Does tipping really encourage great service? The answer may surprise you.

'The very concept of tipping is controversial. Unions have frequently resisted it, yet at times demanded that it be allowed.

Tony Gill, professor of political science at the University of Washington, believes in tipping, and he has a favourite story about it.

By David Walker

Tony Gill, professor of political science at the University of Washington, believes in tipping, and he has a favourite story about it. He’s a fan of US football team the Seattle Seahawks. Every week he goes to his favourite bar, where a stool is reserved for him on game days. One week he had to travel for work, and the bar called to see whether he was OK. That, he says, is how good service quality becomes when you tip.

Social psychologist Mike Lynn also has a favourite tipping story, but it’s a bit different. He was working at a fine dining restaurant during his student days when a customer called him over and slapped a pile of US$5 notes on the table. The customer declared the money was Lynn’s tip, but that he’d take away one fiver for every time his glass went unfilled, his ashtray unemptied, or any other issue that arose. Lynn ended up pocketing a big tip – and, he says, “hating the guy’s guts”.

The two stories encapsulate the weird economics of tipping. In some circumstances it seems at least credible that it works to incentivise better service. In other cases, simple incentives give way to the messy complications of human life.

How tipping spread

Tipping has been around for a long time – in England since the 1700s, according to Kerry Segrave, author of the book Tipping: An American History of Social Gratuities. Back then, one type of tip was called a vail and was paid by nobles to the servants of another noble with whom they were staying. Notes Segrave: “Tipping seems to have started with the travelling aristocracy and spread downward class by class.”

It also spread outwards. It was at first fiercely resisted in the US, now the epicentre of tipping, which even has a special, much lower minimum wage for tipped workers.

Indeed, some believe powerful forces are driving other countries towards tipping. In a 2013 paper, University of Melbourne anthropology student John Burgess argues that tipping emerged in the US as part of a push to lower wages by employers, and that as Australia deregulates its workforce, Australians will likewise tip more often.

Etiquette coach Anna Musson, founder of The Good Manners Company, believes that tipping in Australia is on the rise: the standard Australian tip, she says, has now reached about 10 per cent of the total bill, the same as in parts of Asia. However, Australians divide fairly sharply into tippers and non-tippers. Europeans tend to add 10 per cent onto restaurant meals and round up taxi fares. The standard US tip is higher, about 17 per cent. In contrast, the British are inclined to tip only for exceptional service, and in Japan and Korea, it remains very unusual.

Resistance to tipping

The very concept of tipping is controversial. Unions have frequently resisted it, yet at times demanded that it be allowed. In 1913, US travel and consumer associations condemned it.

Gill calls tipping “a wonderful institution” and “an efficient social mechanism” that makes services markets work better. It has evolved because it solves what economists call a principal-agent problem. A cafe wants its waiting staff to provide good service, but it can’t monitor every interaction. Therefore, it asks its customers to, in effect, explain their needs and then vote with their wallets.

Drawing on his expertise in the political economy of religion – which has extensive literature on sacrificial acts – Gill argues that tipping is a small sacrifice that builds trust.

The trouble with tipping

There’s more to tipping than incentives and trust. Many people still leave tips when service is bad. If they were simply judging and rewarding, this wouldn’t happen.

In fact, as commentators such as Segrave have noted, the tip is a peculiar sort of payment, the type of which is rarely seen elsewhere in the economy. It is only paid after the service is delivered, yet in most cases no one specifies in advance how much will be given or received, or even whether there will be payment at all. Those doing the tipping often tip people they expect never to see again; in theory an incentive for recipients to do as well next time.

How do you find out the tipping norms in particular situations or specific countries? Should you tip the porter in Singapore? (Probably not.) Are the rules in Bangkok the same? (Leave small tips.) How about Atlanta? (Almost everyone – and it’s complex.) Auckland? (No.) Brisbane? (Even the locals disagree.) Worse, this often has to be figured out at the one point in a trip when you’re least likely to have internet access: walking into a hotel lobby.

"Is your 15 per cent tip going to the diligent waiter, the inattentive cook, or restaurant manager? Who do you ask?"

Besides, who are you rewarding? Many organisations require staff to pool tips and some insist that they hand them over. This makes sense for management trying to promote teamwork, but if you go to a restaurant and receive terrifically attentive service but a rather tasteless steak, how much do you tip? Is your 15 per cent going to the diligent waiter, the inattentive cook, or restaurant management? Who do you ask? Untangling it all will likely lead to an uncomfortable end.

Further, why does tipping only apply to people who serve food and drink, work in the public areas of hotels, caddy at golf courses or drive taxis? Why, for instance, do corporate lawyers not receive tips or, for that matter, university lecturers?

Income uncertainty

Remember Mike Lynn, the waiter confronted with that pile of US$5 bills? He went on to become a professor at Cornell University’s School of Hotel Administration and is probably now the world’s leading expert on why people tip and who gains from it. He scours the hospitality system for data he can use to shed further light on the issue.

Lynn’s latest research tends to confirm tipping is more complex than just rewarding people for good service. From an economic point of view, he has concluded that tipping is not a powerful mechanism for changing anything.

In the US, surveys of restaurant companies, managers and employees suggest tipped restaurant workers earn substantially more than untipped workers such as cooks. At one point in his own waiting job, Lynn calculated he was taking home higher hourly pay than the restaurant’s manager.

He has found tips are popular with the best prospective restaurant employees – those who are agreeable, conscientious and emotionally stable.

Indeed, he believes restaurants in the US are actually paying well-tipped service staff more than they need to, without any corresponding improvement in job performance. The restaurants might do better with just wages rather than a combination of wages and tips. This is one of the biggest surprises from tipping research: it is not really benefiting employers.

Lynn’s ultimate conclusion is that if servers are overpaid relative to back of house staff such as cooks – and particularly if customers are wealthier and therefore less concerned about price – the restaurant should consider abandoning tipping altogether.

Lynn also believes tips don’t do much for service quality and that is not why customers tip. They do it because everyone they know tips, they’re generous, have enough money, or just want to show off.

Notably, people tip more because their bill is bigger. Consumption is obviously largely unrelated to service quality, but Lynn’s advice to his younger waiter self would be simply to convince customers to pay for more food and drink.

As an economic mechanism, tipping isn’t worth much. Nonetheless – economically rational or not – it is remarkably resilient.

Tax on tips

Tips are taxable in most jurisdictions. The Australian Taxation Office (ATO), for instance, declares: “If you receive cash tips, you must declare them on your tax return – regardless of how you receive them. It makes no difference if tips come from your employer or direct from customers.” It also says tips shared from a jar constitute part of your wages.

However, in Australia a tip “paid voluntarily” does not form part of the restaurant’s income. Owners need to keep records to show that tips are passed on to employees. If the tip is a predetermined, compulsory surcharge, it is a “consideration for supply” and therefore part of the restaurant’s income.

How to tip

One of the trickier problems of this day and age is how to add a tip.

Founder of The Good Manners Company Anna Musson suggests to first check whether the restaurant has already added a gratuity or service charge, particularly if you’re part of a group booking. At restaurants with electronic payment systems, it may be best to ask the waiter or cashier to add an amount. Alternatively, if you receive one, you can write it on the printed bill. Simplest of all is probably to tip with cash.

Read next: Getting customer service right in the retail sector

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