Home – Tip Credit Latest Front in Minimum Wage Battle

Tip Credit Latest Front in Minimum Wage Battle

In June, Washington D.C. voters strongly endorsed Initiative 77, a ballot referendum to require District eateries to pay workers that rely on tips the same minimum wage as other employees. But amidst furious pushback from the restaurant industry, a majority of the D.C. Council has co-sponsored a proposal to overturn that initiative. The Council will decide the matter when it returns in the fall, with the effects likely to be felt far beyond the nation’s capital.


The District is just the latest battleground in a growing debate over the fairness of the tipped minimum wage. A similar ballot measure will go before Michigan voters in November, while in January New York Gov. Andrew Cuomo (D) ordered the Commissioner of Labor to hold hearings on the issue there. The state Department of Labor concluded those hearings in July, but has not yet given its recommendations to the governor. Bills were also introduced in a dozen states in 2018 (See Bird’s Eye View), though to date none has been successful. 


At the heart of the debate is the so-called tip credit, which allows restaurant employers in 43 states and the District of Columbia to pay servers significantly less than the legal minimum wage for workers who do not receive tips. In D.C., for example, the minimum wage for waitstaff, bartenders and valets is just $3.33 an hour, about 27 percent of the $12.50 minimum for non-tipped workers. And while dozens of states and cities around the nation have raised their minimum wage in recent years, at least 19 states continue to adhere to the federal tipped-minimum of just $2.13 an hour. Another 14 have a tipped-minimum somewhere between the federal standard and $4.00.


Only seven states – California, Oregon, Washington, Nevada, Alaska, Minnesota and Montana – require most restaurants to pay tipped workers the same minimum wage as other employees. Most is the operative word, as a majority of these still allow some tipped workers to legally be paid less than the state minimum wage. According to the U.S. Department of Labor, only Oregon, Washington and Alaska have no such caveats.


Regardless of the standard, a worker’s wage and tips still must add up to at least the minimum wage in their locale. If not, the employer is legally required to make up the difference. But advocates for eliminating the two-tiered minimum say it often doesn’t work out that way. Stories of wage theft abound.


Research by the progressive-leaning Economic Policy Institute for the 2014 fiscal year also indicates that in states using the federal standard, poverty among tipped workers was more than double (14.5 percent) that of non-tipped workers (7 percent). When considering just waiters and bartenders, the poverty rate climbs to 18 percent.


The two-tiered system hits women the hardest. More EPI research shows that almost 70 percent of all tipped workers are women, about 16 percent of which are single parents. Single or otherwise, at least half of all tipped workers are part of a household earning less than $40,000 a year.


The impact is profound, according to Saru Jayaraman, Co-Director of the Restaurant Opportunities Centers United (ROC United) – the advocates behind D.C.’s Initiative 77 – and the director of the Food Labor Research Center at UC Berkeley in California. She says the industry is approaching 13 million workers, making it the second largest private sector employer in the nation, and one of the fastest growing.


“Every year the U.S. Department of Labor puts out a list of the 10 lowest–paying jobs, and every year the seven lowest of the 10 are restaurant jobs,” she told SNCJ. “You’re talking about an immense sector of workers...that is the absolute bottom of the barrel lowest paid even when you take tips into account.”  


That scenario has been baked into the industry pie for a long, long time. Tipping in America dates back to shortly after the Civil War, but it wasn’t broadly codified until 1938 when tipped workers were specifically excluded from receiving the newly-created federal minimum of 25 cents per hour. It stayed that way until 1966, when Congress established a tipped minimum wage of half the regular minimum, then $1.25 per hour. As such, it also rose any time the federal minimum for non-tipped workers went up. But in 1996, then-President Bill Clinton made a deal with Congress that raised the federal minimum wage but set and froze the non-tipped standard at $2.13, where it stands today.


The restaurant industry has fiercely resisted efforts to change that, arguing that doing so would force many eateries to close down and lead to significant job losses for the very people advocates for raising the wage say they are trying to help.


In an interview with SNCJ, Robert Bookman, counsel to the New York City Hospitality Alliance, accused those looking to end the tip credit of “playing a BS game of three card Monty.”


“There’s no such thing as a sub-minimum wage, which is what they call it,” he says. “There is only a minimum wage. If you have a lousy shift at Flo’s Diner and you don’t make enough in tips to meet the minimum, then your employer is supposed to make that up. If he’s not paying you the minimum wage, he’s violating the law.”


Resistance has at times also come from servers themselves, who fear that customers will either think they no longer need to tip or will simply choose not to. That was the case in Maine, where voters in 2014 endorsed a measure to end the tip credit and raise the minimum wage by a dollar per year until 2024. But after the measure passed, a wave of resistance from servers, fearful the new law would gut their paychecks, moved lawmakers to repeal the law before it went into effect.


Jayaraman points to the seven states without a tip credit as proof that those scenarios don’t play out in the real world.


“Not only is the industry doing better in these states, with higher restaurant sales per capita, higher job growth, higher rates of tipping and half the rate of sexual harassment, they have also made the most incredible impact on gender equity of any sector,” she says.


There is definitely an element of the #MeToo movement to the effort to end the tip credit. Data from the U.S. Equal Opportunity Employment Commission shows that the restaurant industry is the single largest source of workplace sexual harassment complaints. Although men are also subject to harassment, the overwhelming percentage of complaints (83 percent) are from women. And because they are so reliant on tips, Jayaraman says, they are often forced to endure harassment without complaint.


“In California and these other states, they don’t have to do that because they get an actual wage from their boss,” she says.


Those bosses, however, are not immune to the growing costs of doing business in the Golden State. Sharokina Shams, Vice President of Public Affairs for the California Restaurant Association, says labor costs are pushing more restaurant operators toward the limited-service model, where people order at a counter with food then delivered by a server. And that isn’t all.


“Restaurants are using more and more automation,” she says, noting that the industry is now drawing as much interest from tech entrepreneurs who see the profit potential in fully automated and robotic food operations as from foodies who want to share their recipes with the world.


Litigation is in play as well. The National Restaurant Association filed suit in federal court in July, seeking to overturn a U.S. Department of Labor rule that requires employers to pay the full federal minimum wage to workers who spend 20 percent or more of their time on non-tipped activities.


Some restaurants around the nation have taken a different tack by eliminating tipping altogether, most notably famed New York restauranteur Danny Meyer, who did so in 2015. Others around the country have since followed suit, with mixed results.


With the DC vote on overturning Initiative 77 on hold until the Council returns, attention now is on New York and Gov. Cuomo. The governor appears motivated to end the state’s tip credit, calling it “a question of basic fairness.” Given the intense opposition from the restaurant industry – in an election year – it remains to be seen whether he will actually do so.


Jayaraman expressed confidence he will, noting that ROC United also has commitments from lawmakers in at least a dozen more states to introduce legislation in 2019 to end the tip credit. The organization declined to name those states.


A public hearing on the proposal to overturn D.C.’s Initative 77 is scheduled for September 17th, with any vote coming later that month.