TIPFLATION: Economist Sean Snaith explains how inflation impacts tips
Some restaurants in Central Florida are trying to stay afloat without raising food prices or cutting staff by charging customers a 20% service fee.
For example, recently a pizza restaurant in Brevard County announced this change.
Unlike a tip, a service fee is not optional.
Sean Snaith, director of the Institute for Economic Forecasting at the University of Central Florida, explains how inflation is impacting the way we tip.
Listen to the full conversation in the player above.
Service Fee vs Tip
According to the IRS, service fees are non-tip wages paid to the employee, which some employers keep a portion of the service charge. They are not optional and the percentage is set by the company.
Meanwhile, tips are described as optional discretionary payments determined by the customer.
Sean Snaith said some restaurants are utilizing service fees as a way to deal with persistent inflation and continue to recover from the COVID-19 pandemic.
"I think what we've seen in recent years because of higher minimum wages in different places around the country, and then more recently the tightness in the labor market, and the difficulty many places are finding get staff is that there's been some more experimentation."
Snaith said one of the objections to service fees is that it's not determined by the quality of service customers receive.
"Substituting service fees, instead of having tips, is that there's no way to reward or send a message when service wasn't up to par or service was above and beyond."
He adds that substitution could lead to a lack of incentives among employees to go above and beyond.
"When you start disassociating incentives from behavior, then don't be surprised that behavior changes. This is one of the greatest sources, in my mind of sort of economic fallacies is this fact that the rules of the game determine how players play the game."
Until the Federal Reserve can reduce inflation, Snaith said restaurants will continue to balance giving customers a good experience while dealing with higher food costs and employee retention.
Counter Service Tipping
Have you ever used your credit card to pay for a coffee or fast-food at a counter and been prompted for a tip at the end?
If you answered 'yes,' you're not alone.
Customers are being asked to leave a tip, often starting at 18%, as more business move to digital payment methods.
"I think one of the drivers there has been the payment services. The companies that these establishments use," said Snaith. "They get paid based on the size of the transaction. So by adding a tip to your bill, that means they're going to get a higher fee for that transaction."
He adds that counter service tipping is also a way businesses can attract and retain employees during a tight labor market.
However, Snaith said for the consumer it's another form of rising cost of living.
"These trips to these establishments now costs more because of service fees, or because of newly added tips that weren't part of the equation a few years ago."
With that being said, Snaith is unsure how much further the minimum of 18% can be pushed.
"I think there's limits here to how much they can push," he said. "If you're going up to a counter in a fast-food type restaurant, you're there because of the price point and tacking on 30% drastically alters what you're paying for that food."
When Should You Tip?
As consumer continue to get prompted for tips at counter services and deal with service fees at some restaurants, it has some wondering when they should leave a tip.
Snaith said it's a personal preference, but it could feel uncomfortable for some.
"At some of these establishments, there's a big giant screen that is in full view of everybody in line behind you, and your input is there. And so there's sort of a shame element to that."