The debate over the “Adopt and Amend” effort that would remove the tipped wage credit for restaurant servers in many parts of the country continues at the state level and national level.
Proponents of the credit removal, combined with a minimum wage increase to $15 per hour, contend that servers will be better off having to rely on tips for a majority of their income while restaurants will find ways to adopt.
Opponents are asking for changes in states like Michigan, where the tipped wage credit is scheduled to be eliminated by February 2025 without further state legislative action.
At issue is a provision for a majority of states that has allowed restaurants to pay their tipped servers a small minimum wage as required by state law. Most states require employers to pay tipped employees a minimum cash wage above the minimum cash wage required under the federal Fair Labor Standards Act, which is $2.13 per hour. That range varies from state to state.
According to a Tip Credit Policy Brief released in April from the National Restaurant Association, servers, customers, and restaurant owners all benefit from the tip credit in a full-service restaurant. It maximizes server earnings, allows operators to hire ample waitstaff, and keeps menu prices affordable, the brief states.
This optional compensation model means that tipped workers never make less than the prevailing minimum wage. Tipped servers take home a median of $27 an hour, with the highest-paid making more than $41 an hour, according to the National Restaurant Association.
“The high earning potential the tip credit provides is what draws servers to a career in the restaurant industry,” the report states, which is why restaurant workers want to preserve—not eliminate—the tip credit.
The impact on individual restaurant owners varies. John Ciaramitaro has owned the Whitmore Lake Tavern near Lansing, Mich. for 25 years. As a business that sits on an all-sports lake, it has higher demand in warm summer months and during snowmobiling season. Ciaramitaro says he has been forced to deal with inflation on everything from food and drink costs to higher staff wages, high service and contractor and utility costs.
“When I got into this business margins were thin,” Ciaramitaro says. “Now, they’re razor thin.”
Restaurant industry trade associations are generally against waiving the tip credit for those states that offer it because they feel it will harm the restaurants themselves and workers. Justin Winslow, executive director of the Michigan Restaurant and Lodging Association, says consumers need only look at what happened in Washington, D.C., last year when voters overwhelmingly approved a ballot to raise the minimum wage for workers, including restaurant staff that traditionally relied on tips. The Tip Credit Elimination Act will gradually reduce the tip credit, eliminating it altogether by 2027.
As of September 2024, there were an estimated 4,000 fewer jobs in the full-service restaurant industry in Washington D.C., Winslow says. Other statistics debate that figure. The NRA stated in September that nearly 1,000 restaurant jobs have been lost after voters passed Initiative 82 to phase out the tip credit.
Either way, Winslow and other opponents of the credit’s elimination feel the negative impact on the industry and diners is permanent. “It’s also a less pleasant experience for (diners),” Winslow says. “The practical application of what would happen (nationally) is what we’re seeing now there.”
The long-tail impact of Covid still is having an impact on the restaurant industry, Winslow says. Not only are workers getting paid more, but many consumers are feeling the effects of tipping fatigue. Fortunately, most full-service restaurant workers aren’t suffering, but it forces restaurants and its servers to provide that high level of experience to justify industry standard tips.
“Consumers like the feeling of having control and if they enjoy the experience and get recommendations (from servers) on menu items, they will tip,” Winslow said. “But consumers need to feel they are getting value. They need to feel they are getting good service.”
One of the things that advocates of the tip credit forget is that the servers themselves should feel they are being treated well by customers, says Kyle Ross, a policy analyst for the Inclusive Economy Team at the Center for American Progress (CAP), an independent nonpartisan policy institute leans progressive.
Ending the tip minimum wage can give workers more flexibility financially, knowing that they are not as reliant on tips to make a living wage. Yet serves may also feel more empowered to speak up if they are being harassed or on the receiving end of inappropriate comments.
“When it does happen, (servers) have that guaranteed higher minimum wage that gives them more of a psychological safety net,” Ross says. “They may feel more comfortable responding to such behaviors in the way they want to.”
The Tipped Income Protection and Support (TIPS) Act currently being considered at the federal level seeks to eliminate taxes on tips and therefore the tip wage. The NRA’s statement indicates while both issues impact tipped servers and bartenders, one is a tax credit that would put money in their pockets, while the elimination of the tip wage would damage their earning potential and take money from them.
“Eliminating the tip credit is a misguided plan that has been rejected in 16 cities and states this year alone because servers and restaurant owners joined together to actively oppose it,” said NRA Vice President for Public Policy Sean Kennedy in a press release. “The elimination of the tip credit is a lose-lose-lose proposal for restaurant owners, tipped workers, and customers alike. It will limit the earning potential of servers; it will force operators to cut hours and jobs; and it will increase menu prices for consumers.”
Employers in Indiana, Michigan and a majority of states must report gratuities of servers and bartenders as part of the hourly rate they’re due under state law. Employers are required to make up the difference if tips don’t bring those servers up to that level, known informally in the industry as a “top-up” provision. Ross says this law also has its downside and is ripe for fraud and abuse.
“There are many instances that have been brought up (in court) where servers are not getting those top-ups,” Ross said. “It’s an administrative burden for both the workers and the restaurant owners. It can be a very complex system.”
Kris Howard has spent parts of the last five years as a waitress in and around Bloomington, Ind. The server at Bloomington’s Uptown Café in Bloomington worries if the tip credit were removed, her potential for income would decrease. It all depends on how people tip. She might actually earn more.
“It’s hard to know,” Howard said. She also wonders whether some restaurants might be forced to hire fewer servers who would be required to do more work. If earnings are higher, Howard might continue to work as a server once she earns her graduate degree next year from Indiana University.
“It can be a lucrative job now or side job for me in the future,” she said. “But it can be hard work. I’d have to figure out if the work I’m doing is worth it for what the pay is.”
If he’s mandated to pay his waitstaff higher hourly wages, Ciaramitaro is confident he’ll survive but he doesn’t know how he’ll do it. He acknowledges how difficult it is to work a front-of-house role at a local restaurant and is a big supporter of his wait staff earning as much income as they can.
Part of the challenge is that finding staff remains extremely difficult, so he has no choice but to treat his staff well.
“No one wants to work in this industry anymore so it’s impacted how long we can be open,” Ciaramitaro says. He will started closing the Whitmore Lake Tavern on Mondays for the first time in October and is only open until 9 pm most nights largely because he can’t get staff to fill those time slots, and not enough business to justify such hirings if they were possible.
“The pressures in this industry are tremendous. It seems as if this (minimum wage increase) will make it even harder for (restaurant) owners and staff. I don’t know what the impact would be. I don’t make much money as it is. People don’t want to pay $15 for a burger and fries but that’s what it has come to.”
Ross says that data CAT has made available don’t indicate the massive closure of restaurants suggested by the MRLA is likely in states that eliminate the tips minimum wage and tip credit for servers. Fewer than 10 states in the U.S. don’t have the credit in place and they haven’t experienced an overwhelming response of closed restaurants.
Furthermore, Ross says there’s some objective evidence that a higher minimum wage for servers will actually increase interest in those jobs, making it easier for restaurant owners to fill positions. He called the elimination of the tip minimum wage an “incentive” for new workers to come into the industry and existing servers to stay in it.
“Employment growth in states where there is no tip credit or (server) minimum wage is similar or better than states that pay the small minimum wage,” Ross says. “We don’t see this issue as having an adverse impact on closures and cutting jobs. Businesses plan accordingly to the labor laws in their states.”
That’s another issue in Michigan and elsewhere, according to Winslow. Legislators simply don’t know how adverse an impact the tip credit elimination would have on the industry. The MRLA spent much of the late summer and early fall holding educational sessions around the state to share its collective opinion of the damage this would cause.
MRLA’s own 2024 Industry Operations Survey this summer that included 209 responses from Michigan foodservice operators, representing approximately 3,000 locations and 104,360 employees indicated that 40 percent of all full-service restaurant respondents aren’t profitable today. That statistic alarmed Winslow and his staff. That same survey suggested 20 percent of all restaurants in Michigan would shut down if the tax credit for servers is permanently eliminated.
“The challenge is that restaurants can’t raise their prices fast enough to keep up with their expenses, but if they do their traffic will go down,” Winslow says. He is confident that there’s enough support for state legislators to reinstate the tip credit over the next few months. But nothing is certain.
Another issue with being reimbursed from restaurant owners to ensure a server gets to the standard minimum wage level in their state is that a create a power dynamic that is at best uncomfortable for the worker, Ross says.
“It’s unnecessary. It only hurts workers and puts them in vulnerable positions,” Ross says. “Imagine having to ask your boss for the money that they owe you under law.”
