How To Choose The Right Tipping Policy

Posted on March 10, 2016 by - Also by this author

Gratuities have always had a solid presence in the transportation industry from cabbies to chauffeurs and bus drivers.

It is rumored that to offer someone “tips” was an act To Insure Prompt Service, or TIPS, as it became known. It was intended to reward exceptional service rather than be a compulsory payment.

Today, people wonder if it is appropriate to tip everyone, from the gardener to the mattress delivery team. You would never tip your Starbucks Barista in England nor would you tip a cabbie. Yet, in the U.S. even fast food counters have obvious tip jars begging you to up the employee’s pay for the day. 

The New Concept

Danny Meyers, a popular restaurateur in New York City, decided to forbid patrons from tipping his wait staff. He instead raised the prices on his menu and began paying his employees top wages with health care benefits. Joe’s Crab Shack, a national seafood chain, followed suit, raising its employee wages to $14 per hour and requested guests to refrain from tipping.

Other companies outside of the restaurant industry forbid tipping employees, such as Albertson’s Grocery Stores, a Boise-based chain. If a clerk helps you carry groceries to your car, he is not allowed to accept a tip.

Limousine Industry

BostonCoach has long maintained a no tipping policy, even stating it on its website and in literature provided to new corporate clients. A direct statement says, “Remember our no tipping policy.” My former company, Limousine Scene in Bakersfield, Calif., eliminated mandatory gratuities six years ago in favor of a starting wage of $12 per hour when the minimum hourly wage was $6.75. 

Clients are free to tip their chauffeurs at the end of rides. Many transportation companies have implemented a “service charge fee” and pass on only a portion of the amount collected. While completely legal, it may deceive the client, who falsely believes the entire amount goes to the person providing the service. 

On the other hand, if an operator passes on a portion of this service charge and the client doesn’t understand the difference between a gratuity and a service charge, the driver may get a double dip.

Are Tips Fair?

Do tips really cause employees to work harder and deliver better service? Customers can use it as a weapon to punish a person for providing bad service. If an employee relies primarily on tips rather than wages, he can be financially penalized for a mechanical failure. An angry client can withhold a tip as a result of a service failure. 

Likewise, is it fair to force your client to pay a 20% gratuity before your chauffeur has even rolled out of bed in the morning? Suppose he is late, picks up the client in a dirty vehicle, and gets lost? Why should a client be forced to pay what was intended to be a gift? Yes, that’s right, the dictionary says, a gratuity is a gift. It’s not really a gift when it is forced upon a customer.


The IRS ruled in June 2013 there is a distinct difference between a service charge and a gratuity charged to a customer. A service charge is a non-negotiable charge forced upon the client and collected by and for the business. A gratuity is an amount decided solely by the customer and can be any dollar amount or percentage the customer decides to pay.

If you are collecting an amount designated and presented to the customer as a gratuity, the entire amount determined by the customer must be paid to the chauffeur. The employer cannot keep any part of it. While this ruling applies to tax and tip matters, keeping any part of an employee tip violates the Federal Labor Standard Act.

At the end of the day, your policy should reflect your values and your bottom line. Each approach, tips or no tips with higher wages, has its pros and cons. Make sure you check with your employees, your clients and your spreadsheets to see what reflects best on your company.

About the Author

Smooth Operations provides a broad range of information focused on new ideas and approaches in management, human resources, customer service, marketing, networking and technology. Have something to share or would like covered? You can reach LCT contributing editor and California operator Jim Luff at [email protected]

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