Waiter, there’s a tab in my soup!

That may well be, but I find it hard to stomach add-ons of any kind. And that includes the presumptuous ‘service charge’ that most restaurants have been imposing in my bill, irrespective of how good or bad the service was.

The Department of Consumer Affairs issued fresh guidelines last week specifying that a service charge is “voluntary”, and that a tip or gratuity paid by a customer is a separate transaction (from the charge for the food and beverages ordered) and is entered into at the customer’s discretion.

Yes, but since then, there have been reports of hotels and restaurants barring customers from entering their premises if they do not agree to pay the service charge. The government has now made clear that such a condition for entry violates regulations governing “restrictive trade practices”. The government reasons that a customer is in a position to assess the quality of service only after completing a meal; to pre-emptively get a customer to commit to a service charge is not, therefore, fair.

The government claims it is clarifying matters in the public interest since many customers have been paying tips to waiters in addition to service charges under the mistaken impression that the service charge is a part of the taxes. But in the final analysis, it is the market that will find an efficient way out.

In practice, restaurants may respond by adding the ‘service charge’ component to the nominal cost of my soup. Notionally, my soup cost should remain the same as earlier. But whereas earlier the ‘service charge’ was a proxy for the tip I would have paid, I will now come under a kind of ‘societal pressure’ to pay a gratuity on top of the enhanced nominal cost of the soup. I will then have to decide if the soup is worth the possibly higher overall cost. If it is, I’ll come back; if not, the restaurant loses my custom.

Actually, even if it seems strange that the waiter is being ‘paid’ by two people — the restaurant owner and the customer – there is an economic rationale to tipping.

The owner gains from having happy customers, but he faces an information asymmetry in determining which of his waiters are good at keeping customers happy in order to ‘reward’ them. Rewarding every waiter equally would push up his labour cost, and disincentivise the outperformers.

Customers too benefit: higher labour costs would have been passed on to them; also, they now get to determine how big a tip to give, instead of a flat service charge, irrespective of how good or bad the service was.

Not always. There’s anecdotal evidence to suggest that restaurants recalibrate wages downwards where waiters get tips from customers. That sets off a vicious circle of low pay justifying tips, and tips justifying low pay.

No, but since we’re overdosing on food-and-beverage metaphors, you can’t have your cake and eat it too. Discretionary pay — which is what a ‘tip’ is — typically helps keep overall costs low, and gives workers a financial incentive to perform better. Those are sound economic principles.

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