What is Automatic Gratuity? Pros, Cons, and Implementation Tips

In the hospitality and restaurant industry, gratuities or tips are a crucial part of a server’s compensation beyond the federal minimum wage. A recent Forbes study reports that around 57% of respondents tip between 11% and 20% on average and that people were likely to tip more when leaving a digital tip.

However, tipping practices can be a source of confusion for both customers and servers — and sometimes even frustration. One solution to this issue is the implementation of automatic gratuity. 

This article will explore what automatic gratuity means, its pros and cons, and tips for implementing it in your establishment. 

What does automatic gratuity mean?

Automatic gratuity, also known as a service charge or mandatory tip, is a policy many restaurants and hospitality businesses use to automatically charge customers an additional percentage of their total bill. 

This percentage is usually around 15-20%, but it can vary depending on the restaurant’s tip policy. This policy helps ensure that the server is appropriately compensated for their work, regardless of whether the customer chooses to tip. 

The restaurant owner is still required to pay minimum wage.

When a customer receives their bill, the automatic gratuity is already included in the total. The customer then has the option to adjust the amount of the gratuity, but they cannot remove it entirely. 

The main purpose of automatic gratuity is to provide consistency in compensation for servers. The hospitality industry can be unpredictable, and while the employer always has to pay employees minimum wage, tips can fluctuate based on factors like the customer’s mood, the server’s performance, and the overall dining experience. 

Is automatic gratuity legal?

The legality of automatic gratuity policies can vary depending on the location and specific circumstances. 

In the United States, federal auto gratuity law allows restaurants to impose an automatic gratuity or mandatory service charge on customers as long as it is properly disclosed to customers. 

According to law, automatic gratuity cannot be distributed to non-service employees, such as restaurant owners or managers.

However, some states and local jurisdictions may have specific labor laws that regulate how automatic gratuity can be applied. In some states, automatic gratuity may be considered a “wage” and subject to additional taxes and regulations. Some also require that automatic gratuities be disclosed on menus or other written materials.

Therefore, restaurant owners need to familiarize themselves with the specific labor laws in their location and consult with legal counsel before implementing an automatic gratuity policy. Failure to comply with labor laws can result in legal action and financial penalties.

Pros and cons of automatic gratuities

Pros

• Consistency in compensation. With automatic gratuity in place, good restaurant servers can be assured that they will receive a set amount of compensation, regardless of the customer’s current mood or other unpredictable factors. This consistency can help servers better plan their finances and improve their job satisfaction, leading to better overall performance and customer service.
• Increased revenue. Automatic gratuity can also lead to increased restaurant revenue. As we mentioned above, a secure amount of additional compensation for servers can encourage better performance, leading to better customer service and repeat business. Automatic gratuity can also help reduce the risk of customers leaving without giving a tip, which can ultimately result in higher revenue because restaurant owners will not have to make up the difference for servers when paying their wages.
• Increased efficiency. Another benefit of automatic gratuity is improved server and restaurant efficiency. With automatic gratuity in place, servers do not have to spend time on calculating tips or waiting for customers to add a gratuity to their bill. This can allow restaurant staff to focus more on providing quality customer service and less on handling individual tips.

Cons

• Frustrated guests. One of the main disadvantages of automatic gratuity is the potential for unsatisfied or frustrated guests. Some people may not be aware of the automatic gratuity policy or may not agree with the amount of gratuity added to their bill. This can lead to dissatisfaction and negative reviews, which can ultimately harm the restaurant’s reputation and business. Guests may also feel that an automatic gratuity is unnecessary or unfair, especially if they have received poor service or had a poor dining experience.
• Legal concerns. As mentioned earlier, there are legal concerns associated with implementing automatic gratuity policies. Restaurants need to ensure that the policy complies with labor laws and regulations in their location, and failure to do so can result in legal action and/or financial penalties. Additionally, restaurants need to disclose the automatic gratuity policy to customers properly, and not doing so can also lead to legal issues.
• Logistical challenges. Restaurants need to ensure that their billing system is set up to properly calculate and apply the automatic gratuity, which can require additional resources (like an employee handbook) and training for staff. And, if the restaurant decides to apply the automatic gratuity to certain tables or customers selectively, it can create logistical challenges for servers and management to keep track of which customers have been charged the gratuity and which have not.

How to implement automatic gratuity in your restaurant

Inform the guests beforehand

One of the most important aspects of implementing automatic gratuity is to inform your guests that it is in place. This means making sure that the policy is clearly stated on the menu, website, or other materials that customers may encounter. 

Additionally, restaurant owners should train staff to inform customers about the policy when they are seated or when they make a reservation. This helps mitigate any surprises or confusion when the bill arrives.

Set a fair gratuity percentage

Another key aspect of mandatory service charges is to set a fair auto gratuity percentage. You do this by determining a reasonable amount to add to the bill that reflects the level of service provided by the server. 

The typical range for mandatory gratuity is between 15% and 20%, although some restaurants may choose to set a higher or lower percentage based on their particular circumstances. Again, it is crucial to ensure that the auto gratuity policy and percentage is clearly stated on the menu or your other materials and that it is not excessive or unreasonable.

Selectively apply

Another option for implementing auto gratuities is to selectively apply them to certain tables or customers. For example, a restaurant may choose to apply a mandatory service fee only to large parties or only to customers who have a history of not leaving a tip. This can minimize the potential for frustrated guests and negative reviews while still providing the benefits of an automatic gratuity charge.

Consider “suggested tip” instead of automatic gratuity

Another option for restaurants is to provide a suggested set tip amount on the bill rather than automatically adding a gratuity. This approach can help restaurant owners avoid any legal concerns associated with automatic gratuity laws while still providing guidance to customers on a reasonable amount to tip. 

However, you should still make sure that the employer policy on the suggested tip amount is clear and reasonable and that customers are not pressured to tip more than they feel comfortable with.

How Eat App helps with implementing automatic gratuity

Eat App is an industry-leading restaurant management platform that provides a range of features to help restaurants implement automatic gratuity and optimize efficiency. 

Here is how  Eat App contributes to a smooth implementation of auto gratuity at your restaurant: 

• Informing guests beforehand about this policy once they book a table — one of the key features of Eat App is its intelligent booking engine. This engine allows guests to book reservations 24/7 from all online channels, receive confirmation emails, and pay no commission fees. When a customer makes a reservation, Eat App can automatically inform them of the automatic gratuity policy. This ensures that guests are aware of the policy before they arrive at the restaurant, reducing the risk of confusion or frustration.
• Segmenting customers — Eat App’s customer segmentation feature allows restaurants to selectively apply automatic gratuity based on various criteria. Restaurants can choose to apply the policy only to bigger groups of customers, for example. In this way, Eat App ensures that the policy is applied fairly and consistently.
• Delivering daily reports — Eat App provides detailed reports that allow restaurant owners to see the impact of implementing automatic gratuity. These reports can show how much revenue the policy generates, how it affects server compensation, and how it affects overall profitability. This information can help owners make informed decisions about whether to continue with the policy or make adjustments.

Eat App also provides a range of benefits to restaurant owners and managers looking to streamline their business operations, such as:

• Hospitality CRM. Eat App’s centralized CRM system allows restaurants to collect and manage guest data, track guest preferences, and send marketing campaigns. This helps restaurants deliver a personalized guest experience that keeps customers coming back.
• Front-of-house operations. Eat App’s integrated platform allows restaurants to manage everything from reservations to waitlists to point-of-sale. This reduces the workload on staff and ensures that guests are served efficiently and accurately.
• Marketing automation. Eat App also offers marketing automation features to help restaurants stay in touch with their guests and promote their business. This includes email and SMS marketing campaigns, automated reservation confirmations and reminders, personalized follow-up messages, and more. 

In short, thanks to its comprehensive suite of tools, Eat App can help restaurants provide a positive dining experience while also maximizing their profit margin.

Conclusion

Automatic gratuity can be a valuable tool for most restaurants to ensure fair compensation for their servers, increase overall efficiency, and boost revenue. However, it remains a topic for debate for a reason. 

Simply put, restaurant owners need to weigh the pros and cons carefully and implement automatic gratuity in a fair and transparent way. 

Using a restaurant management platform like Eat App can make the process of implementing automatic gratuity much easier for restaurant owners. 

If you’re a restaurant owner looking for an easy-to-use and comprehensive solution to help you with this while also managing your reservations, guest data, and marketing campaigns, sign up for Eat App today and start consistently delighting your customers.