front of house staff

It’s a rare situation where management and employees are lined up on the same side of an issue, but such is the case for the tip credit debate. Advocacy groups favoring paying all workers—tipped or not—the same minimum wage have gotten the ear of lawmakers in New York, the District of Columbia, and Michigan, but servers and restaurateurs are lining up in opposition.

“I think it is largely misperception that drives this issue,” says David B. Jordan, a Houston-based attorney and co-chairman of the Hospitality Industry Group at Littler Mendelson, the world’s largest labor and employment law firm representing management. “The optics of paying an employee $2.13 seem outrageous.”

Indeed, the federal minimum wage of $2.13 per hour hasn’t been raised since the 1990s, which seems shocking on its face, but Jordan notes that the law dictates that those workers make at least minimum wage or the employer will make up the difference. Not only that, but tipped servers actually have a built-in cost of living increase—as restaurateurs raise prices to cover increasing expenses, tips go up accordingly. “Tipped employees generally make a significant amount greater than non-tipped employees,” he says.

Rocco's Pizzeria
Rocco’s Ristorante Pizzeria

ROC United released a study earlier this year saying that workers and restaurants are doing better in the seven states that have only one minimum wage, the reality appears to be less cut-and-dried. Jordan notes that IRS figures show that tipped workers underreport their incomes by as much as 40 percent, while at least in California, the industry disputes claims that its industry is growing.

“Statements recently made in New York that California restaurants ‘are thriving’ specifically because [of tipped minimum wage] doesn’t exist here are not based in reality,” Jot Condie, president and CEO of the California Restaurant Association, wrote in a May letter to the New York State Department of Labor. “California restaurants are scrambling to figure out how to remain in business in the long-term as the minimum wage continues to dramatically rise toward the $15 mark. Some restaurants have closed. Many restaurants have either reduced work hours – or are getting ready to do so – in order to be able to afford the higher wage.”

New York Governor Andrew Cuomo’s office didn’t respond to requests for comment, but those fears caused lawmakers in Maine to walk back a new rule requiring all employees to be paid the same minimum wage. Almost immediately after voters passed the initial law last year, workers reported that they saw their hourly wage plummet by as much as 25 percent, as customers tipped less because servers were making more. An advocacy group made up of restaurant workers, now operating nationally as Restaurant Workers of America, sprung into action to get the law repealed.

“Although some may say it’s anecdotal fear or unfounded theoretically sky-is-falling stories, I choose to believe those who are telling us that this new law, as we speak, is hurting their families,” Maine State Rep. Joel Stetkis told the Portland Press Herald.

For their part, restaurateurs say that forcing them to pay servers more exacerbates the biggest problem every owner faces: the growing disparity between the front of the house and the back of the house. Operating on razor-thin margins, giving an extra few dollars to the servers takes up money that could be used to compensate kitchen staff more fairly.

“The IRS counts tips as wages,” says Rocco Biale, who has owned Rocco’s Ristorante Pizzeria in Walnut Creek, California, for 19 years. “Tips are counted as wages for everyone but the owner. Why can’t I count tips as wages?” he asks, noting that as the California minimum wage marches toward $15 per hour, while his servers earn $30 or $40 in tips, he doesn’t see how he can keep the numbers working without legislative intervention.

“So many people view tip credit as ‘just another way for the greedy restaurant owner to line their pockets with cash,’” agrees Michael Maxwell, partner in Blue Orbit Restaurant Consulting in Atlanta, noting that, in theory, eliminating tipping would actually create a much easier world for all restaurateurs. “There would be no time-consuming bookkeeping to make sure tip credit is meeting minimum wage for each employee. No more chasing your staff around at the end of every shift to make sure they have declared their tips. And no more constant complaining from servers about poor tipping customers.”

“Tipped employees generally make a significant amount greater than non-tipped employees.” -David B. Jordan


However, the reality is that few owners can afford that luxury, Maxwell says, offering as an example: If the average check at a local full-service casual restaurant is $19, open 365 days per year and serving 150 guests per day, annual sales would be $1,040,250. “Lucky restaurant owner, right? No not so much,” he says, noting that the average profit margin for that business is about 7 percent, or $72,817, but that owner probably worked most of those 365 days, needs to reinvest in building maintenance, marketing, technology upgrades, and other costs, and also pull a salary from the pot. Taking the tip credit out of the equation could add $112,128 in expenses, assuming six servers working about 10 hours and paying them the $5.12 per hour that was previously covered by tip credit, leaving that business in the red. “I think you can see that is not a very good business model,” Maxwell says.

Rocco's Ristorante Pizzeria
Rocco’s Ristorante Pizzeria

Stuart Reb Donald, chef, food writer, TV personality and radio host on FM Talk106.5 in Mobile, Alabama, thinks chefs and servers should be making the same amount of money, and that could start with eliminating the tipped minimum wage and charging customers the real cost of dining out.

“People think that they should be able to go out, sit down, have someone ask them what they want to eat, cook them what they want, bring it to the table, clean up after them and pay only $10,” Donald says, noting that in 1987, an order of lasagna at Olive Garden was $7.95. Today it’s $13.95. Over that same time, the price of a home has risen from $50,000 to close to half a million.

“The price of dining out has not kept up with the cost of everything it takes to produce that meal,” Donald says, adding that raising prices and putting in a minimum wage for all may be painful in the short run, but in the long run it will solve the bigger problem. “When the servers say they don’t want to change it, I understand their point of view, but it’s selfish. It hurts everyone else on their team.”

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Jeanne O’Brien Coffey comes from a long line of New England foodies – her dad once traded an old car for a dozen lobsters and her grandmother’s whoopie pie recipe is a closely guarded secret. She is contributing food editor at Northshore magazine, blogs on food, wine and travel for ForbesLife and is a contributing writer at Naturally, Danny Seo magazine. Oh, and she was obsessed with Negronis way before they were cool.
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