‘Tipflation’: How is it changing Tipping Culture in America?

A recent Pew Research Center survey involving 12,000 people found that most Americans felt more compelled to leave a tip today than just 5 years ago, in what is known as ‘tipflation’.

The principles and practices around tipping have gradually evolved, leading to some confusion and controversy about when and whom to tip.

As digital payment systems have become more prevalent, the tipping culture, originally based on the voluntary payment of gratuities, has gradually shifted towards a compulsory tipping system that imposes a percentage of the invoiced price, which can exceed 30% for a wide range of services that were not tipped previously.

Tipping used to be limited mainly to sit-down restaurants and cab fares and was performance based. Perhaps you'd throw a few bucks to a car valet or a doorman. Now, every business equipped with a spin-around touchscreen prompt you to leave a pre-determined tip, including fast-food chains, food trucks, self-check out kiosks, farmers market, delivery apps and ride-sharing services.

Given the current rate of inflation, arbitrary tips that increase with menu prices only add insult to injury. The estimated economic value of tips in U.S. restaurants alone is in the billions of dollars. This new tipping culture exerts enormous pressure on consumers, who see it as essentially fueling greed and a false sense of entitlement as a cultural norm.

What is the history of tipping?

While there is no clear origin of tipping, records show that it was practiced in Tudor England between 1485 and 1603. At the time, guests would tip the servants of their host for taking care of their needs during their stay. In the 19th century, boxes labeled “to insure promptness (TIP)” popped up in English coffeehouses and inns to encourage customers to tip for quick yet good service.

Wealthy Americans visiting Europe introduced the practice to the U.S. in the mid-1800s, understandably eager to emulate European customs. However, the practice really came to prominence as a business strategy during the reconstruction period following the Civil War. Some hospitality companies began using freed slaves, paying them low wages and encouraging customers to leave tips.

Today, tipping is the norm for many service industries regardless of whether the workers earn the tipped minimum wage ($2.13)  or the regular minimum wage ($7.25 per hour). These include restaurant servers and bartenders, drivers, delivery workers, valets, porters, hairstylists, and baristas, among others.

What is ‘tipflation’ and what are its causes?

Tipflation refers to the increase in the amount of tips charged to consumers for goods and services rendered. Essentially, 3 factors have been identified as responsible for the surge in tipping. Firstly, the pandemic generated public sympathy for the restaurant industry, which suffered major losses; secondly, the prevalence of digital payment methods enabled businesses to overcharge for tips; and thirdly, the spread of tipping practices beyond their traditional scope.

Covid

The pandemic contributed to tipflation, as many people tipped more generously to support service industry workers who were struggling financially. These folks were on the front line, running our errands and delivering meals to our homes via apps. It was not uncommon to leave a 30% tip. This trend has continued to the present day.

Digital payment methods enabled businesses to overcharge for tips

Payment apps and touchscreens make it easy for merchants to ask us for predefined tip amounts. The proliferation of digital payment products offered by companies such as Square and Toast allows merchants to display a set of default tip amounts – for example, buttons for 15%, 20%, 30%, 33% and more. The aim is to encourage customers not just to leave a tip, but to leave the amount suggested by the business.

One of the key drivers behind the success of electronic payment systems is that they take advantage of a design principle that influences consumer behavior: The default option is the path of least resistance. Many consumers feel compelled to oblige. This phenomenon, known as ‘guilt tipping’, has been exacerbated in recent years as more privileged professionals have shelled out extra cash to help essential workers cope with the pandemic. But even as businesses have somewhat returned to normal, the gratuity request have remained steadfast.

Spread of tipping practices beyond their traditional scope

Many businesses that don’t ordinarily get tips are now using technology (a tipping screen) as a new payment interface that has the option to ask for a tip, making it the default choice, which requires the customer to opt out.

The technology has led to bad experiences when consumers felt coerced by abnormal tip requests from businesses that don't normally ask for a tip. For example, you might get a suggestion to leave an extra $3 for a $4 croissant, which is effectively a 75% tip. This creates an uncomfortable interaction with a feeling of pressure. According to etiquette experts, if you're asked for an exorbitant tip or a tip for a service that doesn't usually require one, there's nothing wrong with saying no.

Why is there a need to tip in the U.S.?  

In many places in the U.S., the minimum wage for tipped workers ($2.13 an hour) is lower than the standard minimum wage ($7.25 per hour). This means that companies can legally pay their employees less and rely on tips to make up the difference. This creates an environment in which workers rely heavily on tips to earn a decent wage.

In the 1960s, the U.S. Congress adopted a "tip credit" policy, whereby the employer could pay the employee the minimum wage of $2.13 an hour if they earned tips. It is expected however, both socially and by the IRS, that they will earn much more than that, by what they are tipped – anywhere from 15–20% on average. And workers have come to depend on it.

Customers are left wondering why they should bear the burden of tipping, instead of businesses paying their staff more fairly?

How much should you tip? What is the current etiquette?

In June, financial website Bankrate published a survey that found that roughly 2/3 of Americans have a negative view of tipping. For 30 % of respondents, the tipping culture is “out of control.” Most see it as social pressure, especially with online payments or new outlets that leave them little choice about tipping.

The problem is that tipping norms went up. Restaurants faced with rising food and labor costs have started to rely on tipping to pay their employees and incorporated higher tipping rates, especially when using online payment systems.

The amount of the tip will depend on the service provider used and the quality of their work. However, according to most etiquette experts, the general rule for services in the U.S. is to leave a tip of 15% to 20% of the bill. Since many workers, such as restaurant waiters and bartenders, earn less than the federal minimum wage, it's appropriate to leave them a tip.

Final thoughts

It's worth noting that tipping is not a universal culture. Almost half of the world's countries do not practice tipping, including Europe, Japan, Singapore, Australia and many others. In Japan, tipping is even perceived as rude! In Europe, where the minimum wage is legislated, restaurants use service-inclusive pricing models, applying a 10% service charge up front.

Addressing the issue of tipping involves broader discussions on labor laws, minimum wages and fair compensation for all workers. Most of the countries that practice tipping resort to wage policies that fall well below the standard minimum wage, and so the difference is made up by tips, a purely arbitrary social convention.

The real issue with tipping is that companies should first strive to pay their employees a decent wage without relying on tips, thus creating a more stable and equitable income for workers.

A tip is intended to express appreciation for excellent service, even though studies have shown that the vast majority of people are motivated more by social pressure. The bottom line is that each person must find their own comfort level in determining the amount of their tip and the type of service they are prepared to leave it for.