American tipping culture means employers only have to pay waiters $2/hour — here's why

With so many industries now building tipping into people's tabs, it can be overwhelming to know when you're supposed to leave a little extra and how much.

The practice has brought on phenomena like guilt tipping, or the pressure to tip whenever presented the option, and tipflation, or customers seemingly being asked to tip everywhere. A majority, 60% of Americans say they're tipping more these days, according to an April 2023 LendingTree survey of 2,000 U.S. consumers. And about a quarter, 24%, say they always feel pressured to tip when presented the option.

While many industries have adopted the practice, tipping is most entrenched in the restaurant industry, where workers rely on gratuities to make up much of their wages. Even there, Americans have long been ambivalent about it.

Here's how tipping came to America in the first place, and how it became institutionalized in food services, specifically.

Americans brought tipping over from Europe

As a practice, tipping has its origins in Europe of the Middle Ages (a period which lasted from about 500 to 1,500 A.D.) when the wealthy would give people in lower classes extra money for their services, according to Kerry Segrave's "Tipping: An American Social History of Gratuities."

In the 1800s, Americans who had seen tipping on travels abroad "thought this would be a wonderful thing to kind of mimic our brothers and sisters in Europe" and brought the practice to the U.S., says Stephen Zagor, a professor at Columbia Business School specializing in the restaurant industry. Though many Americans rebelled against it, the practice spread.

At the end of the Civil War, America's labor force "was flooded" with formerly enslaved people and immigrants, says Zagor. Employers took advantage of this class of "low-educated, low-income" workers, he says, and hired them for jobs that paid very little, encouraging patrons to tip as a supplement to wages. This shifted the responsibility of paying workers to customers and cut employers' costs.

Various businesses within the service industry adopted the practice. But the company that "really institutionalized" tipping, Zagor says, was the Pullman Company, which built and operated railroad cars.

In the 1860s, the company purposely hired "formerly enslaved people to achieve the high-quality customer service the Pullman cars were known for," according to the Library of Congress. Workers shined shoes, made beds, woke up passengers and so on. They worked long hours and relied heavily on tips for pay.

Companies liked 'to not have to pay for labor'

Americans continued to have mixed feelings about tipping, some patrons saying "it was condescending, it was classist," says Zagor. A few states even outlawed the practice around the turn of the 20^th century.

But "economically, companies really liked the opportunity to not have to pay for labor," he says. Those laws making tipping illegal were eventually repealed.  

When President Franklin D. Roosevelt passed the Fair Labor Standards Act in 1938, it established a minimum wage for some industries, excluding food services and others like retail and construction. But when restaurants were added in 1966, they weren't covered under the typical minimum wage as other industries ultimately were.

Instead, restaurant owners would pay what's called a tip credit, "which means you can pay a percentage of the minimum wage as long as your tipped employees get enough tips to equal what the minimum wage is or more," says Zagor.

As of 1996, the federal tipped minimum is $2.13 per hour.

'The whole thing is shifted onto the customer'

These days, tipping is deeply embedded in the restaurant industry.

In part, that's because restaurants are "very difficult to operate and very difficult to make money," says Zagor. "There's a lot of moving parts." Many businesses are small mom-and-pop shops with low margins and not too much excess capital. And labor "has now become the highest cost in any food and beverage business," says Zagor.

With tipping, because "the whole thing is shifted onto the customer," says Harry Holzer, an economist at Georgetown University and senior fellow at Brookings, "it's less expensive for [restaurant owners] to hire people." That makes it easier on those low margins.

For workers, however, that creates a pretty precarious wage system. "It's hard to plan because you don't know" how much you'll make, award-winning bartender Jena Ellenwood previously told Make It. "You're at the mercy of the customer."

If 'you feel the urge to tip, by all means do so'

Not all states have the same tipping system.

As is the case with the regular minimum wage, states can decide to create their own tipped minimum — as long as it's not lower than the federal minimum.

Vermont's tipped minimum wage is $6.59 per hour, for example. New Mexico's is $3. Michigan's is $3.84. Some states, including California, Alaska and Montana, have eliminated the tipped minimum altogether so employers have to pay the state's full minimum wage.

When you're sitting down at a restaurant, know the various people serving you are likely dependent on that gratuity to make a decent salary. In that instance, Diane Gottsman, founder of The Protocol School in Texas and a nationally-recognized etiquette expert, recommends tipping 15% to 20%.

In most other situations, it's up to you, she says. "If you experienced great service from this person," she says, "if there's a connection between [you and] them, they're smiling, they're friendly, and you feel the urge to tip, by all means do so."

DON'T MISS: Want to be smarter and more successful with your money, work & life? Sign up for our new newsletter!

Get CNBC's free Warren Buffett Guide to Investing, which distills the billionaire's No. 1 best piece of advice for regular investors, do's and don'ts, and three key investing principles into a clear and simple guidebook.

Check out:

Quiz: How much do you know about the U.S. minimum wage?

Minimum wages are going up, but typical workers still don't make enough to get by in any U.S. state

The state with the highest minimum wage isn't California or New York—and it pays more than $15/hour