Is it time to end tip-based wages?

Is it time for the government to do away with tip-based wages? Some members of Congress continue to push legislation that would change tipping. President Barack

Is it time for the government to do away with tip-based wages?

Some members of Congress continue to push legislation that would change tipping. President Barack Obama already has said something needs to be done. And now a new study by the Economic Policy Institute maintains that the sub-minimum wage that makes tipping necessary should come to an end.

Gratuity is meant to be gratuitous—given as a thank you for a job well done. But somewhere between the word’s 16th century Webster’s definition and America today, the expectations surrounding tipping have changed. Tips are no longer extras—they have become necessities. It has become customary that a customer will give them in certain industries, and tips makes up the majority of a paycheck for many workers who receive them.

That 15 percent to 20 percent tipped to waiters, hairstylists and valet drivers might seem like a big “thank you,” but economically speaking tipping has become a subsidy.

The Economic Policy Institute has found that tipping doesn’t supplement permanent wages as well as the government presumes and that tipped-based labor—more than any other type—is the least sustainable.

In the current federal U.S. wage system for tip-based workers, customers are responsible for paying a majority of an employee’s wages through gratuity. A recent VOX article summed up the concept like this, “Welcome to my restaurant; now please pay my employees."

“Many people do not even understand how the tip credit works,” said Laura Fortman, deputy administrator for the Wage and Hour Division at Department of Labor. “Tipped employees are the only group of workers that rely on the customer to pay their wages.”

When the sub-minimum wage for tipped workers was created in 1966 under the Fair Labor Standards Act, it was done under the assumption that worker’s tips, when added to the sub-wage, would ensure that hourly earnings would at least equal the regular federal minimum wage—which is currently $7.25. 

However, the federal sub-minimum wage has been frozen at $2.13 since 1991 despite inflation. So in the 23 years since, it has become harder and harder for tipped workers to make at least full minimum wage pay.

According to EPI findings, the income of tip-reliant workers is less than the national average, which includes minimum wage paid employees. Also tip-based workers have almost double the poverty rate, which is 6.5 percent for non-tipped workers and 12.8 percent for tipped workers.

The chart below breaks down the median wage of all workers, tipped workers and specifically waiters/bartenders—whom you will see make the least amount of money of all three groups. It also looks at the base sub-wage salaries that tipped workers receive and how much money they make hourly (tips included).

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Economic Policy Institute

That base salary is key, the findings show, because it sets the stage for a worker’s average hourly income. Currently 19 states use the federal sub-minimum wage of $2.13 as the base salary for tipped workers and those employers make the least amount of money. Not surprisingly, employees who work in one of the seven states that pay tipped workers the same base salary as the overall minimum wage make the highest wages.

Here is a state breakdown of sub-wages for tipped based workers:

Conversations about dumping the current tipping practice have graced dinner tables before. The VOX article titled “Tipping perpetuates racism, classism, and poverty—let’s get rid of it!” sums up one sentiment.

The social reasoning against the practice of tipping is that an industry should not pay its employees through often biased and unequal tips. Often prejudices beyond a server’s actions play a large factor in overall gratuity.

But there also are those against raising the sub-wage all together, just like they are wary of raising the national minimum wage.

The argument is that restaurants will be strapped for cash if they have to pay their employees more out of pocket. And that people will be less inclined to tip when they realize that workers are being compensated more by their employers.

But economist Sylvia Allegret, one of the authors of the EPI report, says restaurants are in a strong position to deal with any potential new costs associated with higher hourly wages. The restaurant industry is booming, and employment in the full-service restaurant industry has grown more than 85 percent since 1990, Allegret says. Comparatively, employment in the overall private sector only grew by 24 percent. And in states where the minimum wage is currently adopted for tipped workers, customers still tip the customary percentage.

“It’s clear at the very least that the restaurant industry does not hinge on paying tipped workers,” she said. “Otherwise there would be no restaurant workers in states like California.”

Congressman George Miller, D-Calif., told DecodeDC that in states where the tipped minimum wage was the same as the non-tipped, there’s been “stronger growth in leisure and hospitality industries since 1995 than the states that have different tipped and regular minimum wages.”

Miller is one of two members of Congress attempting to raise the federal tipped minimum wage.  He along with Sen. Tom Harkin, D-Iowa, introduced companion bills of The Fair Minimum Wage Act, which aim to raise the federal minimum wage as well as the sub-wage. If passed, the law would put the sub-wage equal to 70 percent of the federal minimum wage. If the number is calculated based on today’s federal wage, the sub wage would rise to about $5.

Miller’s House bill has 196 co-sponsors who are all Democrats. Harkin’s bill has 33 sponsors but failed in April to get enough votes in the Senate to move to the floor for a full vote.

In February, Obama made increasing the minimum wage a top priority. He signed an executive order boosting the tipped-worker minimum wage for federal employees to $4.90 in three-year increments. His end goal in 2017 is to ultimately get the tipped minimum wage to be 70 percent of the minimum wage.

Yet, his powers do not extend to changing federal law.

The authors at EPI argue that raising the sub-minimum is not enough. They believe the best way to ensure equal pay across all sectors is to get rid of the sub-wage all together.

“A bill in Congress that would change the tipped minimum wage up to 70 percent of the current minimum wage would do wonders. But we think it’s time to do away with the tipped minimum wage in general,” said David Cooper, co-author of the report. “Let tips go back to just being an expression of gratitude for good service instead of being the bulk of these worker’s paychecks.”

That’s not to say tipping should be outlawed. But the idea is that employers should be fully responsible for making sure their workers are fairly compensated for their labor and that, like a thank you, perhaps tips could go back to being a little nicety at the end of a long day’s work.

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