The voices of Urban Institute's researchers and staff
February 8, 2018

Are we at a tipping point for tip wages?

February 8, 2018

Tipped workers and their struggle with low wages are getting their time in the spotlight.

The administration has proposed regulations that would allow employers to pool the tips their workers receive and distribute the money to others. This proposal has sparked controversy because the language is such that employers could retain some or all the tips their employees receive. In the worst-case scenario, this could mean no one gets a raise, and some tipped workers could see their wages go down.

The US Department of Labor has not publicly released its estimates of the proposal’s economic effects, which is adding to the controversy. But one recent study places the potential lost wages at about $5.8 billion a year.

How the current system affects tipped workers

Median annual earnings for employees of restaurants and other food establishments are considerably lower than the median for all workers, which is about $37,000. Food preparation workers and cooks have median annual earnings of $19,440 and $24,140, respectively, according to the Bureau of Labor Statistics. Waiters and waitresses are also low-paid occupations, with median earnings of $19,990 (including reported tips). 

The Fair Labor Standards Act requires employers ensure tipped workers earn at least the minimum wage in effect (e.g., the $7.25-an-hour federal minimum wage), by adding to the wages plus tips if the total is below the minimum. The Labor Department in 2011 clarified that tips belong to the workers who receive them, under provisions of the law. But that would change under the current administration’s proposal.

The federal minimum wage of $7.25 an hour (about $29,000 a year for a full-time job) and $2.13 an hour for tipped workers hasn’t increased since 2009 (although 29 states and the District of Columbia have higher minimum wages).

How the proposal could change employee wages

The effect on workers will depend on how employers respond. If the employer decides to retain any tips that would be above the minimum wage, some waiters and waitresses would see their wages decline if tips had previously brought their earnings above the applicable minimum wage. Other employers might distribute tips across all workers, even those receiving the minimum wage or higher, meaning some “back of the house” employees would see their earnings rise.

Evidence about the extent of wage violations suggests there is reason for concern. One study estimated that 3 to 5 percent of workers in all sectors, not just restaurants, are affected by minimum-wage violations alone. Another study found that about 12 percent of tip workers in three cities had tips taken by employers. Many legal actions have been taken on behalf of workers affected by wage and tip violations, resulting in hundreds of millions of dollars in recoupment.

If employers that have previously violated wage rules continue to do so and take advantage of the proposed new rule, the loss in wages could amount to billions of dollars a year.

Is this the end of the tip minimum wage?

Of course, not all employers would act with impunity. Danny Meyer, the founder of Shake Shack, has said his solution to equalize wages and simplify the customer experience was to adopt a “no tip” policy beginning in 2015 and raise the wages of all wait staff and back-of-the-house workers.

Meyer said he raised the menu prices about 25 percent to offset the wage increases. There have been no customer complaints, he said, and the key is keeping the quality of the food and the hospitality of the experience high. Presumably, the company’s revenue could increase, which could allow Shake Shack to raise wages even more. It will be interesting to track whether other major restaurants will follow the lead of Shake Shack and other businesses with no-tip policies and how consumers and workers respond.

The controversy over the Labor Department’s proposed rule has revived the question of whether now is the time to raise the federal minimum wage, implement automatic increases in the future (as Canada and other countries do), and perhaps eliminate the tip minimum wage altogether and apply the federal minimum wage to all workers.

Diners at a restaurant in Washington, DC. Photo by Deb Lindsey/The Washington Post via Getty Images.

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