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Serving Up Inequality: The Two-Tiered Wage System for Tipped Workers

Elizabeth Maldonado
By Elizabeth Maldonado
on September 12, 2018

Have you ever waited tables during a recession? — I have. It was brutal. The unpredictability of daily, weekly, monthly, and certainly yearly take home pay can present serious financial stressors to anyone working on tip wages. Unpredictable expenses can hit really hard when matched with unpredictable wages — and there's little ability to budget for the future as a result. 

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The “total tipping economy” is $36.4 billion per year and millions of people are paid tip wages across many industries. Today, there’s a broad national discussion about tip wages as the issue has become one of contention in Washington. Most recently, in March, a spending bill was passed that included language intended to codify the idea that employers cannot redistribute tips from workers to employers and owners.

Meanwhile, some states are moving to address the sub-minimum wage to respond to a worker’s movement called “One Fair Wage.” For the first time in decades, this momentum was powerful enough to move legislative pens, but what’s driving the momentum? 

Let's work together to figure it out.

tip-wages-recruitingImage: One California restaurant, Camino, states on their menu: “No more tips. Our prices now include service so we can pay all our employees a living wage.”

Appetizer: What’s the issue with tip wages?

“The idea that the restaurant industry was the only industry that didn’t have to pay its workers was actually codified into the very first minimum wage law that passed in 1938 as part of the New Deal under FDR. It said that you have the right to the minimum wage either through wages or through tips, which essentially gave tipped workers the right to a zero dollar minimum wage.”

— Saru Jayaraman, Co-founder of the Restaurant Opportunities Center United (ROC United)

For years, there has been a movement advocating for a $15 minimum wage, but some claim the minimum wage movement traditionally leaves out people working for tips. The federal law, unchanged since the Carter administration, sets a "sub-minimum wage" of $2.13 an hour — although, in some states, this can rage as high as $14 an hour.

The idea is that tipped employees make up the difference between the sub-minimum wage and the minimum wage with tips, unless they don’t — at which time, employers have to make up the difference.

Typically, tipped wage workers take home zeroed out paychecks, where 100% of wages paid from their employer are used only to cover the tax liability on their tips. Because a lot of the wages tipped workers take home are cash, pay data is difficult to track.

Tipped workers are also traditionally required to redistribute tips to traditionally non-tipped staff. In a restaurant, for example, a customer-facing waiter would “tip out” 3%-5% of their total sales, to the back-of-house, host stand and bar staff for their support in serving the customer. It's like a gratuity for gratuities, which is about as confusing as it sounds. 

As an aside, there’s usually a kickback for being generous with “tip out.” The more a server tips out, the quicker their drinks are served, the cleaner their tables are, the faster the host seats their section, the bigger the tables (and check) the server gets assigned — you get the idea.

The real downside of tipping out is that a server is 3%-5% in the hole for the night, and on a table that leaves no tip (or less than 5 percent), their jobs can actually end up costing them money.

There’s also the issue of side work, which refers to all job-adjacent work that tipped employees are required to do where they do not make tips — not any compensation, necessarily. Side work can include cleaning, prepping, rolling silverware, taking out trash, refilling condiments, etc.

Another issue of contention is wage theft, which is the wrongful (and illegal) misappropriation of tipped wages by employers and managers.

In an investigation by the U.S. Department of Labor (DoL) of more than 9,000 restaurants, more than 84 percent of the establishments had some kind of violation. Of these violations, fully 1,200 of the 9,000 restaurants were found to have committed wage theft or tip violations that resulted in approximately $5.5 million reported lost by workers in the investigated restaurants alone. The true cost of annual wage theft to tipped American workers is likely in the billions, although, again, it's hard to follow the money in an industry which covers its tracks with cash. 

Courts at both federal and state levels have consistently ruled that tips are the property of the employee. And it's not just small business owners who cut corners to keep their restaurants running and make ends meet through incremental wage theft.

In fact, even high profile chefs and restaurant owners have been sued for wage theft, like Jessica Biel and Mario Batali. Those stories may make headlines, but workers in the food and drink service industries at large are more likely to suffer minimum wage violations than workers in any other industry.

That’s not the only abuse tipped wage workers face on the job. A living base wage is not guaranteed, remember, so tipped workers rely on the generosity and perceived experience of customers they serve. This reliance can put tipped workers in vulnerable positions with customers who can leverage abusive behavior in exchange for higher tips.

This issue isn't just about economic inequality, but gender inequality, too. A full 70 percent of tipped workers in the restaurant industry are women, according to BLS data, and the EEOC recently identified the industry as the single largest source of sexual harassment charges, with a rate five times higher than any other industry.

 

Main course: Why should we raise tip wages?

Seven of the ten lowest paying jobs in the U.S. are in the restaurant industry, with tipped workers twice as likely to need food stamps than the rest of the country’s workforce, and three times as likely to live in poverty.

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We don’t need to speculate about the effect of raising tip wages. Eight states have already eliminated the gap between minimum wages and tip wages and have become so-called “One Fair Wage” states.

The worker’s argument for raising tip wages could begin and end with the data that show tipped workers’ median hourly pay (counting both base wages and tips) is significantly higher in those eight states. Service staff in “One Fair Wage” states earned 17 percent more per hour than in states with the federal minimum tip wage. There is no evidence that customers tip less or that net hourly earnings go down when tipped workers are paid the standard, statewide minimum wage — even when costs were raised.

The fear that rising wages will cause economic stagnation, but growth in full-service restaurant employment in “One Fair Wage” states was 4 percent higher than in states with a sub-minimum wage for tipped workers. Tipped workers are also concerned that raising the minimum wage — and associated costs — would impact their tips, which is currently their majority source of take home pay.

But data from payment processing company Square showed people tip about the same across the country, with no evidence that people tip less in “One Fair Wage” states.

Many employers argue that tipped employees don't, in fact, actually work for their employers. They work for customers, after all — and if they do right by the customer, the customer will be more likely to do right by them.

Imagine that you work in a restaurant right now. You know that if you can “comp” — or just not ring up — a table's drinks or appetizers, that customer may pass their savings on to your tip.

Are you more likely to worry about making the restaurant more money or earning more money in tips? At the end of the day, many restaurant workers know who they work for: customer service is the most important part of any restaurant experience, and any server's job. They're motivated to provide the best service possible, even if it ends up costing the restaurant money. That's the cost of doing business in the service business today, but it doesn't have to be this way.

 

Side dish: What do we have to lose in raising tip wages?

Employers claim raising tip wages will eat their bottom lines alive, relaying price increases to consumers, and, eventually, cutting jobs. When surveyed, 43 percent of diners said they support eliminating tips, even if it means higher menu prices. This number is encouraging, but that still leaves a majority that still fear raising wages will raise their costs and impact the momentum of their lives. The customer, it turns out, isn't always right — at least not quantitatively speaking. 

Another argument against raising wages is that Mom and Pop shops will suffer the most from those policies. Big time beneficiaries, however, including chains like Darden, Bloomin’ Brands, Brinker International, Cracker Barrel, and Cheesecake Factory — to name a few — are sprinkled throughout the Fortune 1000, with net revenues in the billions of dollars, employing hundreds of thousands of people each. Total restaurant industry sales reached over $799 billion in 2017, spread among more than 1 million restaurants in the U.S.

Some labor advocates have argued that if we’re going to have a tip wage, there actually should be tip pooling and redistribution to close the gap between front-of-house and back-of-house staff, as the latter are more likely to include people of color. Essentially, part of the inequality within restaurants is that customer serving employees can rack up tips to improve their wages, while the back of the house cannot.

It’s unclear, however, why it’s assumed that already low-paid workers (averaging annual take home of less than $26,000 (BLS)) redistributing their pennies is the best way to address inequality, but still: let's run with this theory for a minute.

Plenty of front-of-house workers would (and have) argue(d) that they’re the ones dealing with (often) abusive behavior from customers and that managers might use tip pools as an excuse to cut base pay for back-of-house employees.

Still, some workers report preferring tip wages.

 

Dessert: I don’t make tip wages, why should I care?

Americans are eating at restaurants more than ever before.

U.S. diners eat out an average of 4.9 times per week, with an average cost of $36.40 per person. Eating out at restaurants has become a big part of our lifestyle as a nation. Getting takeout or eating at a restaurant is something some people do for all of their meals of the day. As consumers, you and I are not just causal observers in this, but essential stakeholders in the battle for raising tipped wages.

It’s worth it to ask yourself how you feel about the millions of people paid to provide tipped-base services as their primary source of income. How do you really feel about these people, largely working class, struggling, and yet such a common part of our lives that many of us eat more meals served by these workers than we do with our own families. 

I may be biased as a former restaurant worker, but I am also biased as a consumer. Underpaid, overworked employees with no sick pay, no health care, no job security and very little social support have every reason to come in sick to work. And for food service workers, that generous sharing of germs is probably not what most customers want when they go out to eat. Beyond public health issues, though, the thing is — you should care because these workers are humans, and there's a real human cost to clamoring for lower wages. 

This is a contentious debate across the country. It gets to the heart of economics, class mobility, gender inequality, work conditions and workers' rights.

The question of tip wages is about whether or not the 1 million+ restaurants in the U.S. can be profitable and viable while paying living wages — and whether or not we demand that as a condition for labor.

Many corporations today are succeeding and topping their respective categories in performance while paying living wages, offering health care benefits and paid time off to even hourly, part-time workers.

It’s my opinion that any industry whose margins are so slim that they require paying workers a sub-minimum wage to ensure viability probably isn't viable at all. If ponying up a few more dollars an hour to ensure their workers don't live in poverty is a threat to the industries relying on tip wages, I'd suggest maybe it's time to pick a new model — or a new business. 

That's one tip you can bank on.

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Elizabeth Maldonado
Written by Elizabeth Maldonado
Elizabeth Maldonado joined AGS after almost a decade of working for several leading marketing agencies, where she focused almost exclusively on HR Technology and TA clients. She also served as the social media marketing lead at RadioShack. A graduate of the University of North Texas in journalism and public relations, and current grad student at Tulane, Elizabeth lives in Fort Worth with her husband and two sons, Zeke and Eli, and her wolf dog Vinnie.

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