A perfect pairing: New tip provisions and a strong minimum wage

Last December, the U.S. Department of Labor (DOL) issued a proposal to allow employers to collect their workers’ tips, ostensibly to distribute them more evenly through tip pools. However, the rule was written in such a way that it would have made it legal for employers to simply pocket tips. This would have been a major windfall to restaurant owners and other employers of tipped workers, out of the pockets of people who work for tips. We estimated that if that rule were finalized, workers would lose $5.8 billion a year in tips, with $4.6 billion of that coming from the pockets of women working in tipped jobs.

Because of the overwhelming outcry from workers and allies in response to the proposal, along with excellent investigative journalism that uncovered the administration’s cover-up of its analysis showing the rule would be terrible for workers, DOL came to the table to hammer out a compromise. As a result, last week’s spending bill included a provision that makes it clear that employers may not keep any tips received by their employees, and ramps up the punishment for violations. Those things are huge wins for workers.

The clear next steps for protecting workers in tipped occupations are eliminating the tip credit for minimum wage employers, enforcing one minimum wage for all workers regardless of whether they receive tips, and substantially increasing the federal minimum wage. The rest of this post explains why these next steps are so crucial.

It is not uncommon for servers in restaurants to voluntarily share a portion of their tips with kitchen staff. A provision in the spending bill passed last week allows employers to operate tip pools between tipped workers and “back-of-the-house” or other non-tipped workers. Under the new rules, employers can operate these pools if they pay their tipped workers a base wage of at least the federal minimum wage, which is currently $7.25—i.e. employers cannot operate a tip pool between tipped and non-tipped workers if they use a tip credit to cover any wages up to $7.25 an hour. Non-tipped workers in tip pools must still be paid a base wage of the full minimum wage in their city or state. And, as always, the total pay of tipped workers (base wage plus tips) must be at least the full minimum wage in their city or state.

Employer-operated tip pools elevate the importance of a strong minimum wage. Given how dramatically the federal minimum wage has been allowed to erode, many employers must pay their back-of-the-house workers substantially more than the minimum wage to get the workers they need (in other words, the minimum wage is fallen so low that it often isn’t “binding,” even for low-wage occupations). A look at Occupational Employment Statistics (OES) data on cooks and dishwashers reveals that, on average across U.S. states, the median wage for cooks in restaurants is 38 percent above the state minimum wage and the median wage for dishwashers is 13 percent above the state minimum wage. An employer who wanted to take advantage of a tip pool could theoretically reduce or freeze the base wages of back-of-the-house workers—as long as their base wages don’t drop below the minimum wage—and fill in the difference with servers’ tips so that back of the house workers would not see a decline in take-home pay. In this way, employers can legally “capture” some of workers’ tips when they operate a tip pool.

For example, say a line cook is paid $10 an hour in a state where the minimum wage is $7.25. Her employer could theoretically lower her base wage to $7.25 and make up the difference with tips collected from servers, thereby lowering labor costs at the expense of tipped workers.

You know what can limit this? A strong minimum wage. Employers cannot reduce base wages for back-of-the-house workers below the minimum wage, so a strong minimum wage would dramatically cut into employers’ ability to legally capture tips through tip pools. In our example, if the minimum wage were more than just $10, the employer would not be able to legally capture any tips.

The federal minimum wage, at $7.25 an hour, is more than 25 percent below where it was in real terms in the late 1960s. We should raise the minimum wage nationwide to $15 in 2024, and phase out the subminimum wage for tipped workers. A strong minimum wage works hand-in-hand with the new tip provisions of the Fair Labor Standard Act, and that makes this the crucial next step for workers.