Time for a tip credit?

The minimum wage debate got a big boost with President Barack Obama’s recent State of the Union address, where he proposed Congress work to raise the base wage for U.S. workers to $9 per hour, up from $7.25. Those paying attention to local politics know that Minnesota Governor Mark Dayton voiced his support for minimum wage increases proposed by the state legislature up to $9.50.

Raising the rate to this level would return the minimum wage to its purchasing value from nearly 40 years ago: According to a 2012 Minnesota Department of Labor & Industry study, “In 2011 dollars, the Minnesota minimum fell from $8.36 in 1974 to $6.15 in 2010, while the U.S. minimum fell from $9.13 to $7.25.” In that time, worker productivity has nearly doubled.

The growing income inequality gap within the United States is well documented, and an increase in the minimum wage is one way to at least acknowledge there’s a problem—although it’s a paltry increase, from $15,080 to $18,720 per year, the percentage raise does compare to that of the CEOs at the nation’s 500 largest companies in 2012, who received a 16 percent salary increase to maintain a salary gap of, depending on which study you prefer, 231 to 343 times the average worker, compared to a 42 to 1 ratio in 1980. (Average worker being defined by the Bureau of Labor Statistics and as the average wage across all occupations, which is about $34,000—a wage that’s been flat for more than 25 years, whereas the top 1 percent earners—those who earn $380,000 or more per year—saw their incomes grow 33 percent over the same timeframe, according to the IRS.)

With all the talk of a minimum wage hike, I’ve heard groans from many. There are still those that cling to the idea that raising the minimum wage—even a small amount—only benefits teenagers and hurts businesses, but data deosn’t support the claim. Take a look at where critics of minimum wage increases always point to for “teenage” evidence: quick-serve restaurants—McDonald’s, Burger King and their ilk—where there are no tipped employees. According to the Bureau of Labor Statistics, of the 2.7 million (and growing) quick-serve workers, two-thirds are women, with a median age of 32, and earn on average (this stat averaged from several surveys) about $7.75 an hour. Further, history has proven modest increases in the minimum wage has not been a job killer—that evidence summarized most recently by a study from the Center for Economic & Policy Research.

Where am I going with this? A minimum wage hike would also affect tipped employees in Minnesota, and impact restaurants that employ tipped servers, of course.

The argument restaurateurs make that by being forced to give servers (who are, in many instances, among the higher-paid restaurant employees with tips factored in) an increase in base wage shrinks margins and prevents pay increases for, say, kitchen staff, is valid.

That argument has come to me from owners whose personal politics vary tremendously—Dennis Kucinich liberal to Ted Nugent conservative—and none of them denied the value of great servers and bartenders.

The solution, the industry has said for years, is the “tip credit,” which basically means to count tips as part of a base wage. The only states that do not allow tip credit are California, Alaska, Montana, Nevada, Oregon, Washington (a state with $9.19 minimum wage) and Minnesota. (I’ve also heard from many restaurateurs who are against the tip credit—and I understand their viewpoint, too.)

A few years ago, when a DFL-dominated state legislature murmured about raising the state’s minimum wage, the Minnesota Restaurant Association proposed a “Super Wage,” which would have established a tip credit with the $7.25 federal minimum wage as the base, instead of the Federal tipped-employee minimum of $2.13. (Minnesota’s neighbors rank thusly: Wisconsin, $2.33; Iowa, $4.35; North Dakota, $4.86; South Dakota, $2.13.)

In addition, as a way to protect a tipped-employee’s current wages, if that employee failed to meet a $12 threshold during their pay period, they would receive compensation to equal either the federal or state minimum wage—whichever was greater.

The MRA is advocating this again with the new DFL majority (although it’s thankfully dropped the “Super Wage” title and called it what it is: the “Tipped Employee Wage”) as part of three bills in its Restaurant Recovery and Job Creation proposal. (The other pieces include requiring local governments that enforce the food code through inspections to provide an accounting of the costs covered by the fees charged for the inspection, and allowing restaurant capital equipment eligible for sales tax credits as is available to other manufacturing companies—all rational proposals to help the industry.)

Some might think that the tip credit issue is a dead one given which party has control of the state legislature (and Republican gubernatorial candidate Tom Emmer in 2010 did nothing to help by quoting Eagle Street Grill owner Joe Kasel, who claimed that three of his servers took home more than $100,000 per year, a level of pay very rarely approached except by servers or bartenders and high-end establishments—according to a Hospitality Minnesota/MRA survey in 2008, servers state wide averaged $15.43 per hour including tips).

But, like many issues, tip credit has turned partisan where it shouldn’t be. So, what if the hospitality industry was to voice support—loudly—for a $9 minimum wage, in conjunction with a tip credit as structured by the MRA? With a $7.25 base wage, it would be the highest among the states with a tip credit, which fits with the progressive Minnesota tradition. By jumping into the debate, it would also provide the opportunity for industry players to explain the issue effectively, something they have not done well in the past.

In that explanation would also be an admission of the shortcomings. There would be a small pocket of tipped workers—those employed at locations where the check average is low and traffic irregular—that would definitely take a pay cut. And there would have to be an explanation how it appears there is no shortage of interest and innovation in the restaurant industry in California and Oregon (the latter often used in comparison to Minnesota for other hosptiality issues, most recently for electronic pull tabs), where there is currently no tip credit and a high minimum wage ($8 and $8.95, respectively).

But if the tip credit is critical to the industry, and if restaurateurs say they would be able to give a higher wage to other non-tipped employees with it, it could be a win-win. And with the weight of the state’s hospitality industry and its 250,000 employees—behind a minimum wage increase, the current legislature and governor might be willing to listen.

UPDATE: At the Foodservice News Restaurant Business Summit on Monday, February 25 (After the March FSN went to press), one of the issues discussed was the minimum wage/tip-credit discussions going on at the capitol. Frank Ball, the executive director for the Minnesota Licensed Beverage Association said one item being bandied about at the capitol was a tiered-wage system in lieu of a tip credit.

The issue was also discussed during the multi-unit operators discussion panel. None expressed any issue with raising the minimum wage, but all favored a tip credit, because, they said, they would be giving raises to employees that are already among the best compensated and not impact other staff (most of whom earn more than the proposed minimum wage anyway) and further shrink already tight margins. Scott Foster, co-owner of Nova Restaurant Group, a small collection of casual and upscale-casual restaurants, said his servers at the Hazellewood Grill & Tap Room in Tonka Bay currently average $26 per hour with their reported tips. “I want them to make a great wage,” he said, but increasing the minimum wage—which would force him to raise their base salary—”would tip us over.”

J.J. Haywood, CEO of Pizza Lucé, a seven-unit restaurant company, said a $2 increase in the minimum wage for her tipped employees (servers) who, on average, currently earn $20 per hour, would cost the business $700,000. David Walia, VP of operations for Bonfire Restaurant Company, a seven-unit casual restaurant chain, reported that tipped servers at those restaurants currently earn on average $22.50 per hour with their reported tips.

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