America / Labor Force

The Tipped Minimum Wage with a No Change Policy

Since Bill Clinton was elected into office, the minimum wage for tipped workers hasn’t changed. It’s been set at $2.13 an hour since 1991. Up until 1996, the tipped minimum wage was pegged to increase with increases in the minimum wage, but for nearly two decades that number has remained stagnant. To understand the tipped minimum wage, it is important to understand how employers pay their employees in predominantly tipped occupations.8375048642_dc95bdd8db_o

Under the Fair Labor Standards Act, anyone who receives more than $30 a month in tips is defined as a tipped employee and is eligible to earn the tipped minimum wage. Predominantly tipped occupations include servers, hairdressers, bartenders, gambling services, massage therapists and barbers.

In principle, no tipped employee should be walking away with just $2.13 an hour because if the employee doesn’t earn at least the full federal minimum wage ($7.25) after adding tips, the employer is responsible for making up for the difference. In other words, the employer can apply $5.12 an hour in tips the employee earns to the “tip credit” to help meet its minimum wage obligation of $7.25. Essentially with this tip credit, a tipping customer is subsidizing the employers’ payment of minimum wage because if the customer chooses not to tip, the employer would be responsible for paying that $5.12 an hour. In contrast, the employer of a non-tipped worker is responsible for paying the full $7.25 without subtracting any “tip credit.”

While $2.13 and $7.25 are the federal tipped and standard minimum wages, respectively, some states have set their own standards at higher levels. The Department of Labor’s map outlines the rules within each state. Some states require the employer to pay the state’s full minimum wage before tips and some states require a minimum wage before tips between $2.13 and $7.25. As such, the tipped minimum wage ranges from $9 or higher (California, Washington, and Oregon) to just $2.13 an hour in 19 states.

The disparity in tipped wages across states should be some indication of the debate surrounding the federal tipped minimum wage that has remained stagnant for 23 years. According to a report from Economic Policy Institute, tipped workers are more likely to be in poverty and on government services than other workers.

Some proponents of an increase in the tipped minimum wage argue that this is a gender inequality issue, and that a tipped minimum wage increase would have a targeted effect on women.

According to the Wall Street Journal, the median wage of all workers is $17.12 an hour, and women comprise 48% of all employment. In contrast, for predominantly tipped occupations, the median wage is $10.64 and women comprise 72% of all employment.

While the Fair Labor Standards Act is designed to protect against such an outcome, “some workers don’t report all their tips, and some employers don’t comply with wage laws, industry and gov’t officials say.”

A White House report said 1 in 10 tipped workers surveyed reported hourly wages below the full federal minimum wage, including tips. Unfortunately tipping data are not readily accessible, especially because many tips are dealt in cash. Theoretically, employers would be likely to comply with an increase in the base wage, even if they don’t necessarily comply with the tip credit.

Senator Tom Harkin (D-IA) sponsored a bill last year that would have raised the federal tipped minimum wage to at least $7.10 from $2.13 now, phased in over 6 years. The Fair Minimum Wage Act of 2013 would have raised the federal tipped minimum wage to at least $7.10 from $2.13 now, phased in over 6 years. Then it would have pegged the federal tipped minimum wage at 70% of the standard minimum wage. The bill was introduced, but did not move forward.

Historically, we have seen Congress increase the standard minimum wage on a regular basis so that employees’ earnings keep up with inflation. Generally, a customer chooses how much tip to leave as a percentage of the total bill. With inflation, menu prices increase and the amount of tip should increase accordingly, acting as an adjustment mechanism that protects the earnings of tipped workers against inflation. Furthermore, the National Restaurant Association is wary that such an increase could reduce hours and slow hiring as restaurants choose to adopt technologies for customers to order and pay at their tables.

Given that tipped workers are more likely to live in poverty than other workers, and that 72% of them are women, policy in this area has the potential to narrow the poverty gap and the gender gap. Yet, in light of the particular structure of the tipped wage and tip credit, efforts should focus on improving implementation of the Fair Labor Standards Act so that no tipped worker walks away with less than the full federal minimum wage.