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Here is a tip–tips aren’t always tips

Sylvia Allegretto, Economist, Co-Chair of the Center on Wage and Employment Dynamics | August 13, 2013

Workers from Wal-Mart to Macy’s to McDonald’s have taken to the streets across the country to demand better wages and working conditions. The actions have brought to light the plight of low-wage workers and how difficult it is to makes ends meet on such low pay. Importantly, their ranks are on the rise given that most of the jobs created post-Great Recession have been in low wage service occupations. Many of these jobs are in retail and the restaurant industry which pay wages at or close to the minimum wage—which is $7.25 nationally. However, many are paid just $2.13—two-thirteen you say? Yes, that is what wait staff and other tipped workers are often paid.

As a former waiter and bartender of seven years, I’m always a bit miffed that the sub-minimum wage paid to tipped workers has been all but forgotten. The $2.13 wage has been the law of the land since 1991! As with the regular minimum wage, some states have higher sub-wage floors and seven states do not allow for a sub-minimum; but a third of all workers reside in states that allow for the two-thirteen wage.

The two-tiered wage system hinges on the ‘tip credit’ provision afforded to employers. The tip credit is the amount of customer tips an employer can use as credit towards a worker’s wage. Today the federal tip credit, which is the difference between the regular minimum wage of $7.25 and the $2.13 tip wage is $5.12 — this is the part of the tip that is not a tip but a customer-provided wage subsidy to the employer. If a worker’s tips combined with the cash wage paid by the employer do not equal the regular minimum wage, the employer must make up the difference (good luck with that!).

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When originally instituted in 1966, the tip credit and the tipped wage both contributed half of the regular minimum wage as depicted in the Figure. Today, the tipped wage of $2.13 is now just 29% of the regular minimum wage, while the tip credit afforded to employers makes up 71%. Thus the customer provided subsidy is now the lion’s share of a worker’s legal minimum wage. Restaurant customers typically believe the tip that they leave is a reward to the worker for good service; in reality, customers are paying a significant portion of the wage bill—a nice subsidy to an employer’s bottom line.

Tipped workers often do not receive any other benefits such as paid sick days, paid vacation, health insurance or retirement benefits–and their base pay is often all but gone after taxes. So these workers live off of tips that are uncertain and work shifts that are often unpredictable. Wait staff are overwhelming women (72%) and a third are at least 30 years old. Wait staff from a Denny’s in Detroit or a diner in Texas to a truck stop in Wyoming deserve better.

For more information of the sub-minimum wage, its history and the consequences of such a low base wage see this article I wrote on the subject for the August edition of Symposium Magazine. This is a new online magazine that merges academia with public life.

Comments to “Here is a tip–tips aren’t always tips

  1. A point that seems totally overlooked is that the only one authorized to provide employers with a tip credit is the U.S. Secretary of Labor. Federal laws explain that the Secretary of Labor is authorized to determine the fair value of board, lodging and other facilities which might be credited toward the payment of minimum wage.

    However, lawmakers have in the past and are currently deciding whether or not employers will gain an even larger credit to be applied toward the payment of minimum wage. For instance, while the original maximum tip credit was introduced as $2.13 an hour, Congress and many state lawmakers have increased the tip credit to amount without any authorization from the U.S. Secretary of Labor.

    While CFR 203(m) along with parts of CFR 531 explain that the tip credit is an allowance the Secretary of Labor is authorized to permit employers, Congress and many state lawmakers have taken it upon themselves to expand the amount employers may be permitted to take as a tip credit. Something has clearly gone awry.

    Maybe things have gone awry because we are talking about a lot of money. Ask yourself this question. What’s the difference between an employer who simply steals $5.00 in tips each hour from his employee and an employer who deducts $5.00 an hour from this same employee’s minimum wage?

  2. I do feel bad for those unfortunate servers that only make $2.13 per hour, but you fail to calculate the actual wages servers earn, which general go unreported. I manage a restaurant, and each night(Thursday through Sunday) the servers sell approximately $800. That means if they average a 15% tip, which that is a low estimate, the server would be earning $480 in tips for those 3 days of which they only work 24 hours. If you divid $480 by 24 hours the server is making $20 dollars per hour on tips, and then you add their hourly wage of $2.13, the server is making $22.13 per hour. The average household income in my area is approximately $45,400, which translates into $21.84 per hour. There are tax benefits also, because a server only pays taxes on 8% of their total sales which means they pay less in taxes than someone working a any other job.

    Working at McDonalds and someone can’t make a living? Why would anyone believe a part time job should or would pay enough to live on? 24 hours a week and cant pay the bills? I would be working another job for at least another 20 hours to help pay my bills. Why do you imply a company should pay more so the government does not have to supplement the employees income? I would be all for the government paying for training, schooling, or technical school attendance, but I do not feel it is the government’s responsibility to demand low wage, low skill job employees to demand a wage that is not indicative of their skills. I support equal opportunity, and at times have given the benefit of the doubt where it has only came back to haunt me. When everyone is talking about a “Living Wage” I have to wonder what that would be? A “Living Wage” job will pay a “Living Wage”, but don’t expect every job to pay a “Living Wage”. The term “Living Wage” is a made up term to justify people working at entry level jobs demanding the more pay. Most would want a house, a car, and children, but today’s society seems to have forgot, it takes time to earn those things, and just because a worker believes they should earn a higher wage doesn’t mean the company has to pay it. Just like the worker can look for another job. Ah, you say, they are not that many jobs out there. Well, I say, not true, at least in my area. I have listed job opportunities in the newspaper numerous times this past four months, but you know how many people came to apply for any job I have posted for? Wrong, not a single person has came to apply. So don’t tell me there are no jobs available, because there are. There just aren’t any people that want to work when the government can supply them with everything from food to housing. If I didn’t make enough at my job, I would work 2 jobs, and 3 if that would not pay the bills. I have earned everything I have, and maybe it is time to allow others to earn what they have.

  3. Sylvia, What is the research on whether employers really do make up the rest of the worker’s minimum wage if tips do not do it?

    I like the article a lot — very enlightening. Good perspective — that we are giving employers a big subsidy. Disgusting really.

  4. Dr. Allegreto, your analysis ignores some key facts. You point out that a server’s base pay is all but gone after taxes, for example. How is that possible? Could it be that there a law on the books that requires the employee to fork over 15% of their wages to retired individuals? As you know the payroll tax is not set aside for a worker’s retirement but goes to current retirees. Why don’t we remove that tax so workers can make more money and pay for their own expenses since so many are struggling? Is it possible that the problem with this situation are laws that create perverse incentives instead?

    Moreover, I find it interesting that you admit that most patrons consider tips a “reward.” So are you saying it is a gift? If tips are a gift, why is it taxed as income by state and federal governments? Tips are gifts and servers should pay no taxes.

    You are right that servers “deserver better”: the problem with your analysis is that you ignore all the ways that they are being mistreated. They are taxed on gifts that should be excluded from wages and forced to subsidize the lifestyle of the age group with the highest net worth (retired people).

  5. I Can’t believe that employers in the bottom feeding states are only required to pay $2.13 toward the $7.25 minimum wage.

  6. Quite a few of us have had an opportunity of trying to make a living at the mercy & kindness of strangers. Few customers are aware of how hard a waitperson works for that subminimum wage. Routinely they are required to scrub floors, toilets, walls, vacuum, babysit and run errands with own car, for that paltry wage. And they get a front row seat when the newest hot shot who is trying to impress, throws money around and 10%s’ the wait-person who stayed after closing to serve them.

    Yet the majority take pride in their work, no matter what amount of money they are paid, because they enjoy doing their best everyday.

  7. Thank you, Sylvia! I had no idea about how the wages for waiters worked, and this information will help me make much more informed decisions about it.

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