The Subminimum Wage for Tipped Workers is a Scam

Posted on August 29, 2018

Everyone is familiar with the minimum wage, and most policy advocates understand that there exists a much lower minimum wage for tipped employees. Normally, policymakers consider the issue from the viewpoint of the tipped worker. Those Americans are far more likely to live in poverty and require social services like Medicaid and SNAP. They are very commonly the victims of wage theft. And workers who rely on tips are more likely to be sexually harassed.

But perhaps you haven’t thought of the subminimum wage for tipped workers as a scam, a swindle or a fraud. Let us understand how the policy operates and then look at it from the point of view of the person who’s paying—the tipper.

Forty-two states have a lower minimum wage for tipped employees than for everyone else. On the federal level, the minimum wage is $7.25/hour but for tipped employees it’s only $2.13/hour. If the $2.13/hour and tips combined don’t equal or surpass $7.25/hour, then the restaurant is required to make up the difference. (Thousands of restaurants don’t make up the difference which is illegal wage theft. But for purposes of this discussion, let’s assume they follow the law.)

In eight states—Alaska, California, Hawaii, Minnesota, Montana, Nevada, Oregon and Washington—tipped employees are paid the same minimum wage as everyone else and they keep their tips. The policy question across most of the nation is whether jurisdictions outside of these eight states should do away with the subminimum and adopt an “equal treatment” minimum wage.

A scam is when someone is induced to pay money under false pretenses. Nearly all restaurant guests believe that when they tip a waiter their money goes to that employee, or at least is pooled among the workers. But in 42 states, most, or nearly all, of the tip is being pocketed by the restaurant. This is a payment under false pretenses.

For example, if a waiter is paid the federal minimum wage, the owner is required to pay only $2.13/hour from his/her pocket but is responsible for ensuring that, including tips, the worker receives $7.25/hour. So every penny in tips that make up the $5.12/hour difference is going to the owner, not the waiter. The worker doesn’t receive anything more unless the total of the subminimum and tips exceed the minimum wage. The tipper is mostly paying the owner, not the waiter.

Consider that example in the course of a week. Over 40 hours, that waiter is paid only $85.20 ($2.13 x 40) out of the owner’s pocket. The first $204.80 paid in tips ($5.12 x 40) simply covers what the owner is required to ensure. Again, the customers who pay those $204.80 in tips are paying the owner, not the worker.

Here’s a recent specific example. In Washington, D.C., the median wage of waitstaff in May 2017 was $11.86/hour. At that time, D.C.’s minimum wage was $11.50/hour and the tipped minimum wage was $2.77/hour. So the average waiter was paid $2.77 from the owner’s pocket. Of tips paid, 36 cents went to the waiter and $8.73 went to the restaurant owner.

I live in Washington, D.C. and am a fairly generous tipper. (I’m sure you are too.) It never occurred to me that more than 90 percent of the money I pay in tips is pocketed by the restaurant. That’s a scam, don’t you think? And it’s a totally unnecessary one. Restaurants in the eight states with an “equal treatment” minimum wage are thriving. Obviously, that should be everyone’s standard.