Raising Minimum Wage Hurts Tipped Workers

Raising Minimum Wage Hurts Tipped Workers

In widely celebrated moves, Michigan and the District of Columbia recently passed minimum wage hikes for tipped workers. However, there’s growing opposition from industry representatives and tipped workers themselves, most of whom depend on gratuities for their take-home pay. As a result, legislators are already eyeing rollbacks on the law, and rightly so.

According to Alicia Renee Farris, Michigan campaign chair of One Fair Wage advocacy group, the tipped minimum wage hike in Michigan does not impact tipping in any major way. Instead, workers retain their right to tips while receiving raises, and business owners experience little discomfort.

But, despite support for tipped minimum wage hikes from outside labor groups flush with activists, business communities — backed up by servers and bartenders — oppose them.

“Good servers understand that good service equals great tips… And every good server I’ve talked to doesn’t want to see the end of tipping practices for a higher base wage,” said Scott Ellis, Director of Michigan Licensed Beverage. Indeed, a survey by the American Express Restaurant Trade Survey shows that 97 percent of servers nationwide prefer tipping as their payment method.

The wage-hike policy looks particularly ill-conceived, because, with tips, many waiters already earn more than the minimum wage — even as businesses struggle to fill empty seats, with more Americans eating at home. Wage hikes would only make things worse. “On a whole, I think dining out will be a lot more expensive,” said Ashok Bajaj, founder of the Knightsbridge Restaurant Group. For customers, this could disincentivize not only tipping, but dining out altogether.

Because of some legal finagling, opponents of the tipped wage increase in Michigan actually voted to past a tipping law ahead of a November ballot vote. The law cleared the state’s congress on September 12, marking the beginning of a gradual increase in the minimum wage — from roughly $3.52 per hour to $12 by 2022 — for workers who receive tips. But this was done in hopes of defeating the initiative, since if it were passed only by voters in November and not by congress, opponents would have needed a three-fourths majority vote to repeal it. 

“It’s confusing, because we’re opposed to the proposals [tipped minimum wage and paid sick leave], so we asked the [Michigan] legislature to vote for them,” said Charlie Owens, of the National Federation of Independent Business. Now, the legislators require a simple majority vote to roll back the passed tipping law.

The Great Lakes state is not alone on eyeing a rollback. On June 19, following a massive push from poster-waving advocates throughout the city, District of Columbia voters approved a gradual raising of the tipped minimum wage standard from $3.89 to $15 by 2026. 

D.C., however, went further than Michigan in laying ground for repeal. Coming on the heels of a heated public hearing on September 17, the D.C. Council approved legislation that rolls back Initiative 77 by a 8-5 margin. With another vote in sight, Mayor Muriel E. Bowser (D) has already pledged to sign the repeal legislation. 

Both Michigan and D.C. have similar laws when it comes to minimum wage and ballot initiatives. Both require that employers pay tipped employees above the minimum cash wage stipulated on the 1938 Fair Labor Standards Act. As it stands, local employers are also required to make sure their workers, together with tips, earn at least the regular minimum wage that non-tipped employees receive (currently $9.25 in Michigan and $13.25 in D.C.). The minimum wage increases, however, would effectively eliminate the practice of counting tips toward the difference (i.e., “tip credit”), locking employers in for higher labor costs, regardless of tips received by employees.

There are other positive effects of tipping of which many are unaware. Tipping helps solve a so-called “principal-agent problem.” That is, a classical issue caused whenever incentives for the worker (agent) don’t fully align with those of the owner (principal). Tipping helps solve this issue as employers no longer need to constantly monitor tipped workers who now have vested interest in receiving higher gratuities. This means they can focus their attentions elsewhere, improving the quality of the restaurants themselves.

Gradual increases in minimum wage for tipped D.C. workers will likely have a less adverse impact than it will in Michigan, because of the capital’s sky-high costs of living. In general, however, it is hard to deny that the policy will have a tough time sticking around if it reduces gratuities for servers, raises costs for employers, and makes dining out more expensive. Legislators who are smart and eager to help out their voters will keep that rollback of the tipped minimum wage hike on the table. 

Anil Niraula is a Young Voices advocate and a policy analyst who writes on labor, public pension, tax, and economic policies.

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