Right now, employers who utilize the tip credit without meeting the legal requirements to do so face costly wage and hour lawsuits, significant back pay requirements, stiff penalties, and major harm to their reputation. Stealing the hard-earned tips from tipped employees should never be tolerated, and this activity is rare. These bad actors should be punished, and the current legal requirements have stiff provisions to deter this type of behavior. As a reminder, in cases where a tipped employee’s earnings fall below the applicable minimum wage, the restaurant is responsible for making sure that the tipped employee earns the minimum wage by increasing the cash wage paid to the employee.
No tipped employee can ever legally earn less than the minimum wage, period. Tipped employees must earn at least $7.25 per hour (or the applicable minimum wage) through a combination of the direct cash wage from their employer and tips they earn. If the combination of the direct cash wage and tips does not equal or exceed the minimum wage, the restaurant must compensate the tipped employee to make up the difference. In the end, the tipped employee legally must make at least $7.25 (or the applicable minimum wage) when their tips and the employer’s cash wage are added together, and many make significantly more.
Restaurant employers invest in their businesses to provide the conditions that enable employees to earn tips. Decades ago Congress created the tip credit system and its safeguards for servers because lawmakers recognized that in the United States servers receive tips due to the jobs that restaurants create. The tip credit system incentivizes servers to deliver excellent service and to be compensated well for that service. By keeping labor costs in check, restaurant owners are able to invest in their businesses to continue improving the atmosphere that enables servers the most tips possible.
Eliminating the tip credit would likely hurt tipped employees as opposed to helping them. When faced with higher labor costs related to the elimination of the tip credit, a restaurateur will have three difficult choices: reduce the number of tipped employees, eliminate tipping and institute a flat wage, or raise prices. Raising prices is the least attractive due to price competition with others in food service (both other restaurants and grocery stores) and will likely reduce the number of customers for the restaurant. Reducing the number of tipped employees is more likely but can impact service and the customer experience. Finally, eliminating tipping and instituting a flat wage will reduce a tipped employee’s earning potential. Some restaurants have voluntarily experimenting with eliminating tipping and instituting a flat wage, but many have gone back to the tipping model because many of the best employees left when their earning potential went down. None of these three scenarios would be beneficial to tipped employees.
The business model and accumulation of tips is quite different throughout the various segments of our industry. When patrons dine at an upscale restaurant they will sit at the table for one or two hours, and make a night of the experience. Servers generally only have two or three tables with a higher menu price. In smaller casual establishments the tables turn over quickly. Tips are accumulated while serving multiple tables during the course of a shift.