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 themselves. 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 experi-
ence. That will take a shift in public policy and we are actively doing all we can to
persuade state and federal lawmakers to make that change."

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 support, 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?

Source: Lawrence, A T et.. al. Business and Society, Stakeholders, Ethics, Public Pilicy,
17th edition, pp22-24. McGraw Hill.