Keep the Change: Restaurant Industry in Uproar After Israeli Court Overhauls Tipping System

Tips will now be considered employer’s income, making them easier to tax

Waitresses count tips.
Greg Ceo / Uppercut / Getty Imag

The tip that diners pay at Israel’s restaurants will no longer belong to the waiter or waitress but to the restaurant, who will pay it to the staff as part of their regular income. Among other things, that means taxes deducted at source.

The new status of the age-old tip was made in a ruling by the National Labor Court on Monday and immediately drew a sharp and critical reaction from the restaurant industry, even as the full implications of the decision, which applies only to tips at restaurants, cafes and bars, are not yet clear.

“What interests me as an employer is that my waiters will be happy and satisfied, and this ruling will lead to exactly the opposite, because the bottom line is they’ll earn less money despite the social benefits that they’ll receive, which is not suitable for the nature of most of the waiters,” said Tal Shtern, who owns the pizza chain Tony Vespa.

The judges, headed by court President Yigal Plaitman acknowledged in their ruling how they were shaking up the industry.

The decision was made by an expanded panel of five judges and two public representatives, and the order won’t go into effect until January 2019 to give restaurants, cafes and bar, as the Israel Tax Authority, time to prepare for the new regime.

But, as Plaitman said in the ruling the Knesset had failed to clear up a legal tangle in the industry created five years ago when the High Court of Justice ruled the tips should be considered the waiter’s private income, separate from the pay he or she receives from the employer.

In doing so, the High Court ruled that it would be the waiter’s responsibility to report his or her tip income to the tax authority, which most don’t do. By one estimate between 1 billion and 2 billion shekels ($290 million-$580 million) in tips are collected without any tax paid.

Plaitman said that created a problem since waiters were receiving two payments for performing the same service and decided that if the Knesset had failed to act then the court had no choice.

“The tip money in the restaurant industry should be considered part of the restaurant’s income, and each waiter’s income should be considered work income from his employer,” the ruling said.

“This will be so, even if the tip was paid directly to the waiter, even if he did not put the money into the cash register, even if it was paid separately from the how the meal itself was paid and even if [the tip] was not recorded in the restaurant’s books or service log,” it said.

Shai Berman, CEO of the Restaurants Association, said the trade group, was still studying the matter, but was concerned.

“We hope that the National Labor Court ruling won’t harm wages,” he said. “We’re now studying the implications of the ruling and if we find that it could hurt waiters’ pay, the association will weigh an appeal to the High Court of Justice.”

He added that he hoped the Israel Tax Authority wouldn’t interest the ruling to mean that tip should be liable to the value-added tax. “We’re not talking about a business’s ordinary income Taking off VAT will hurt waiters’ income badly,” he said.

Restaurateurs were less equivocal about the ruling’s negative impact, even if it means that wait staff will now be able to include tips as part of their pay when social benefits are calculated, like vacation pay or unemployment benefits.

“Waiters in their twenties are interested in getting their money fast and easily without too many obligations. If the ruling stays at is, the interest in working in restaurants will decline, even for dishwasher and kitchen staff,” said the owner of a café chain, who asked not to be identified.