The great tip credit debate

Republican gubernatorial candidate Tom Emmer recently created a firestorm by suggesting that Minnesota revise its labor laws regarding tipped employees. At the root of the issue is the contention that workers receiving gratuities should not be eligible to be paid the current minimum wage. In Minnesota, exceptions to the minimum wage are made for businesses that did not generate more than $625,000 per year in annual revenue allowing employers to pay $5.25 as opposed to $6.15 per hour for businesses with revenues in excess of that. However, the federal minimum wage as of July 24, 2009 is now $7.25 per hour. In an instance such as that, an employer must pay the federal rate unless an employee is remunerated in other ways that raise his or her wage to the federal level. Tipped employees fall under this classification. If an employee receives gratuities that do not close that gap, then the employer is responsible for doing so.

It sounds complicated, and it kind of is especially when you consider that all fifty states set their own minimum wages. Some are in excess of the federal standard, and some are below it.

Then there is tip credit. Stay with me here. What tip credit allows an employer to do is set a minimum wage for tipped employees that can be as low as $2.13 per hour. Again, the employer must make up the difference between what a tipped employee earns through the combined total of wages and gratuities and the federal standard of $7.25 per hour.

Does anyone really believe that $7.25 per hour is a living wage? Assuming someone works forty hours per week and takes no unpaid time off over fifty two weeks, that comes out to just over $15,000 per year. While that might be fine for a single person living on the edge, no one could reasonably be expected to raise a family on that let alone live a life that allows for anything other working, sleeping and eating. Its pretty much subsistence wages that offer a very poor quality of life. That is the wage that employers may legally pay their employees if they so choose, and there are some who choose to do so.

Here's where the whole tip credit idea gets particularly sticky. Restaurant and bar owners experience some of the highest labor cost percentages of any business since their enterprises rely so heavily upon large pools of staff. The work is very labor intensive. In most circumstances, many jobs cannot be performed by machines or other automations. Consequently, it takes an pretty good amount of people to run a business that doesn't generate a whole heck of a lot of revenue. Compare any restaurant to an advertising agency for instance, and you will get the picture.

Tip credit is designed to allow employers to pay less money to those receiving gratuities since the assumption is that those employees are amply compensated in other ways. That, in turn, should make those businesses more stable and profitable and allow for those employers to pay more money to those who are on the bottom of the wage scale. The more stable and profitable the business, the better the chance that it will succeed and continue to provide employment for all of those many people who cannot be replaced by a machine. Its a good theory, and it works pretty well although it certainly isn't perfect.

Minnesota is one of only seven states that doesn't allow tip credit. That probably makes the Minnesota hospitality industry less competitive with other states like Wisconsin where some form of tip credit is allowed. For instance, if given the chance would a prospective restaurant owner rather open a business in Hudson, Wisconsin or in Afton, Minnesota? There are a lot of factors involved in that decision, but I am guessing that tip credit might be one of them. In addition, it makes it a lot more difficult to be profitable in a tough industry when labor costs are so high. A little relief can go a long way toward helping some marginal operations survive.

Currently, as the minimum wage increases the wages of all tipped employees go up. The employer must increase the wages of every employee not making the new minimum wage. That means that for many restaurants the highest paid employees are getting a wage increase while the lowest paid are left to pick up the scraps. For instance, a dinner server in your average fine dining restaurant should expect to be making somewhere in the range of $50,000 for part time work. That means about 30 to 35 hours per week over four days. That doesn't include the hourly wage paycheck most of which will go toward payroll taxes. So that's fifty large after taxes. Not bad. Meanwhile a well paid dishwasher is probably pulling in around $10 to $12 per hour before taxes for full time work. That's less than half of what the server makes. An increase in the minimum wage does nothing for the dishwasher, but it gives the well remunerated server an extra bump toward making those tax payments. So the gulf between those who are better off and those who are not widens once again because the employer can only afford to pay so much in labor costs before the business goes under. That's why often times restaurant managers and chefs make far less money than servers while working far more hours with much greater responsibility and a more demanding skill set.

So Tom Emmer's solution is to propose tip credit. He doesn't spell out what tip credit means. Is he suggesting that we adopt $2.13 an hour as a wage for servers? That's pretty ridiculous asking servers to take that kind of pay cut. Most states including Minnesota have a mandated minimum wage for tipped employees that far exceeds the federal standard. Once he realized how badly he botched this issue, he back pedaled by saying that tips should not be subject to taxation. I didn't think it possible, but that bit of nonsense actually trumped the first statement. Here's a bunch of money for a job well done. Don't bother to pay any taxes on it since it doesn't count as income if isn't printed on a paycheck. Not only that, but try getting a loan when your reported income is less than $15,000 per year.

The response from the Democrats has either been nonexistent or lacking in any real substance except to say that they are not in favor of taking money out the pockets of hardworking Minnnesotans. Oh really. I work pretty darn hard, and the government takes a lot of money out of my pocket and puts it in the pockets of others. Not that I am opposed to paying my fair share, but why do I and my dishwashers have to give more to those who are making the most? 2009 was the worst year economically since the Great Depression. My servers made twice us much money as I did since I only paid myself as much as conditions would allow. Now they are saying that I should continue to further increase their wages while asking everyone else to continue to bite the bullet. It's not a fair and equitable system.

I saw a video of what was labeled as the Democrats press conference response to Tom Emmer's proposals. I heard nothing but empty talking points. The one server they pulled forward to speak claimed she was just getting by on her $50,000 per year. They couldn't do any better than that? If it wasn't for Ariel Lawson who stepped forward out of the crowd at the end to help them save face, they would have been completely laughable. At least she had some coherent and sensible points to make. By the way, to whomever that was who was speaking on behalf of the Democrats, if you are looking for servers who can pull down close to $100,000 or better per year you might look a little harder next time you're in Manny's eating a steak that's bigger than your head.

So why isn't anyone proposing a solution to this controversy that takes a sensible middle ground? Perhaps because it wasn't a front burner issue until Tom Emmer made it one, and because his potential opponents would rather sit back and watch him shoot himself in the foot. It's like the guy's in quicksand, and the more he struggles the deeper he sinks.

One more thing that the many hardworking servers should keep in mind. Last February 23, the U.S. Court of Appeals for the Ninth Circuit issued an opinion in the case of Misty Cumbie vs. Woody Woo, Inc. It was a class action suit in which a server alleged that a tip-pooling arrangement was made against her will, and that tips were being dispersed to employees who were not customarily tipped. The contention was that this was in violation of the Fair Labor Standards Act. The court held that there was nothing in the text of the act that prevented a business not taking tip credit from redistributing those gratuities to the rest of the staff. In other words, as long as the wages received by the servers was not below the federally mandated minimum wage then they were not in violation of any laws. While I think that is a lousy and morale-busting way to force a more equitable situation, there might be others who find it to be just what the doctor ordered.