When Tip Jars go High-Tech, do U.S. Workers Benefit?

Latte buyers in select New York City venues may have noticed an addition to coffee shop counters lately: DipJar, a tip jar that takes plastic.

With a quick dip of their credit cards into the sleek machine, grateful customers are able to leave a pre-set tip (generally $1) for baristas. An old-fashioned cash-register chime alerts them that the transaction has gone through, but there is no receipt. Counter workers later divvy up the proceeds, which right now are not subject to a processing fee.

DipJar, located in six stores, is just one high-tech innovation seeking to make up for declining gratuities as people pay for small purchases with credit or debit cards. More than 30% of debit card receipts were for less than $10 in 2011, with the median amount of all debit transactions just $19, according to the ATM/debit network PULSE. Losing out, however, are workers, whose pay is directly impacted as fewer customers leave behind loose change as tips.

"Tip jars once upon a time could mean $2 or $3 more in hourly wages," says Richard Seltzer, author of the 2010 book 'Gratuity.' "That's a significant pay cut for the person behind the counter."

It is not just a simple bonus baristas are losing out on. "Employers have come to depend on wages being paid out of the tip pool," says Shannon Liss-Riordan, a Boston-based attorney who has represented workers in tipping cases for a decade. "Workers depend on tips to pay for things like rent, tuition- it's real money for them."

After years of seeing tipping decline, Oren's Daily Roast, a coffeehouse chain, agreed to test-pilot DipJar at two of its New York locations last year. "Credit cards aren't just reserved for special purchases any more. I saw one woman charge 45 cents," says Gabe Smentek, director of operations at Oren's. "But less cash means less tipping, and that affects workers' morale."

In October, Starbucks said that from next summer it would start letting customers who pay via mobile devices add a digital tip through Square, the San Francisco-based mobile payments system started by Twitter chairman Jack Dorsey.

Ziptip, a nascent startup based in Boston and Florida, is also experimenting in this space. Tippers use the Ziptip smartphone app to scan unique QR codes, those funky-looking square barcodes, assigned to tip recipients and transmit their gratuities through PayPal.

"The money goes directly into the recipient's account to be used that day," says Lois Hamblet, Ziptip's CEO. "And you can tip anyone you feel who deserves it, from a barista to a hotel doorman to your yoga teacher." Ziptip service is available in 20 countries so far.

HOW MUCH TO TIP?

As tips drop, Liss-Riordan would like to see employers to make up the difference with higher wages. She is realistic, however, and would at least prefer that customers be given credit card slips to sign. "More often than not, most will leave a little something," Liss-Riordan says.

The rule of thumb, among baristas at least, is $1 per drink for counter service. Beyond anecdotal evidence, little research on gratuities has been done in this area, experts say.

New York City taxicabs offer one prime example. When cab drivers starting accepting credit cards in 2007, riders were given the option for tips of 20%, 25% or 30%. Tips more than doubled in the first two years. Over time, though, fares increased and riders began to ignore the tip options, and tips as a percentage of fares have fallen back closer to pre-plastic levels, according to the NYC Taxi & Limousine Commission.

Perhaps the closest comparison is to waiters and bartenders, for whom patrons are now accustomed to adding 15 to 20% onto their credit card receipts, and as much as 25% in pricey cities like New York, according to Cornell University's Michael Lynn, who studies tipping.

The analogy isn't a great one, however. Restaurant workers typically earn what's known as a "server's wage," the federal tip minimum wage of $2.13 per hour since 1991, with the expectation that they'll earn the rest of their hourly wages in tips. Even with tips, however, the median wage for restaurant workers is $8.90 per hour, slightly below the poverty level for a family of three, according to the advocacy group ROC United. Plus, compensation rarely includes health insurance or retirement plans.

What most restaurant-goers don't realize is that when they tip on plastic, management will often deduct a portion, usually for processing fees, before distributing the money to servers on a weekly or monthly basis. State law in New York and several other states prohibits management from taking any part of tips for any reason.

Baristas, on the other hand, don't work for tips. By law they make at least minimum wage. At major coffee houses like Starbucks, they may also qualify for health benefits.

Smentek estimates that at the busiest Oren's stores in New York, cash and credit card tips add up to an extra $10 to $25 per employee's shift.

Technology, of course, isn't always a solution. When Swork Coffee in Los Angeles recently swapped paper receipts for an iPad checkout system at its three locations, tips dropped more than 25% overnight, says owner Patricia Neale. Neale laments that her baristas, who make between $9 and $12 per hour, could once count on $50 in tips per shift, but now sometimes make less than $5.

Neale says she has also had to raise prices for customers to cover credit card processing fees. She estimates she rings in $30,000 in sales each month, and pays $1,500 in credit card processing fees.

DipJar plans to expand rapidly across the United States and abroad over the next year. For its 10-device pilot project in six locations, the company is covering all the debit and credit card fees. Co-founder Ryder Kessler says going forward the company hopes to ensure that at least 80% of each tip goes to workers. "Fees are a reality," Kessler says. "But we're negotiating with banks and credit card companies to keep them as low as possible."

Using Ziptip, tippers pay an extra 1% of the tip, which goes to Ziptip, and tip recipients pay any associated PayPal fees.

At Oren's, Smentek notes, many customers still seem wary of DipJar, which doesn't produce a receipt or email confirmation. Baristas receive $5 to $10 from the electronic jars every couple of weeks. It's not as much, but as cash tips dwindle, Smentek adds, "every little bit extra helps."