Fairness of Tipped Worker Pay

Are there changes coming?

On June 11, 2021, the U.S. Department of Labor (DOL) issued a new agenda – one key topic included the fairness of tipped worker pay. While the agenda is specifically related to tipped worker pay on federal contracts, this could be an indicator of wider scale changes for all employees.

Current State

Tipped workers under the Fair Labor Standards Act (FLSA) are defined as workers who receive more than $30 in tips per month (think delivery drivers, servers, host/hostess, etc.). The cash minimum wage for tipped employees varies by state but the goal is for the tipped employee’s overall wage to be raised to the federal legal minimum wage through tips. Employers must be able to meet requirements under FLSA 3(m) in order to receive the tip credit. While the floor for minimum wage for tipped employees is $2.13, many states pay a higher wage. Click to learn more: https://www.dol.gov/agencies/whd/fact-sheets/15-flsa-tipped-employees

How the FLSA tip credit works (not to be confused with the FICA Tip Credit): The tip credit enables the employer to credit some of the tips towards the required federal minimum wage. The tip credit is not deducted from the employee’s pay but used to show that the worker is compensated above the cash wage floor (varies by state). If the worker does not reach the required federal minimum wage, the employer is required to make up the difference.

Proposed Changes

The proposed changes referenced in the June 2021 agenda, lead many to believe that the tip credit will go away and tipped employees will receive the same wage as other hourly employees in commensurate roles. While the June agenda refers to employees on federal contracts, this could be the tip of the iceberg and eventually apply to all U.S. employees.

Potential Impact

Raising the minimum wage for tipped employees will undoubtedly lead to higher costs for operators; many of which will not be able to sustain under the proposed changes. Arguably, this ‘wage push’ would lead to increasing menu prices and inflation. Evidence suggests that incremental wage increases do not necessarily lead to inflation but that drastic increases could. Increasing minimum wage without a doubt would clear the under-performers and only the strongest operators with access to cash will survive. Further, could this mean eliminating the FICA Tip Credit?

What Can You Do?

Stay informed and on top of legislation, watch what your competition is doing, balance wage strategy with the need for workers, keep an eye on operating margin and strategically assess menu prices. Arguably we could also see an acceleration in technological enhancements and automation that would decrease the need for as much human labor. This could also be a good time to analyze your suppliers and other fixed costs to see if there are savings opportunities.

Interested in learning more? Please reach out to HORNE Franchise today.