As of Jan. 1 this year, the IRS passed a new law that may force some restaurants to reconsider automatic gratuity, a practice that ensures waitstaff an 18% tip when serving tables of six or more customers. Under the new policy, there is a more defined distinction between tips and service charges.

The new rules say that payment must reach the following four requirements to be considered a tip. The payment must be made free of compulsion, the customer must have the right to determine the amount, employer policy should not dictate the payment and the customer has the right to determine who receives the payment.
“That’s really bad for our pay,” senior Linda Tabisz, who works at Logan’s Roadhouse, said. “The reason wages are so low is because of how much we earn in tips.”

Automatic gratuity does not meet these criteria. Tips must now be classified as service charges that are taxable as regular wages, rather than collected into the cash waitstaff split up at the end of their shift. Instead of going through the process to meet the requirements, some restaurants are deciding to do away with automatic gratuity all together. This could mean servers will not earn as much money as they used to, especially for larger tables.
“It depends on if the restaurants raise the wages of waiters,” Tabisz said. “If they keep them as they are, then we’re screwed. I only get paid $2.13. I need the tips.

Yet there are some restaurants that don’t have any issues with the new law. If most tables pay by credit or debit, then tips are already processed and paid out. As a result, restaurants won’t have to end automatic gratuity because it’s already being correctly processed.

Still, most servers depend on gratuity to earn their income.

“I wouldn’t have gotten my $40 in tips last night without gratuity,” Tabisz said