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What Is A Tip Credit, and Why Does It Matter?

The war over worker wages is nothing new. We can point to a myriad of historical examples where heated battles regarding how much a worker should be paid became woven into the fabric of America.  Even as far back as the Great Railroad Strike of 1877, wages have been the center of the tug of war between labor and industry. 

War on Wages

Today, the service industry is engaged in one of its most significant labor battles surrounding tipped workers’ wages. This conflict is built on $15Now minimum wage legislation, and the push to eliminate tip credits. But this position against the formidable rising cost of living and a looming recession, it is easy to see why restaurant operators and workers feel uneasy about their working futures.

Many legislators feel that raising wages is the cure for helping workers catch up to the ever-rising rents and inflation. This may be the case for workers in retail or flat waged service genre jobs, but for those in full service tipped positions, the fix may be the thing that labor groups are railing against.

The Tip Credit

The tip credit was enacted through the Fair Labor Standards Act in 1966. It stated that employers of tipped workers need only to shoulder 50% of a tipped worker’s wages because tipping allowed that worker to add to their income. This provision was initially based on a percentage that fluctuated between 40% to 60% of the federal minimum wage until 1996 when the tip credit was cemented at $2.13 an hour.  Since then, some states have taken the initiative to raise the tip credit to keep pace with inflation and other economic factors, increasing the employer contribution to tipped employee wages. However, in recent years labor groups like One Fair Wage and Restaurant Opportunities Center, both imagined by Berkeley labor activist Saru Jayaraman, are trying to eliminate tip credits altogether, forcing the industry to change how it pays tipped employees. Only seven states have eliminated the tip credit and put the minimum wage on the $15Now scale.

The Solution is Simple

Every year as the minimum wage climbs the $15Now ladder, this artificial wage hike without a tip credit has negatively impacted the service industry and the very workers it claims to help.  Employers giving a raise to its highest earners, the tipped employees, now have little to spare for non-tipped workers like dishwashers and cooks. Back-of-house wages have become stagnant, with more and more employers turning to tip pooling to subsidize the wage hike for non-tipped positions. Many operators have tried to navigate the lack of a tip credit by crafting new pay models for traditionally tipped workers in hopes of keeping their businesses sustainable. Unfortunately, we also experience the culling of support staff, hours, and a decrease in pocketed tipped income for many tipped employees. All of these circumventions negatively impact workers and could be avoided as wages rise with a simple solution: Require a tip credit.

Our Most Important Tool We Have

For owners and operators facing the wage hike wall, preserving tip credits is obvious. Keeping a reduction in the cost of labor is a definite plus when profit margins seem to shrink overnight in today’s economy. However, tip credits safeguard more than just the sustainability of the business. Tip credits are the key to keeping the tipping culture intact as wages rise. Tipping has a cost of living increase built into it, keeping workers making far above the minimum wage without needing wage adjustments via the employer. Tip credits allow money to flow to back-of-house positions to keep those wages competitive and growing. Without giving a raise to those workers already making far above minimum wage, owners would now be allowed to feed that money to those workers who need it most.

Tip credits also allow operators to keep menu prices as low as possible to keep guests coming through the door. Customers are more decerning these days as discretionary income is harder to come by. Increasing menu prices to offset labor can only go so far as customers turn away to find less expensive options or stay home.

In today’s tight labor market and inflationary business environment, operators must use every tool in their arsenal to stay competitive. The tip credit is the most important of these tools. It should be fought for and preserved as we face some of the most significant crusades against our industry in modern history.


How do we as an industry fight for a tip credit?

In 2018, the Washington D.C. city council was set to vote to eliminate the tip credit in their city. The fight around Initiative 77 was a great example of how our industry came together to stop policy measures that would negatively impact our incomes. Workers and employers spoke up and made clear to labor groups and legislators that they were not in favor of ending the tip credit. The industry won. 

As wage legislation jumps from state to state, our industry leaders must be engaged. Educate fellow industry professionals, employers, and workers, about why a tip credit is vital in keeping the service industry sustainable.

Should the tip credit floor be raised?

In 1996 the tip credit floor was frozen at $2.13 an hour. Even though some cities and states have adjusted their tip credit, the Fair Labor Standards Act’s tip credit rules have remained untouched. Regarding the Federal Minimum Wage rules, Democrat Senator Joe Manchin, who infamously voted against the latest attempt to raise the wage, had proposed the wage be moderately raised and then be indexed for inflation. This move makes sense for all industries and takes the wage out of the control of labor groups. The same argument could be made to protect the tip credit. Raise the credit floor to a reasonable amount given economic factors and then set it back as a percentage of the minimum wage. Of course, there are many factors to consider when undertaking such a policy. Still, taking control of our wage destiny would be welcomed in the current battle between big labor and the service industry.

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