A recent report published by Oxfam America says that 31.9% of hourly-paid workers earn less than $15 per hour. Union-funded researchers and activists use statistics like these to argue for policies to eliminate the federal tip credit and raise the minimum wage to $15 per hour, like the proposal that died in Congress last year.
According to the same data source, the Bureau of Labor Statistics concludes that the majority of hourly paid minimum wage earners work in the restaurant industry. Controversial groups like the Restaurant Opportunities Center say eliminating the tip credit and raising the minimum wage to $15 per hour (and higher) will raise restaurant employees’ income. The report itself calls for a “universal $15 minimum wage.” But actual tipped restaurant employees disagree with this policy – and actively oppose movements to eliminate local, state, and federal tip credits. Why?
Currently, the National Labor Relations Act says employers can credit employees’ tip earnings into the minimum wage requirement when calculating base wages. That means they can pay a minimum of $2.13 per hour as long as tips make up the difference from the standard $7.25 rate.
Many tipped restaurant employees say they earn far more than the federal minimum wage of $7.25 through their tips, and some say they even earn more than $15 per hour without the presence of higher wage mandates. Testimony of tipped restaurant workers reveals that once tips are factored in, their take-home earnings are $25, $45, or even more per hour.
Analysis of U.S. Census Bureau data by economists from Miami and Trinity Universities backs this up. Since the federal minimum and tipped minimum wages last changed in 2009, tipped worker earnings have been steadily on the rise for more than a decade. The average reported hourly earnings of tipped workers in states with the $2.13 tipped minimum wage was higher than $15 last year, reaching $15.51 per hour.
Not surprisingly, many tipped workers oppose movements to eliminate the tip credit due to the potential loss of earnings, their jobs, and even the restaurants that employ them.
Inevitably, when restaurants’ wage bills increase dramatically due to the sudden removal of the tip credit, they are forced to adjust for the costs in other ways, such as raising the price of menu items or adding flat gratuity charges to customer bills. Restaurant Opportunities Center’s nonprofit offers these suggestions itself. Many restaurants’ customers are sensitive to changing prices, and either reduce their tip percentages when they see service charges added, or reduce their dining out. Unfortunately, many restaurants can’t afford to lose foot traffic over rising prices, and instead are forced to make up for the suddenly-increased price of labor by reducing staff.
Economic research and employee experience reveals earnings drop when tipped minimum wages are drastically increased. A Census Bureau study found that tip income drops proportionally to an increase in the tipped minimum wage, affecting overall take-home pay. In restaurants that have eliminated the tip credit and foregone tipping, tipped employees pushed back at the model for loss of income. When NYC restaurateur Danny Meyer did so, one of his employees reported a $10,000 loss in her annual pay. When San Francisco’s Zuni Café announced a no-tipping, flat minimum wage model, employees estimated similar tens of thousands of dollars in annual earnings loss, and stated: “[Without tips] I couldn’t make the ends meet. It would be going into debt working for them again.”
Research also finds that tipped minimum wage hikes cause significant employment loss for restaurant employees. Economists from Miami and Trinity Universities found areas such as San Francisco and Seattle that have severely reduced or no tip credits employed 18 percent fewer tipped restaurant employees compared with areas that have larger tip credits and lower tipped minimum wage requirements. Likewise, a study by economists from the University of California-Irvine shows even a $1 wage hike could cause employment loss of up to 4%.
If tipped employees don’t lose their jobs or suffer income losses right away, drastically raising tipped minimum wages may cause their restaurant employers to shut down. A Harvard Business School analysis found that a $1 hike in the tipped minimum wage increased the likelihood of restaurant closure by 14% in San Francisco.
Tipped restaurant workers have fought hard against tip credit bans that would dramatically raise tipped minimum wage rates in Maine, New York, Virginia, New Mexico, and the District of Columbia. Now, anti-tipping activists are using reports like Oxfam’s to push for ending the federal tip credit system and a $15 national minimum wage. Unfortunately, that’s not what tipped restaurant workers want.