Gratuity Vs Tip: What are the Differences? Full Guide 2024

Are the terms “gratuity” and “tip” synonymous? How can we differentiate between the two? These questions are commonly posed by employees across various sectors in the UAE, United States, Canada, and many other countries. While “gratuity” and “tip” are often used interchangeably, they have distinct meanings and legal implications. In this article, we will discuss about gratuity benefits, service charges, and tipping practices, providing a comprehensive understanding of these concepts.

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Gratuity Vs Tip: Clarifying the Concept

What is Gratuity?

Gratuity is a sum of payment; an employee gets from his employer or the hiring company at the end of his service tenure. Every worker receives a different amount of gratuity at the end of his tenure based on the total number of his service years, type of contract, last basic salary, and the way of leaving the job (termination or resignation).

A hiring company or employer provides gratuity to employees as a reward for their service. The amount is determined by the employer, based on an evaluation of the employee’s performance and the terms of the job contract.

What to Know About Tipping?

A Tip Credit or Tip Allowance represents an amount earned by an employee following a specific organization’s tipping laws or minimum wage requirements. Tipping refers to the amount of money given to the service providers as an appreciation for their best services.

A tip is an amount you give to a service provider to show appreciation for their work. The manner and amount of tipping often reflect personal preferences and affordability. While some people consider gratuities and tips “illegal” or “informal” payments, they are widely accepted and practiced in various service industries.

According to the Oxford English Dictionary, the word tip means ‘to give something as gratitude’ or ‘to give a small present of money.’ A tip can be offered to the restaurant staff (waiters and waitresses), baristas (coffee experts), bartenders, tour operators, taxi drivers, or any other worker or domestic helper.

Is Gratuity a Tip? Understanding the Key Differences

Words gratuity, tip, and service charges are considered the same in some countries. However, generally, end-of-service gratuity is compulsorily added to the employee’s payables after the end of his job contract.

On the contrary, tipping is optional and voluntarily paid as an appreciation bonus to a worker by the customers. Let’s find out how gratuity amount and tipping differ!

Aspect	Gratuity	Tip
Definition	A lump sum amount given to the employee by the employer or a hiring company at the end of his service tenure	A voluntary payment, given by a customer to the service provider.
Payer	Employer	Customer
Mandatory or Optional?	Mandatory	Optional
Rules or Legal Obligations	Often regulated by labor laws and contractual agreements.	Generally informal and discretionary, with cultural variations.
Payable Amount	The gratuities are paid to the employees based on their basic pay and contract types.	Tips are offered as a substantial percentage of the customer’s total bill.
Ethical Perspective	Legal Obligation of the employer or hiring organization.	Some companies, such as restaurants and bars, speak against tipping or even ban it to maintain equality and reduce employee discrimination.
Taxation	Subject to specific tax regulations and reporting requirements.	Typically subject to income tax, but reporting can vary.

Is Mandatory Service Charge Considered Tip or Gratuity?

Under Federal Law, tips and gratuities are not included in service charges. Sometimes, Mandatory Service Charges are confused with gratuity; but both differ. In mandatory service charges, the customer is bound to pay money in response to getting services or at the end of the contract between an employee and worker or a customer and a service provider.

Service charges are mandatory fees, usually added by caterers and banquet providers. Unlike tip, that is optional and left to the customer’s discretion, service charges are automatically included in the billing.

Gratuity is paid per the Labor Laws and the employee’s contract with a specific company. Similarly, tips are not compulsory to pay the workers; their payment solely depends on the customer’s satisfaction with the provided services.

Gratuity Vs. Tip in Restaurants

Tipping is a common practice worldwide, especially in the UAE and USA, where customers give a tip to the staff by choice. In the hospitality sector, gratuities and tips words are often used interchangeably. In many restaurants, menu bills may include a service charge (around 10%) and a tourism levy (around 6%) that has to be paid by the customers along with their bill invoices.

However, they can also leave a tip in addition to their food bill and service costs if they get incredible services. The standard tip percentage in the UAE is about 10-15%, while in the US, it’s a minimum of 10-15% of the total bill and even 20% for excellent service.

The employer can not retain any percentage of his worker’s gratuity or tip. However, certain rules and percentages are set in each company, which mention how much tip credit a worker can take in a certain period.

Tipping Etiquettes in the UAE and USA

Tipping is a less common practice in the UAE than in the US, and how it’s offered to service providers differs from that in North America. Unlike the US, a tip is never expected in the UAE or Dubai, and you would not be treated disgracefully here if you don’t tip.

Even in different States of America, servers may follow and keep asking you about the tip; that’s quite embarrassing sometimes. Moreover, tipping in certain employment types, such as police and government sectors, is illegal in the USA and may be considered ‘bribery.’

The National Restaurant Association in the United States confirmed that a few restaurants have recently developed a ‘no-tipping model’ for a better customer experience, but it resulted in a reduction in employee retention.

Should I Tip if Gratuity is Already Included?

If gratuity is already included, additional tipping is not necessary, but can be considered based on your satisfaction with the service. The included gratuity ensures the service staff is compensated, typically for larger groups or special events.

However, if you feel the service was exceptional, you may choose to leave an extra tip to show your appreciation. Always review your bill to confirm the gratuity is included, and consider cultural norms and your personal experience when deciding whether to tip extra.

Bottom Line

Hopefully, you now better understand the concept of gratuity vs tip. Employers are legally bound to pay gratuity to their employees on the completion of their contract, while tipping is an informal payment that’s not compulsory to offer. If you still have queries, contact us or read the complete guidelines about gratuity calculation in UAE here.