Here’s a Tip: Tips are Not Always Gratuity

May 20, 2024

In Recognition of National Waitstaff Day Tuesday, May 21, 2024

April 1, 2024, marked the 33rd anniversary of the federal law that permits employers to pay tipped workers a cash wage of just $2.13 per hour, which is $5.12 per hour less than the federal minimum wage for the rest of the workforce. But federal law also mandates that all workers are due the full federal $7.25 minimum wage. So, what gives? The customers do!

The two-tiered wage system that exists in the US today was legalized in 1966 when the landmark Roosevelt-era Fair Labor Standards Act (FLSA) was amended. The 1966 amendment extended labor protections to service workers, but it also allowed for much of the newly covered workforce to be paid a subminimum wage that was originally half of the regular minimum.

To meet their obligation of paying all workers the regular minimum wage, the 1966 amendment introduced the “tip credit” provision. The tip credit allows employers to credit a portion of a worker’s tips toward the employer’s payment of the full federal minimum wage; otherwise, employers legally pay tipped workers a subminimum $2.13 cash wage and use the workers’ tips to offset the remainder of the federal minimum wage. This customer-provided employer wage subsidy at the federal level is $5.12 per hour for every hour a tipped worker works.

To make matters worse, the 1996 FLSA amendment that raised the federal minimum wage from $4.25 to $5.15 in two steps, froze the subminimum wage in perpetuity at $2.13 per hour. This stunning policy passed without much debate. As the minimum wage increased the original 50-50 split was decoupled. As a result, the portion of the federal minimum wage covered by tips increased from 50 percent to 71 percent today.

Today 20 states follow the $7.25 federal minimum wage and 16 states allow tipped workers to be paid a cash wage of $2.13. Fourteen states have both federal wage floors. With little movement at the federal level, many states have acted to implement more generous wage policies. Across the US there exists a vast diversity of wage floors and allowable tip credit allowances. The mix of policies that exist today has resulted in historic tip credit amounts in many states that have left even more of the responsibility of wages due to the tipped workforce in the hands of customers, while employers pay relatively less and less.

For instance, Maryland increased its minimum wage from $7.25 in 2014 to $15.00 on January 1st of this year, but it kept in place its $3.63 subminimum wage for tipped workers. As a result, the employer tip-credit allowance went from $3.63 to $11.37 — the largest tip-provided employer wage subsidy in US history. The cash wage paid by employers stayed at $3.63, falling from 50 percent to just 24 percent of the legally due minimum wage. Maryland left the tipped workers behind as they continue to be paid $3.63 even while inflation eroded its buying power by 25 percent since 2014.

Twenty-three states allow employers to pay tipped workers cash wages that represent less than a third of their respective minimum wages. Importantly, seven states do not allow for a subminimum wage rate. In these states, all tips are gratuity on top of minimum wages. These states also have minimum wages significantly above the federal level: Alaska ($11.73), California ($16.00), Minnesota ($10.85), Montana ($10.30), Nevada ($11.25), Oregon ($14.20), and Washington ($16.28).

That employers pay tipped workers cash wages that are just a fraction of the legally due minimum wage is an important policy question that for decades has gone largely unaddressed. One reason may be the confusion about how the mechanics of the two-tiered wage floor system operate and a misunderstanding of the wage subsidy provided to employers via the tip credit allowance. Also at play is the powerful National Restaurant Association lobby that was instrumental in freezing the subminimum wage at $2.13 and continues to work to keep subminimum wages low and tip credits high.

Over the last few years, on the heels of the pandemic reopening, there have been increased reports and debate around tipping — when to tip and how much. In the US, it has been customary to tip wait staff and bartenders who are likely paid subminimum cash wages, but less so for café baristas or other counter staff who are probable minimum- or low-wage workers. As explained, tips are also credited as the payment of wages and the public is often not aware of the interplay between custom and wage policy across the US.

Perhaps a bigger conversation should be taking place like the one that last occurred over a hundred years ago when renowned book publisher William Scott penned The Itching Palm (1916). Scott wrote passionately about the harms of tipping, arguing that a customer giving a tip and a worker accepting it created inequities and was, in fact, antithetical to US democracy, especially in situations where the payment of wages was negligible, such as those paid to the formerly enslaved. We are certainly in a better world today, but the vestiges of low pay, coupled with customers footing the majority of the wage bill for many employers are still with us. I agree with the sentiments of Eleanor Roosevelt who, in a 1938 hearing on wage standards, expressed her dislike of tipping because it was a result of the failure to pay workers a livable wage.

Is it a reasonable policy to pay tipped workers a cash wage of just $2.13? Or allow employers to skirt paying the lion’s share of wages to tipped workers as customers subsidize 71 percent or $5.12 in wages federally and up to $11.37 or 76 percent in Maryland? On this National Waitstaff Day get to know the wage floor policies in your state — do you know how much of your tip is a wage subsidy? A firm understanding of policy is necessary before real change can be implemented.

It is clear there is another way, especially since seven states do not allow for a subminimum wage and none of our peer countries allow for such a policy. A raise in the federal wage floors is long overdue given we’ve had 33 years of $2.13 and 15 years of $7.25. The Raise the Wage Act was again stymied in 2023 as were all attempts to pass a version of the bill since 2017. Had the 2023 bill passed, the country would be on its way to a $17 minimum wage and a phasing out of the subminimum wage, assuring that millions of workers in all states are able to work with dignity and stop the practice of having the public subsidize wages for employers.

For more information that highlights all the various state policies on subminimum and minimum wages along with tip credit amounts see this recent piece by Dr. Allegretto.

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