Tipping points: Japan, North America and the limits of performance pay

Dear readers, how are you all doing? I am sure some of you are still enjoying your summer vacations and others already have their noses to the grindstone — still others, no doubt, have worked straight through the o-Bon period.

My heart (and a pang of guilt) goes out to the latter group, as I am enjoying a summer holiday, recharging my batteries in North America. I rarely get a chance to gallivant around Canada and the U.S., so I figured for this month I’d tackle an American custom that is rare in Japan: tipping.

It is an unspoken agreement in Canada and the U.S. that you tip about 15-20 percent on top of the bill to hotel and restaurant workers. Having grown up in Japan, this is a tough custom to get used to.

Three years back, rapper Jay-Z plonked down a $50,000 tip for waiters at his album release party. But while the amount may seem obscene, the tip was pretty standard, percentage-wise, considering the final bill for Champagne at the nightclub in Miami: $250,000.

But when, where and how did the custom of tipping arise? Wikipedia notes that one 18th-century English pub left a box on the bar counter labeled “To Insure Promptness,” apparently a hint for folks to put money in to get faster service. Scholars dispute whether the word “tip” is derived from an acronym for this label. Personally, I’d like to believe that it is.

In both the U.S. and Canada, waiters routinely come up to our table after our meal is finished to ask us how our food was. It appears that customers have the custom of responding, “It was wonderful.” Not once did I hear someone say, “It sucked” or “Service was terrible.”

Even though it was small talk and lasted but seconds, this personal interaction between waiter and customer was something quite new to me, having never experienced it in Japan.

I had assumed that tips were special rewards for particularly tasty meals or outstanding service, and that bad food or service would mean smaller or no tips. But it appears it is not so simple. The law makes things even more complicated. Let’s look at how U.S. labor law deals with the issue of tipping.

Article 208 of the U.S. Fair Labor Standards Act of 1938 sets a federal minimum wage for the entire country, which is currently $7.25. Exceptions are rife, and include management (are they paid less than minimum wage?), workers at fisheries and small farms, newspaper delivery personnel and temporary baby-sitters. Lower minimum wages are permitted for those under age 20, disabled people (yes, that’s legal discrimination against the disabled) and those who rake in $30 or more a month on tips. For these tipped workers, the minimum wage is just $2.13, unless they make under $5.12 per hour in tips, in which case the difference must be covered.

So, in the U.S., the fact that tips count toward wages is recognized by the law. Tips are crucial for workers, not something extra, and, so the logic goes, it is unfair to decide the size of the tip based only on the taste of the food and quality of the service.

As a Japanese person, I can’t help asking myself: Why must the customer pay wages that should be paid by the employer? But in Canada and the U.S., there seems to be social consensus that tips make up for lousy wages. (Incidentally, the Council of Economic Advisers in March proposed raising the minimum wage to $10.10 and the tipped-worker minimum wage to $4.90 by 2016.)

In Japan, Article 11 of the Labor Standards Act defines wages as “the wage, salary, allowance, bonus and every other payment to the worker from the employer as remuneration for labor, regardless of the name by which such payment may be called.”

Under such a definition, tips paid directly from customer to waiter cannot be considered wages, since the employer does not pay them. The Occupation-era Ministry of Labor issued a directive in 1948 stating clearly that “tips paid by inn guests to inn employees are not wages.”

The definition and legislation of tips clearly depends on the customs in the country in question.

In Japan, there is a push to change to a system of payment based on results alone: kanzen buai kyū, or a full-commission salary system. We see more and more want ads for what look like full-commission salaried jobs, particularly for taxi drivers and salespeople hawking insurance and other goods and services. After all, defenders of this system would say, when a salesperson fails to sell a product or service, the firm gains no revenue, so why should the worker be paid?

Despite the presence of these ads, full-commission salary systems violate Japanese labor law. However, standard labor law protections do not apply to private contractors. This means that such a full-commission payment system is permitted in cases where a contract is between a company and a private contractor — known as a gyōmu itaku contract — rather than between an employer and employee. If you look carefully at the aforementioned ads, you can usually find some telling term such as kojin jigyōnushi (private contractor), gyōmu itaku keiyaku (outsourcing contract) or furīransu (freelance). These companies must always be careful, however, to avoid accusations of gisō ukeoi, or false outsourcing — where companies claim that the contract is gyōmu itaku when in fact they give orders and control the worker just as they would in an employment relationship.

Article 27 of The Labor Standards Act states, “With respect to workers employed under a piece-work system or other subcontracting system, the employer shall guarantee a fixed amount of wage proportionate to hours of work.” This means that company workers must be paid a certain wage regardless of specific profit for the company and other business results. Case law has interpreted this to mean that at least 60 percent of the typical wage for a specific job must be guaranteed. The full-commission system fails to guarantee even the minimum wage, and that’s why such contracts are invalid.

The most famous court case regarding commissions is the Kochi Prefecture tourism case. The Supreme Court on June 13, 1994, ruled in favor of the plaintiff, who was claiming unpaid wages. The plaintiff was paid on a commission basis but was not paid extra for working overtime and at late hours. The company claimed the commission payments had factored in overtime rates. The court said that even commission wages must be separated into ordinary and overtime rates, and ordered the company to pay the shortfall.

Comparing customs and laws regarding tips and commissions makes clear that workers’ wages are more than simply a return for concrete results. Workers are employed and receive wages that serve as their main source of income to support their livelihood. This is why wages should have an element of stability.

We hear assertions that the seniority salary system is ancient history and that wages should be paid for real ability and results only. Many in Japan believe that performance pay equals the American way, full stop. But the American custom of tipping even for mediocre and unremarkable service suggests things are not so clear-cut.

Performance pay also works to drive a wedge between workers’ solidarity. It chips at the foundations of the social stability that humans have worked so hard to build.

Article 1 of the Labor Standards Act states that “Working conditions shall be those which should meet the needs of workers who live lives worthy of human beings.” What this means is that wages speak to more than that particular worker, but rather to all our lives. This was the intent of legislators in making this the very first article of the act.

The topic of tips has led us to many other questions, but first things first: Now lunch is over, let me see if I can get this tipping business right.

Hifumi Okunuki teaches at Sagami Women’s University and serves as executive president of Tozen Union (Zenkoku Ippan Tokyo General Union). She can be reached at On the fourth Thursday of each month, Hifumi looks at cases in Japan’s legal history to illustrate important principles in labor law. Your comments and ideas:

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