Understanding How the Tip Credit Works in Restaurants

Understanding How the Tip Credit Works in Restaurants

Understanding How the Tip Credit Works in Restaurants banner

Restaurant managers and food and beverage professionals are keenly aware of the national buzz surrounding tip credit. Seven U.S. states already operate without the tip credit, and several other states are considering legislation, according to Skift Table. Those currently without it are California, Washington, Minnesota, Alaska, Oregon, Nevada, and Montana. Tipped employees in these states receive the general minimum wage.

New York may be next in line to eliminate the tip credit. New York’s Department of Labor concluded extensive hearings on June 27, 2018, and Governor Andrew Cuomo is expected to render his recommendation on the tip credit issue in a few months.

According to Johnson & Wales University professor and online instructor Brian Warrener, the federal government has recently changed the law to allow tips to be distributed to employees not considered owners, managers or supervisors as long as the establishment pays all employees at least the standard minimum wage, making matters even more complex. “Traditionally, tips have been reserved for high customer contact employees like servers and bussers,” he said. “The new law allows tips to be collected and distributed to employees like cooks and dishwashers.”

What is tip credit?

The tip credit, also known in some areas as the tipped minimum wage, is a wage break enjoyed in some states by businesses that employ tipped workers. The United States Department of Labor defines tipped employees as “those who customarily and regularly receive more than $30 per month in tips.” While these tips belong to the employee, the employer can use them as a credit against its minimum wage payment to the employee, up to a current maximum credit of $5.12 per hour.

The minimum wage varies across the United States, with individual states and cities enacting their own higher local minimum wage laws. But according to federal law, tipped employees must make at least $7.25 an hour. This means that the minimum cash wage that an employer must pay is $2.13 per hour.

There are five requirements employers must meet to comply with the Department of Labor’s tip credit provision. The fifth states that an employer must provide oral or written notice to its tipped employees informing them of all five items. Any employer who fails to do so cannot use the section 3(m) tip credit and “must pay the tipped employee at least $7.25 per hour in wages and allow the tipped employee to keep all tips received.”

What if it is a slow week?

If a restaurant employee doesn’t earn at least $5.12 in tips per hour, the employer has to make up the difference in wages to ensure that their minimum wage is at least $7.25. (This also applies in states that have a higher minimum cash wage.) The employer must compensate the employee to make up this hourly deficit in every pay period, ensuring that in slow weeks tipped workers will at least make the legally required minimum wage. This requires thorough payroll record keeping on the part of the employer to ensure tipped employees are paid correctly.

Restaurant owners generally aren’t happy with the possibility of eliminating the tip credit. In fact, research conducted by Warrener and fellow JWU professor Paul Bagdan, PhD, indicated that 72 percent of managers surveyed were not in favor of eliminating the tipped wage. The National Restaurant Association’s 2016 Restaurant Operations Report showed the national averages for labor costs can run as high as 36 percent of a restaurant’s total operations budget.

Should restaurants that lose the tip credit make up the cost by trying to turn tables faster and do more covers? Should they raise menu prices? Add a bar? According to Warrener and Bagdan’s research, some of these practices have been tried and were successful in high-profile eateries in large, affluent cities. “However, in just as many circumstances restaurants that have employed these solutions have abandoned them and gone back to a tipped wage,” Warrener said. “Regardless, these strategies aren’t workable solutions for small mom-and-pop operators in economically challenged rural areas.”

What do servers think of the tip credit?

Tipped employees have fallen on both sides of the tip credit controversy. Many tipped employees are quite happy with their method and rate of pay. In fact, Bagdan and Warrener found that 89 percent of their respondents prefer to continue working for tips. Some workers said they worry that customers will stop tipping altogether or greatly reduce the amount of the gratuity when they learn wait staff is receiving the general minimum wage.

Servers who prefer the elimination of a tip credit and the gradual transition to a full minimum wage point to evidence that a tipping environment often encourages sexual harassment and discriminatory practices, with black servers receiving lower tips than their white counterparts, according to data compiled by the New York Times.

Warrener said the current tipping situation is quite dynamic because restaurant industry associations and social justice organizations have marshalled industry forces on both sides of the issue. “Recent votes have been taken in Maine and the District of Columbia to eliminate the tipped minimum wage and tip credit,” he explained. “Politicians in both locales are working on changing the results of these votes.”

In their most recent presentation on the topic, Warrener and Bagdan opined that the new federal law might be the best resolution for the current circumstance, with both sides being able to benefit. Servers can continue to receive tip amounts based on the quality of their service while at the same time being paid a reliable wage. Owners and operators can shift some tip income to cooks and dishwashers, helping them to attract workers to positions that are becoming increasingly difficult to fill.

In the meantime, industry experts are eager to see where New York falls on the often-contentious and confusing tip credit decision. It may be just one more element that makes running a profitable restaurant even more challenging than it already is.

Interested in learning more about hospitality and food and beverage? Earn your bachelor’s degree in culinary arts & food service management online. Learn more by completing the “Request Info” form on this page, calling 855-JWU-1881, or emailing: [email protected].

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