You Don't Believe In Tipping?
Michael “Schatzy” Schatzberg
🔵Hospitality|Investor🚀 Food Service|Technology|Innovation|Emerging Brands|Restaurant Owner|Venture Capitalist|TechStars Mentor|Advisor|Co Founder| Podcaster🎙️Influencer⭐️ Managing Partner|Talk Show Host
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Friends of Branded!
Happy Saturday and I hope you had a great week!
Both Republicans and Democrats appear to be on the same page (or at least a similar page) when it comes to proposals to end taxes on tips.
This will be a win for the hospitality industry, right?
Not so fast young Jedi, not so fast.
There’s plenty of economic analysis available on why this policy sounds broadly appealing but from an economic and financial perspective, it loses its value beyond being a soundbite. Sorry, not sorry, but it does.
Speaking only for myself (b/c I have no right to speak for anyone else), the whole idea of the government stepping in to help foodservice tipped workers (which, by definition, means only front-of-house members of the team) seems incredibly arbitrary if the objective is to improve the lives of working families.
While the devil, of course, will be in the details, broadly speaking, only workers who get paid tips will see any changes if the No Tax on Tips Act move forward.
According to the Fair Labor Standards Act (FLSA), a tipped worker is defined as an employee who customarily and regularly receives more than $30 per month in tips. This classification includes workers in roles where tipping is common.
The Foodservice & Hospitality industry is well understood to have jobs where tips are often a significant part of the employees’ income and where a dependence on tipping practices for financial stability is high. However, our industry doesn’t have exclusivity when it comes to employing tipped works. Travel & Lodging is loaded with tipped workers (hotel bellhops & porter, housekeeping staff, valet attendants); as are Transportation & Delivery (taxi or rideshare drivers, food delivery drivers); Personal Care Services (hairdressers, barbers, beauticians, spa workers); Entertainment & Recreation (tour guides, museum guides, casino dealers, floor staff, golf caddies, coat check attendants); and Event & Venue Services (wedding & event servers, ushers at theaters or stadiums, restroom attendants in upscale venues).
My point for sharing this (exhaustive) list, is to highlight that tipped workers aren’t limited to restaurant waiters and bartenders.
The FLSA allows employers to pay tipped employees a lower hourly wage (referred to as the "tipped minimum wage") than the standard federal minimum wage, as long as the employee’s tips plus the base wage equal at least the federal minimum wage of $7.25 per hour. If an employee’s tips, combined with the base wage, don’t reach the federal minimum wage, the employer must make up the difference.
Let’s dig into the number a little bit, and I’m leveraging work done by Yale University’s Budget Lab to help me.
According to the Budget Lab, in 2023, there were about 4 million workers in tipped jobs, which comprises 2.5% of the US Workforce. Tipped workers tend to be younger (median age of 31) compared to non-tipped workers (where the median age of 41) and earn lower wages. Experts believe that only a fraction of tipped workers would benefit from this tax break and that would be limited to middle and higher earning service workers but would have no impact on the lower-wage workers.
According to the Bureau of Labor Statistics, of the more than 2 million food servers in the US, 50% earn less than $37,000 per year. More than a third of tipped workers don’t make enough income to pay federal income taxes.
Again, there’s a healthy debate whether the No Tax on Tips Act is sensible legislation and will in fact provide tax relief for working families. In a recent poll, a little more than 50% of respondents believe it will help workers, while a little less than 50% of respondents believe it will create an opportunity for employers to pay workers less. For whatever its worth, 100% of the authors of this Top of the Fold article believe it will further complicate a tax code that’s already complicated and create incentives for people to recharacterize income in a way that takes advantage of this tax credit (if it comes to fruition).
Now after sharing all the above, here’s where I feel this No Tax on Tips Act REALLY fails – b/c it further delineates the front-of-house members of the team from the back-of-house members of the team.
America has a tipping problem (Houston, we really do have a (tipping) problem), but as someone who has worked on so many different compensation models (in restaurants and in my financial career), I subscribe that there is no perfect compensation model (but we should never let perfection be the enemy of good enough).
Our industry needs to put a team on the floor (as essentially every business does) that can compete and win. For restaurants, that’s a combination of meeting (exceeding) the expectations of our guests, maintaining a clean & efficient operation and keeping our costs in check relative to our sales (sounds easy, right? Trust me, it’s not).
Mr. Danny Meyer (Union Square Hospitality Group) and other restaurant leaders tried (with good intentions and deserving of admiration) to eliminate tipping for front-of-house employees as part of a broader goal to improve wage equity, staff retention, service quality, and operational transparency.
Specifically, and importantly, our industry has a wage disparity issue between the front-of-house and back-of-house staff. In traditional tipping models, front-of-house employees (like servers and bartenders) often earn significantly more than back-of-house employees (such as cooks and dishwashers). Tipping laws usually prevent tip-sharing with kitchen staff, leading to income imbalances. By removing tips and raising menu prices to fund higher, consistent wages for everyone, Mr. Meyer aimed to address this inequity and create fairer compensation across roles.
Even for the higher paid tipped front-of-house workers, the current compensation model creates income instability and retention issues for operators. With front-of-house employees depending heavily on tips, the result is less predictable income and increased wage volatility. Back-of-house staff, meanwhile, could often find better-paying opportunities elsewhere. By adopting a no-tipping policy, the objective was to provide more stable income for front-of-house workers and increase overall compensation for back-of-house workers to improve retention.
This week’s Shoutout section will be a little different. Branded was fortunate to have a wealth of activity and specifically friends and portfolio companies doing some amazing things that I want to make sure I capture this week.
So, let’s get it on!
Nothing screams “shoutout” more than a new business initiative and that’s what I’m fortunate to share with this week’s 1st shoutout.
Branded is thrilled to announce a partnership we’ve formed with ARI Venture Studio. We’ve known the principals behind ARI Venture Studio and have been fortunate to find various projects and opportunities (on a case-by-case basis) to work together. This is different and the opportunity to take a position with this differentiated venture studio is something the Branded team is very excited about.
We’re an early-stage operator-centric investment platform, and we’ve been interested in moving even earlier into the maturation curve. We believe the team at ARI represents ideal partners for Branded to be part of a venture building business and help drive transformative change in restaurant operations.
You can read about this partnership and ARI Venture Studio here: ARI Venture Studio Secures Branded Hospitality Group as Lead Investor to Revolutionize Restaurant Technology
Branded’s friends at Craveworthy, also had a big week, yes, a BIG one!
Branded invites readers of the H^2 that are interested in learning more about our portfolio companies, and investment strategies to become part of our Access Hospitality Network.
Below please find a few of the things we're focused on.
Featured Episode: Powerhouse Dynamics' Drew Holst on Embracing Tech Through A Digital Transformation
Join Michael Schatzberg, “The Restaurant Guy,” and Jimmy Frischling, “The Finance Guy,” In our latest Hospitality Hangout episode, with Drew Holst- Vice President of Powerhouse Dynamics. Drew brings unmatched energy and expertise to the table, driving innovation with cutting-edge tech solutions that keep restaurants running seamlessly from front-of-house to back-of-house. With a deep understanding of the power of IoT, he’s helped countless brands transform their operations, cut energy costs, and turn kitchens into high-tech hubs.
In this episode, Drew emphasizes the importance of energy-efficient operations and reliable equipment maintenance to control costs and ensure a smooth guest experience. Key highlights include insights from the National Restaurant Association (NRA) report on restaurateurs’ preference for tech-enabled dining experiences and how Powerhouse Dynamics' IoT solutions help maximize operational efficiency. Drew also predicts a major increase in connected equipment technology, spurred by the technician shortage, and Jimmy weighs in on the next big industry trend.
Tune into the episode and subscribe to our channel here: Hospitality Hangout With Drew Holst
Re-Run of the Week: Union Square Hospitality’s Chip Wade on Expanding Daily Provisions and Breaking Barriers in Hospitality
In this throwback episode of the Hospitality Hangout podcast, Michael Schatzberg, "The Restaurant Guy," and Jimmy Frischling, "The Finance Guy," welcome Chip Wade, CEO of Union Square Hospitality Group. Chip shares his inspiring journey from working at Dunkin' Donuts to becoming a leader in the hospitality industry, illustrating how the sector can embody the American dream.
This throw back episode is in honor of our new mini-series "Hospitality Hustlers"! The podcast has been fortunate to feature some incredible industry leaders—the true movers and shakers of hospitality. With over 200+ episodes, we’ve noticed an amazing trend: more than 85% of the CEOs we’ve interviewed began their careers as bussers, servers, dishwashers, or cashiers. To spotlight the humble beginnings and hard earned successes of these industry icons, we want to know if YOU have a similar story? We'd love to hear about it! We truly appreciate your support, and we’re excited to share more inspiring journeys. Email us at Podcast@brandedstrategic.com if someone you know or you have a similar path!
Tune into the episode and subscribe to our channel here: Hospitality Hangout With Chip Wade
You can tune in on:
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Apple Podcasts: Click Here
Watch on YouTube: Click Here
Are you loving the Hospitality Hangout? Let us know! Please leave us a review here!
Who Made The B List?
TECHNOLOGY
Leveraging Card-Linked Offers to Navigate Rising Costs in the QSR and Fast Casual Industry
By: Andrew Landis, CEO of LuckyDiem
Card-linked offers (CLOs) present a strategic solution, offering a targeted, performance-driven approach to customer acquisition in this complex landscape.
MARKETING
BIGGEST TAKEAWAYS Florida Restaurant Show / Pizza Tomorrow Summit
By: Rev Ciancio, Head of Revenue Marketing at Branded Hospitality Ventures
The Florida Restaurant & Lodging Show and Pizza Tomorrow Summit just concluded in Orlando, FL. This was great! They combined two shows into one and had an even better-attended event with more people and more diversity.
That’s it for today!
See you next week, same bat-time, same bat-channel.
It takes a village!
Jimmy Frischling Branded Hospitality Ventures jimmy@brandedstrategic.com 235 Park Ave South, 4th Fl | New York, NY 10003
Branded Hospitality Ventures ("Branded") is an investment and solutions platform at the intersection of foodservice, technology, innovation and capital. As experienced hospitality owners and operators, Branded brings value to its partners through investment, strategic counsel, and its deep industry expertise and connections.
Learn more about Branded here: Branded At-A-Glance