Tips Are On The Policy Menu

Almost anyone following  current labor issues (or who works at a minimum wage job) knows that the federal minimum wage of $7.25  per hour is pathetic. But did you know that many workers – those who work receive tips — work under a minimum wage of only $2.13 per hour?

Before delving into the “tipped minimum wage” issue, I honestly had little idea there were different minimum wage laws for tipped workers than those for other workers. Reading about an upcoming ballot measure in my home state of Massachusetts was a real learning experience for me. The ballot measure would phase out the “tipped minimum wage” and require employers to directly cover the full minimum wage of their tipped workers by 2029.

In the U.S., many states have their own tipped minimum wage laws, along with their own minimum wage laws. Both of which can vary significantly and are often far greater than the  paltry 2024 federal minimum wage of $7.25 per hour and the unbelievably paltry federal tipped minimum wage of $2.13 per hour.  For example, in Massachusetts, the minimum wage is $15.00 per hour, and the tipped minimum wage is $6.75 per hour. And in California and Washington, tipped workers must be paid the state minimum wage of $16.00 and $16.28 per hour respectively. Forty-three states have tipped minimum wage laws, 7 of which require employers to pay the full state minimum wage.

Some Background

Under the Fair Labor Standards Act (FSLA)t, a tipped employee is an employee engaged in an occupation in which they customarily and regularly receive more than $30.00 a month in tips.  Tipped occupations are jobs where tips are common, such as restaurant wait staff, bartenders, barbers, and hairdressers.  According to the Budget Lab – a non-partisan policy research center at Yale – roughly 4 million people worked in tipped occupations in 2023 — about 2 ½ percent of all employment.

An employer of a tipped employee is only required to pay $2.13 per hour in direct wages if that amount combined with the tips received at least equals the federal minimum wage. If the employee’s tips combined with the employer’s direct wages of at least $2.13 per hour do not equal the federal minimum hourly wage, the employer must make up the difference.

However, as noted above, many states require higher direct wage amounts for tipped employees.  The FLSA also permits employers to take a tip credit toward its minimum wage and overtime obligation(s) for tipped employees, meaning they can count a portion of the worker’s tips toward meeting the minimum wage requirement.

The FLSA allows employers to require employees to share or “pool” tips with other eligible employees. There are several possible tip pooling arrangements, from one that limits the pool to employees who regularly receive tips to one that includes employees who do not, such as dishwashers and cooks, the so-called “back of house” staff.  And under no circumstances can employers be included in a tip sharing arrangement.

Tip pooling is a common practice in the restaurant and food service industry, which employs approximately 11.5 million workers — making it one of the largest employment sectors in the country. According to the National Restaurant Association, 40% of tipped workers in the restaurant and food service industry are under the age of 25, and 60% are under 35.  Women make up a majority of tipped positions; 69% of waitstaff and 56% of bartenders are female. Minorities make up 50% of employees in the industry, compared to 41% of employees in the total U.S. employed labor force.

Under current law, all gratuities that workers receive must be taxed at the same rate as their regular income, and many employers report their workers’ tips to the Internal Revenue Service. Employers use various methods to determine how much a worker gets in tips.  These include daily or monthly employee reports of tips received.

Many businesses – like my local watering hole — have systems in place where workers log their tips at the end of each shift. Other businesses use point of sale systems that track tips paid through credit and debit cards.  Others might use a tip estimator based on historical tip rates for certain positions, typically as a percentage of sales, especially in the food and beverage industry.

The Pros, The Cons, The Views on the Massachusetts Ballot Question

According to a fact sheet produced by the Tufts Center for State Policy Analysis, research and experience in other states have found that income among tipped workers is likely to rise slightly and businesses will see increased costs if the referendum succeeds and the tipped minimum wage is phased out.

Arguments for a YES vote on the ballot measure:

• Tipped workers don’t earn much, even counting tips. This policy will boost their income.
• The ballot measure allows but does not require tip pooling.
• Tipped workers experience on the job might improve because reliance on tips sometimes leads to unreasonable demands or even harassment by customers.
• Higher wages can help retain workers and reduce turnover, thus reducing employers’ cost of training new workers.

Arguments for a NO vote on the ballot measure:

• Requiring employers to cover the full cost of minimum wage will likely increase prices for customers. Menu prices could rise.
• Employers might introduce a “customer service charge” to help meet the additional labor costs.
• Employers might hire fewer workers or reduce workers’ hours.
• Higher labor costs could favor chains over local establishments, as lower profit margins make it harder to earn a living and keep a business going with just one or a few locations.

The Views

Views vary among the tipped workforce, and both sides have coalitions or groups engaged in the issue (see here, here, here).  One Fair Wage is a national coalition working to end all subminimum wages in the U.S. They have a special focus on service sector, with state-based campaigns, including one in my state.  They call for a One-Wage policy with fair, non-discriminatory tips on top. Two state legislators have introduced bills requiring One Fair Wage in Massachusetts (here, here).  And MA workers have rallied to the cause.

Opposing the measure, the Committee to Protect Tips asserts that workers overwhelmingly oppose the ballot measure, with data from a survey conducted by the Massachusetts Restaurant Association. There is concern that customers might tip less if they knew their server was making the $15 minimum wage or was participating in a tip pool. And a bipartisan group of mayors in the state also oppose the measure.

A Different But Related Issue:  Taxing Tips

Another current tip-related issue involves taxes, i.e., whether or not tips should be counted as taxable income. This issue has an interesting set of actors.  Senator Ted Cruz (R-TX)  introduced the “No Tax on Tips Act”, which excludes tipped income from federal income taxes, but not from federal payroll taxes. In the House, Rep. Thomas Massie (R-KY) and Matt Gaetz (R-FL) introduced the “Tax-Free Tips Act of 2024,” which would exempt tips from both income and payroll taxes.

And both presidential candidates – former President Donald Trump and Vice President Kamala Harris – have weighed in on the issue and called for the elimination of taxes on tips. Trump was first to the table, noting that he would ask Congress to exempt tips, as well as social security benefits and overtime pay from federal taxes (see here, here). You can see some reactions to his proposal here.

Shortly thereafter, Harris made a similar promise to work with Congress to eliminate income taxes on tips for service and hospitality workers, as well as to increase the minimum wage. She said she’d work to craft a proposal that would have an income limit and strict requirements to prevent fraud (see here, here).  Again, workers’ reactions were mixed.

Economists are also weighing in, questioning whether the proposals will actually help workers. First, there is some fear that employers will shift more toward basing compensation on untaxed tips instead of hourly salaries.

And then there are equity issues:

Another issue is likely to come up …is the question of fairness. Why should a waitress who makes 30 grand a year in wages and tips pay less in federal taxes than a cafeteria worker who doesn’t get any tips? And that bartender you talked to who said he makes 120 grand a year – 75% of it from tips – is that really what President Trump and Kamala Harris have in mind – giving someone like him a tax cut? Indeed, the Harris campaign tells reporters that they’re going to limit this to people who make up to 75 grand.

And another economist asked  “If you’re a warehouse worker making the same amount of money as a restaurant server, why should you pay more in taxes on your income?”

Others point to other potential impacts, arguing that tax-free tips may disproportionately benefit employers by discouraging broader wage reforms, such as increasing the minimum wage. Some union representatives emphasize that while eliminating taxes on tips could be beneficial in the short term, a broader focus on fair wages and worker protections is needed to ensure long-term economic security for low-wage workers​.

And if you want to know more, in almost mind-numbing detail, take a look at the Yale Budget Lab’s new report “No Tax on Tips”: Budgetary, Distributional, and Tax Avoidance Considerations.”

Bottom Line

Well, I really went down a rabbit hole on this one. First because I wanted to be a knowledgeable voter on the Massachusetts ballot question. But then because I got hooked, having been a tipped worker myself so many long years ago.  Scooping ice cream and flipping burgers helped me pay for my undergrad books. Serving cocktails and learning how to balance a tray full of drinks helped me pay my grad school tuition. And the tips I made slinging bacon and eggs helped me cover rent in my first apartment as a newlywed.

Plus —  even well before — watching my dad, working class father of five, always leave a very generous tip. As he said, “Everyone has to make a living.”  Clearly, I agree with my Dad.  Everyone needs and deserves a living wage— without having to rely on the generosity of a customer or client. What constitutes a living wage is a whole other issue for another time.