Danny Meyer, founder and CEO of New York-based Union Square Hospitality Group LLC (USHG), which provides catering and business services, began eliminating the policy of tipping in most USHG-owned restaurants in 2015 (Tishgart, 2015). The company offers a full-scale catering and venue hospitality business, a jazz club, and organizational consulting business services (Union Square Hospitality Group LLC, 2021b). Meyer eliminated tipping for several reasons. For example, frontline employees were earning more than 50% of their wages in tips (Tung, 2018), increasing the median income gap between frontline and backend employees such as cooks, where the income gap was up to 80%, and possible pay gap when consumers tip only the waiter ("No-Tipping Trend," 2016). Meyer assured workers that there would not be any net deduction in pay, because USHG introduced the no-tipping policy by using the increased food menu prices to pay all workers their rates both frontline and backend (Sutton, 2015). Soon customers began to show their dissatisfaction with the policy by decreasing their visits to restaurants and writing negative online reviews, hinting that a no-tipping policy was an issue for them (Lynn, 2017). Because part of frontline employees' wages was tied to the total visits of customers, they ended up making less wages than they earned under the tipping policy, and several frontline employees left USHG-operated restaurants with a no-tipping policy (Steiner, 2017). To fill the gap, Meyer had to hire new employees who could not be adequately trained before taking the job, adversely impacting customer satisfaction (Steiner, 2017). Consequently, Meyer did not expand the no-tipping policy to all of the USHG-operated restaurants (Steiner, 2017). What should Meyer do to make the no-tipping change successful? Why were customers not receptive to the no-tipping policy? What should Meyer do to retain frontline employees?

Background

Danny Meyer founded USHG with the first restaurant opening of Union Square Cafe in 1985 and USHG went on to found several of New York's most famous restaurants, cafes, and bars. By 2019, USHG extended to other businesses as well, including multifaceted catering and operational consulting and a growth fund, Enlightened Hospitality Investments (Union Square Hospitality Group: Who, 2021c). In the 1980s, Meyer initiated the casualization of fine dining at Union Square Cafe (Union Square Hospitality Group: Who, 2021c). Later, in the 1990s, he experimented with the split-format restaurant with Gramercy Tavern's two-in-one: a la carte in the front, set menu in the back (Union Square Hospitality Group: Who, 2021c), a concept that became very popular. Meyer also overhauled the status quo of museum dining in 2005 with The Modern restaurant inside the Museum of Modern Art (Sutton, 2015). In several policies, USHG's CEO was ahead of time. For instance, Meyer banned smoking at Union Square Cafe several years before the law prohibited the practice of restaurant smoking (Sutton, 2015). In 2021, USHG operated more than 20 restaurants in New York and Washington and had USD 87.1 million in revenues. The company had 501 employees (Thorn, 2021; Union Square Hospitality Group Competitors, 2021a). History of the No-Tipping Policy

In the United States, traditionally, consumers tip as a part of gratitude. Gradually, tipping made up the difference between regular minimum wage and sub-wage for tipped workers in restaurants (Sutton, 2015). As part of employee wages began to be paid by consumers, the role of tips as gratitude was diminished (Allegretto & Cooper, 2014). Meyer stated, "Tipping is actually one of the biggest hoaxes pulled on an entire culture, the American culture" (Giannini, 2017). As a result of tipping, Meyer noted that in the past 31 years, wages of frontline employees increased by 300%, while wages of non-tipped employees largely remained stagnant (Giannini, 2017). He stated, "Our country has a longstanding tradition where a server's income is determined by guests' tips rather than a weekly salary set by the restaurant" (Sutton, 2015). He further mentioned: "We are at a disadvantage when it comes to recognizing and promoting outstanding service." European restaurants inspired Meyer to introduce the no-tipping policy (Sutton, 2015).

Initiating the No-Tipping Policy

Meyer intended to eradicate tipping at each of the USHG restaurants and raise menu prices as part of a system called "hospitality included" (Tishgart, 2015). With the hospitality-inclusive policy, Meyer intended to adequately pay low-earning cooks, who were not benefiting much from New York's increase in the minimum wage (Fuchs, 2016; Tishgart, 2015). In 2018, frontline employees' tips accounted for more than 50% of their wages, depending on their role (Tung, 2018). For example, wait staff tips comprised 58.5% of their wages, and bartenders earned 54% of their wages as a tip. The median monthly tip earnings for wait staff and bartenders was USD 867, with which these workers paid their rent and utilities (Tung, 2018). Cornell University and Ohio State University research found that the median weekly wages of frontline employees in large metro areas exceeded backend employees by 29% to 80% ("No-Tipping Trend," 2016). This gap was more significant at fine dining restaurants, with a median of USD 792 versus USD 441 ("No-Tipping Trend," 2016). Sometimes, frontline employees suffered when customers from European countries visited. Meyer mentioned, "I'd see nights where waiters were crying because somebody from Europe, where they don't have a tipping culture, would walk out without leaving a tip" (Sutton, 2015).

As per the revised salary structure at USHG's restaurants with a no-tipping policy, cooks earned USD 14 per hour, and other backend employees made USD 11 per hour, and dining room staff were to reach USD 9 per hour (Tishgart, 2015). Meyer stated that a change in tipping policy would allow him to "compensate all of our employees equitably, competitively, and professionally" (Giannini, 2017). Erin Moran, USHG's chief culture officer, acknowledged that the hospitality-included initiative was less likely to benefit all employees, and some servers and bartenders might experience a dip in pay. However, the take-home pay was likely to remain the same at a macro level (Steiner, 2017). For USHG, introducing the no-tipping policy change implied change in the restaurant culture, and, financially, it began to look more like a traditional office environment with a revenue-sharing program. Waiters and cooks were likely to see pay increases when managers would approve the increment based on their performances in written tests on their knowledge of service, food, and wine (Steiner, 2017). Moreover, benefits they received from USHG, such as paid leave, 401(k), healthcare, and flexible scheduling, were all excellent benefits appreciated by employees. Moran believed this approach provided better professional growth for servers who intended to become managers as a part of their career growth, along with advantages of "predictable wages" as well as a more flexible schedule. The change also forced workers to rethink the way they approached service jobs (Steiner, 2017). Meyer also wrote an email (visit: https://www.grubstreet.com/2015/10/danny-meyer-eliminates-tipping.html to read the content of the email) to customers explaining the need to stop tipping at USHG restaurants (Tishgart, 2015). The email intended to explain to customers that by eliminating tipping and including a standard tip rate in the price menu, Meyer would be able to do justice to the hard work put in by backend staff such as cooks, chefs, or dishwashers and not only frontline servers (Tishgart, 2015). The CEO also assured customers that their overall bill would not increase much as menu item prices would not increase exorbitantly (Tishgart, 2015). To stop the practice of tipping, Meyer also eliminated the tip line from the check, which was considered Meyer's most radical move. He believed that leaving space on bills or checks could be perceived by customers that further gratuity was expected or welcome (Sutton, 2015). The first restaurant where Meyers introduced the change was The Modern, where the cost of each dish went up by 30 to 35% (Sutton, 2015).

Employee Response to the Policy

Once Meyer implemented the policy, current and former employees at USHG stated that employee morale dropped considerably, and several people left the brand (Steiner, 2017). This made USHG slow down the "hospitality-included" implementation plan to manage the squabble (Steiner, 2017). A former manager at Union Square Cafe stated, "The majority of our strongest people have left" (Steiner, 2017). USHG employees working at other restaurants such as Maialino and Gramercy Tavern stated that their pay dropped by USD 100 per week after the no-tipping policy was implemented. An employee mentioned that once the hospitalityincluded policy was implemented her per annum income dropped by USD 10,000 from USD 60,000 to USD 50,000 (Dai, 2017). Affected workers felt that the changes resulted in more turmoil than expected as more than the expected number of employees left USHG. This attrition included not only frontline but some of the backend employees as well. At Gramercy Tavern, though several veteran servers stayed to begin with, after a few months they realized that they could not bear the pay cut and quit (Steiner, 2017). Although employees recognized the benefits, still deduction in pay could not entice employees to stay back (Steiner, 2017). Some USHG employees believed that their expectations of this change were set much higher, which was difficult to be realized. One of the employees stated, "We were all believing that we were going to be making what we were making before" (Steiner, 2017). According to the employee, that was the explicit promise. During an interview with CBS, Meyer stated, "The waiters at our restaurants, when we eliminate tipping, will make as much or more, in 75 percent of cases, than they're making right now" (Steiner, 2017). However, according to employees, this is not what happened. According to Moran, Meyer made that promise assuming that by changing the tipping policy, the business at the restaurants would not change, which was not the case (Steiner, 2017). Customer visits instead dropped, and a portion of the servers' wage was directly tied to the restaurant's revenue by virtue of the revenue-sharing program. As revenue dropped, employee wages also declined under the variable pay component (Steiner, 2017). Consequently, within a few months of implementing the no-tipping policy at USHG, employees began to leave (Steiner, 2017). One of the servers who left USHG stated, "That place was my New York home and the way I made my living," she said, "and it's no longer a sustainable place to do that" (Steiner, 2017). As USHG had flexible work policies, certain employees preferred to work during busier shifts while others preferred slower nights (Steiner, 2017). Once USHG fixed the wages, employees stopped showing any preference for any particular shift. Moran stated, "We know some peopleespecially servers and bartenders used to working Thursday, Friday, and Saturdayare making less. In those cases, we've tried to address that on an individual basis" (Steiner, 2017). At USHG-owned restaurants, backend employees benefited from the no-tipping policy. For instance, in the kitchen, cooks' starting salaries increasedfrom around USD 11 per hour to USD 13 (Steiner, 2017). The company also managed overtime more carefully. The fast attrition at USHG-owned restaurants resulted in hiring underqualified and undertrained staff to fill the gap (Steiner, 2017). At the USHG-owned restaurants where customers came for exceptional service, the management was experiencing service issues (Steiner, 2017). As workers began to quit, USHG did not implement the hospitality-included policy across all of its 15 restaurants that it earlier pledged to complete by the end of 2016 (Steiner, 2017). Moran stated, "We were very ambitious with our timeline... and we learned very quickly that this is much more challenging than we had anticipated" (Steiner, 2017).

Competitors' Experiences With No-Tipping

In addition to USHG, other restaurants also attempted to enact no-tipping policies and struggled with these models. For example, restaurateur Gabriel Stulman switched back to tipping at Fedora after customers' orders began to decline (Steiner, 2017). Tom Colicchio's Craft, Momofuku Nishi, and I Trulli were other restaurants that experimented with no-tipping policies and then quickly shifted back to tipping (Steiner, 2017). Joe's Crab Shack, a U.S.-based restaurant chain, also ended its tipping-free experiment at most of its restaurants (Steiner, 2017). Nevertheless, there were a few restaurants that expanded the no-tipping policy to their chain of restaurants. For example, Andrew Tarlow expanded the no-tipping policy to his Brooklyn restaurants and a brand-new Louisville restaurant as well (Steiner, 2017). Also, some USHG employees felt that the no-tipping policy was the future of restaurants in the United States. A USHG employee said, "It's something that will probably work better in five years' time than now" (Steiner, 2017). Another staffer mentioned: "I do believe in Hospitality Included" (Steiner, 2017). The employee added, "I believe in not living off tips. It's racist and sexist. The only people that benefit from that are owners of the restaurant." Still, another ex-USHG worker stated, "In the long run, if Hospitality Included ever works, I wouldn't be surprised. But it's going to take a while. There are too many moving parts before they figure it out" (Steiner, 2017).

Response of Customers

Service-inclusive pricing was not acceptable to consumers. Not only did their percentage of visits to restaurants decline, but through online reviews, they also expressed their discontent with hospitality-included pricing (Lynn, 2017). The overall rating of restaurants with hospitality-included policy decreased with the policy stated as the main reason (Lynn, 2017). Restaurants that replaced tipping with automatic service charges received a quarter of a point drop in online ratings. In contrast, those who switched to serviceinclusive pricing experienced a decline of about a 10th of a point (Lynn, 2017). Less expensive restaurants suffered a greater dip in their ratings than classier joints (Lynn, 2017). In a survey conducted by Joe's Crab Shack in 2016, approximately 60% of customers expressed displeasure with the no-tipping policy, which led to an "8 percent to 10 percent" drop in customer visits (Chandler, 2016).

The Road Ahead

Meyer admitted that a large chunk of his employees left due to the no-tipping policy (Dai, 2018). He was also positive about the employees who joined the brand over the no-tipping policy. He stated, "The great thing is that the people who came in to take those jobs understand 'Hospitality Included' and are thrilled about it. They are doing the job because it is a profession" (Dai, 2018). The no-tipping policy became a part of the national conversation triggered by the rise in the minimum wage and the disparity in pay between frontend and backend employees (Tuder, 2017). How can Meyer introduce a successful change? What are the reasons for customers not positively receiving the no-tipping policy? How can Meyer retain frontline employees?

Discussion Questions

Part A: ANALYSIS For this section, you must apply specific OB concepts or theories from my lectures and/or the textbook to answer to answer the following questions:

1. Apply concepts or theories from Chapter 2 to analyze the reasons why employees and customers did not like the new tipping policy. Using specific facts from the case and your own reasonable assumptions, identify some factors influenced their perceptions about the policy?
2. Apply concepts or theories from Chapter 3 to describe how employee and customer attitudes were formed and expressed. Using specific facts from the case and your own reasonable assumptions, describe specific cognitive, affective and behavioural components that caused customers and employees to form positive or negative attitudes.
3. Apply concepts or theories from Chapters 4 and 5 to explain the how the policy changes affected motivation. In particularly, discuss Meyer's rationale for the changes, what aspects of motivation he was attempting to influence, and if his efforts were/were not effective.

Part B: RECOMMENDATIONS

Based on specific findings from your analysis above, answer the following:

1. What should Meyer do to make the no-tipping change successful?
2. What should Meyer do to retain frontline employees?
3. Recommend any additional changes that you think Meyer should make to improve motivation and performance in his restaurants.