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Low restaurant pay leads to tax evasion

Lack of regulation lowers level of services, deters qualified staff

By František Bouc
Staff Writer, The Prague Post
August 20th, 2008 issue

MICHAEL HEITMANN/The Prague Post
Many servers who rely on tips to boost their low wages do not declare the extra income on tax returns.
The government’s inability to curb the collection of unreported tips is lowering the quality of service at local restaurants.
Earlier this month, Polish speedway fan Piotr Korzenowski wanted to drown the sorrow of his national team’s failure in the Prague Grand Prix with beer and some snacks at a downtown bar. When paying the bill, Korzenowski and his friends counted out the exact sum of money they were asked for, and were unnerved when the waitress stared at them in apparent disbelief.
“Suddenly,” Korzenowski recalls, “she gave it to us straight: ‘will you leave some tip? The service was not included in the bill.’ ”
In the end, Korzenowski and his friends left 20 Kč on top of their check. “It was not a very comfortable situation to be in,” he said. “We wanted to avoid an embarrassing situation.”
What Korzenowski and his friends experienced is a growing trend in the local restaurant business. Free from regulation, an increasing amount of restaurant workers are augmenting their low wages by pocketing unreported tips.
“[Restaurant employees] are trying this, especially on foreigners,” said Pavel Hlinka, president of the Czech Association of Hotels and Restaurants. “It should be up to the individual guest to decide whether he or she wants to leave a tip or not. ... Charging them automatically would be a rip-off.”
Although eateries cannot legally include tips in the prices quoted on their menus, most bar and restaurant owners depend on them.
In contrast to England, where the government recently introduced a law to eradicate the common practice of using tips and service charges to bring staff salaries up to minimum wage, tips and service charges paid in Czech restaurants are often used to supplement the below-minimum wages of bar and restaurant personnel.
“We leave tips with the waiters and waitresses so that they could make at least some money,” said Alex Novanský, owner of the Zlatá hvězda sports bar near Wenceslas Square. “Good-looking waitresses can make some 30,000 Kč just from tips each month. In this respect, a male waiter’s chances of making big money are somewhat more limited.”
Without tips, Novanský’s waitstaff make only about 9,000 Kč ($562.50) a month, he added.
Despite their dependence on the extra income, not all restaurant owners allow tips to be distributed directly to their personnel.
“We hand over all the tips we collect along with the overall cash, and we don’t get anything from it,” said Hana Patocsová, a waitress from a restaurant in Kladno.
Long-term damage
The controversial practice of using tips to bring salaries up to competitive level is rather short-sighted for the waiters themselves, Hlinka said. “This money increases employees’ immediate income, but it doesn’t get included [in social security payments and as a result] in future [state] pension payouts,” he pointed out.
The practice also causes innumerable losses to the state. By paying low wages while depending on tips, restaurant owners avoid paying more in income taxes.
“I can imagine sizeable tax evasion in this field,” Hlinka said.
While the government is aware of the tax evasion opportunity caused by this loophole, it currently has no plans to curb the practice, according to Jan Kněžínek, director of the tax directorate at the Finance Ministry.
“We will make several random checks in certain large restaurants with high revenues,” he said. “But, it’s quite difficult — if not impossible — to find evidence of someone getting tips and not paying taxes on them.”
The low declared wages and the non-transparent distribution of tip money also deter qualified personnel from working in local mid-range bars and restaurants, according to Hlinka.
Meanwhile, those undeterred by the official figures typically report wages significantly lower than their actual incomes, which are increased by untaxed tips. “The average declared monthly salary in this industry is about 15,000 Kč, but it is misleading,” Hlinka said. “In fact, they get much more.”
Unregulated tip distribution also causes a shortage of qualified cooks, who often fail to receive a portion of the tips intended to supplement their low wages, according to Hlinka.
“In contrast with waiters, who usually get a chance to collect some money on top of their wages, cooks’ chances to get to this money are very limited,” he said. “That’s why they are not interested in working in restaurants.”

František Bouc can be reached at fbouc@praguepost.com


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