What does this mean to employees? First, it means a delay in receiving their pay if the business has to ring the automatic tip as a service. If you get paid on a biweekly schedule, that could mean anywhere from two to three weeks to get your hourly plus automatic gratuity tip pay. In addition, it ensures that all automatically added tips get taxed as ordinary income. Under the current system, the IRS presumes that restaurant employees are honestly and truthfully reporting and accounting for all their tips on their tax filing — which is likely in some cases, but nowhere near a reality.
How could this affect restaurant employees? I suspect by demoralizing them off even further! Can you imagine being a server in the restaurant industry and having hours scaled back to part-time in the fast-food industry and having the IRS clamp down on your automatic gratuities in the more casual-dining restaurants? You can’t win no matter where you work!
To use Darden Restaurants, Inc. (NYSE:DRI) as an example again, it recently announced, in lieu of the IRS’ new guidelines, that it will end the automatic gratuity on its receipts. Darden Restaurants, Inc. (NYSE:DRI) just didn’t see any reason to do the extra service-charge legwork in keeping the automatic gratuity charge. While that may help its servers and employees in the end, those larger parties also serve as a nice chunk of change come pay time. If consumers pare back their tipping on large parties, casual-dining restaurant employees could be put in a bind.
What’s an investor to do?
Despite some select strong results within the restaurant industry, I’m treading very cautiously and would suggest you do the same. Thankfully for investors, Obamacare and the new IRS guidelines are staggered by a year and won’t hit all at once. However, it’s hard to overlook how restaurants will drive new traffic when their most precious asset, their employees, could be burdened with smaller paychecks for the foreseeable future.
The article Will These 2 New Guidelines Cripple the Restaurant Industry? originally appeared on Fool.com and is written by Sean Williams.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of, and recommends, Buffalo Wild Wings and Chipotle Mexican Grill. It also owns shares of Darden Restaurants.
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