Gratuities, Tips and Service Charges: Where Does Your Money Go?

CashI have heard so many variations of these charges over the years, I thought I would take this opportunity to try and come to some sort of consensus. I am going to explain the way I understand it. Please use the comments area below to expand on or disagree with what I am presenting.

Tips are the easiest to understand. Tips are voluntary, like when you are in a restaurant. If service is exceptional, planners may add a tip on top of the gratuity, or they may tip individuals for services rendered.

Gratuities are mandatory and are added to the bill. They can range from 18% to 24% of the total bill. They belong to the staff, and the hotel is not allowed to keep any portion of the monies.

One of the items that I think most professional miss in trying to discuss this issue is the effect on server/employee compensation and its subsequent effect on the skill level of banquet/catering service staff. In part, server compensation at gratuity-based properties seems to require a higher level of record keeping, as the gratuity “pool” for each event must be kept separate and divided by the staff who worked the event. The result is relatively transparent compensation to service staff and service staff feel reasonably compensated for their work, resulting in attracting a higher level of professionalism, loyalty and dedication to service. 

Service Charge: Most people would think that the service charge is for service, but hotels can keep a portion of this fee. I have heard hotel sales people say that the service charge is non-negotiable, but I have also heard meeting planners say they ask what it covers, and have been able to negotiate away part of the fee by eliminating part of the services. 

tips

With a service charge-based compensation model, the compensation becomes far less transparent.  Record keeping is made easier by allowing the property to create a "tip pool" for the pay period - the total amount of service charges are divided by the total work hours of service personnel for the pay period, resulting in an hourly wage or ‘share’ (e.g., $10,000/500 labor hours = $20/hour)   The total amount of compensation to an individual is based on the number of hours worked x the dollar amount of the share.   

BudgetWhile easier from a record-keeping standpoint, this method is much less transparent to the front line worker in a variety of ways.  In general, the house rarely discloses to either the planner or the employee how much of the service charge is actually directed to worker compensation and how much is directed to the house.

Examples how this has played out:  At one property, all catering managers and CSMs were allotted 40 hours in the tip pool per week, adding to the number of labor hours and reducing the front line hourly wage.  While this serves to incentivize the manager, it can discourage professional service personnel, as it reduces their overall compensation.  At one property, it did not stop with middle management, but upper level management (from assistant director to the higher levels), further diluting the tip pool).

At another property, the compensation for workers ranged from $12-$16 per hour, dependent on what the resulting calculations regarding the tip pool were.  On the one hand, this meant that servers were always guaranteed to make at least $12/hour.  On the other, if the hourly wage calculated out to $18/hour, then all additional monies above the $16 per hour were shown as revenue towards the catering/conference services budget.  Because the property was located in an area with a small labor pool the director of the department proposed doing away with the $16 ceiling in order to attractive and retain a more highly skilled worker.  High management refused because they did not want to lose the revenue that the additional money from the service charges provided to the bottom line.

Kelly Rush, an event manager for Forklift Catering and East Meets West Catering in Boston reviewed the above for me and made the following comments:  “While I agree with your general definition of the above terms, it’s important to note that most of them are defined by individual state laws. For example, in Massachusetts, gratuities must be distributed in their entirety to front line service personnel.  Also, taxes may not be charged on top of gratuity, but is added to the total after computation of taxes.  

"In most of the states that I’ve worked service charges are collected by the house and redistributed as management sees fit.  While the lion’s share of the service charge goes to the service staff, often a portion is kept by the house for bonus and/or commission payment to catering sales and/or conference services managers, with the remainder going to the overall bottom line of the property. Again, the tax issue tends to be governed by state law, but the states that I have worked charge tax on top of the service charge."

Thanks for your insights, Kelly!

For more budgeting insights, read Tying Up Loose Ends: Cvent Task Lists and Other Budgeting Features and Event Planning Tip - Watch for Extra Fees.

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