Your consulting company has been asked to conduct a report for Diamond Enterprises, Which runs three
national chains: FishStix, The Bar-B-Q Pit, and Morrie’s. All are medium-priced, family-friendly
restaurants. The CEO is thinking of replacing optional tips with a 15% service fee automatically added to
bills.
You read articles in trade journals, surveyed a random sample of 200 workers in each of the chains, and
conducted an e-mail of the 136 restaurant managers. Here are your findings
1. Trade journals point out that the Internet Revenue Service (IRS) audits restaurants if it thinks that
servers underreport tips. Dealing with an audit is time-consuming and often results in the restaurant’s
having to pay penalties and interest.

2. Only on Morrie’s restaurant has actually been audited by the IRS that servers were reporting tips
accurately. No penalty was assessed. Management spent $1,000 on CPA and legal fees and spent over 80 hours
of management time gathering data and participating in the audit.

3. Restaurants in Europe already add a service fee (usually 15%) to the bill. Patrons can add more if they
choose. Local custom determines whether tips are expected and how much they should be. In Germany, for
example, it is more usual to round up the bill (from 27 to 30, for example) than to figure a percentage.

4. If the restaurant collected a service fee, it could use the income to raise wages for cooks and hosts and
pay for other benefits, such as health insurance, rather than giving all the money to servers and bussers.

5. Morrie’s servers tend to be under 25 years of age. FishStix employs more servers over 25, who are doing
this for a living. The Bar-B-Q Pit servers are students in college towns.

6. In all three chains, servers oppose the idea. Employees other than servers generally support it.
7. Servers said that it was important to go home with money in their pockets (92%), that their expertise
increased food sales and should be rewarded (67%), and that if a service fee replaced tips they would be
likely to look for another job (45%). Some (17%) thought that if the manager distributed service-fee income,
favoritism rather than the quality of work would govern how much tip income they got. Most (72%) thought
that customers would not add anything beyond the 15% service fee, and many (66%) thought that total tip
income would decrease and their own portion of that income would decrease (90%).
8.
Retain tips Change to
service fee added to bill don’t care
FishStix managers (n=44) 20% 80%
0%
Bar-B-Q managers (n=13) 33% 67%
0%
Morrie’s manager (n=58) 55% 45% 0%

9. Comments from managers include: ‘’It isn’t fair for a cook with eight years of experience to make only
$12 an hour while a server can make $25 an hour in just a couple of months,’’ and ‘’I could have my pick of
employees if I offered health insurance.
10. Morale at Bar-B-Q seems low. This is seen in part in the low. This is seen in part in the low response
rate to the survey.
11. In a tight employment market, some restaurants might lose good servers if they make the change. However,
hiring cooks and other nonservers would be easier.
12. The current computer systems in place can handle figuring and recording the service fee. Since bills are
printed by computer, and additional line could be added. Allocating the service-fee income could take extra
managerial time, especially at first.
Write the report

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