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By Dana Krook
While customers argue over whether a 10%, 15%, or 18% tip is standard, you’re probably having conversations about tipped minimum wage: whether it’s going up in your region, the tip credit, and how rising labor costs will affect your bottom line.
As a restaurant owner, you already know rising minimum wage has been a big focus for the foodservice industry. But now, with many restaurants struggling to stay afloat in the wake of the COVID-19 pandemic, it’s more important than ever to know what changes are coming in the months and years ahead.
And it’s not just the minimum wage debate you should be paying attention to. You should also be keeping an eye on changes to the tipped minimum wage – which could be going up at the end of 2021 and eventually eliminated by 2027.
Tipped minimum wage is an hourly pay rate for employees who receive tips on a regular basis. The minimum wage for tipped employees is generally lower than the general minimum wage.
Currently, the U.S. federal government requires that tipped employees are paid at least $2.13 per hour in direct wages, as long as this amount equals the federal hourly minimum wage when combined with tips. If the employer’s direct wages of $2.13 per hour plus the employee’s tips do not equal the federal minimum hourly wage, the employer must make up the difference.
While this may seem fairly straightforward, it’s important to note that many states require higher direct hourly wages for tipped employees. And that’s where things get tricky because there are frequent changes to the tipped minimum wage in different parts of the country.
That’s why you need to know what’s happening now with tipped minimum wage, what could happen in the future, and how to keep your doors open no matter what changes come your way.
This article will tell you:
The Department of Labor (DOL) defines a tipped employee as someone who “customarily and regularly receives more than $30 per month in tips” – although certain states have established slightly different standards. You can view state definitions of tipped employees on the DOL website.
While tipped employees represent more than just restaurant workers (think valets, gaming dealers, porters/bellhops, etc.), research from labor economist Sylvia Allegretto shows that the majority (60%) of tipped workers in the U.S. are servers and bartenders. This means restaurant owners and their employees are affected the most by changes to tipped minimum wage.
In the U.S., the federal minimum wage is $7.25 per hour. But for people who receive tips as part of their income, that total wage can come from different sources.
Why?
The Fair Labor Standards Act (FLSA) lets businesses apply a tip credit to the minimum wage of tipped employees, paying them a lower wage. Businesses do not pay full minimum wage and then later receive a government reimbursement. An employer simply calculates a lower wage during payroll – but only if the tips received by an employee combined with hourly wage add up to at least $7.25 an hour.
A tip credit is the maximum portion of minimum wage that employers are not required to pay tipped employees. The tip credit portion of their wage is counted as being paid through tips. When an employer applies a tip credit, they subtract the tip credit amount from the federal minimum wage in payroll. What’s left is the tipped minimum wage.
Federal minimum wage (base) – tip credit = hourly tipped minimum wage
The maximum tip credit in the U.S. is $5.12, which means the tipped minimum wage (paid by the employer) in some regions is $2.13. The tips employees receive from customers then bump them up to minimum wage or higher.
$7.25 – $5.12 = $2.13 / hour
Tipped minimum wage used to be set at 50% of general minimum wage. Whenever general minimum wage went up, so did tipped minimum wage. But in 1996, tipped minimum wage was uncoupled from federal minimum wage and kept at $2.13, where it had been since 1991. While minimum wage has risen since 1996 – from $5.15 to $7.25 – federal tipped minimum wage has stayed the same.
Recent increases to minimum wage have affected tipped minimum wage and the tip credit differently, depending on where your restaurant is located.
Your state will fall into one of three categories:
Here’s where tipped minimum wage and/or the tip credit have risen in each of the three categories:
These states don’t allow a tip credit. Tipped workers make the same as non-tipped workers. This means that when minimum wage rises in these states, restaurateurs also have to raise the wage for tipped employees.
These are the 2021 minimum hourly wage rates for states that require employers to pay tipped employees full state minimum wage before tips:
Alaska: $10.34
California*: $13.00 (25 employees or less); $14.00 (26 employees or more)
Minnesota*: $10.08 (for large employers with more than $500,000 in annual gross revenue); $8.21 (for small employers with less than $500,000 in annual gross revenue)
Montana: $8.75 (for businesses with gross annual sales over $110,000); $4.00 (if the business has gross annual sales of $110,000 or less)
Nevada:
Oregon*: July 2020 to July 2021 $12.00 (Standard), $13.25 (Portland Metro area), $11.50 (Nonurban Counties); July 2021 to July 2022 $12.75 (Standard), $14.00 (Portland Metro area), $12.00 (Nonurban Counties)
Washington*: $13.69 (workers who are 14 or 15 years old may be paid 85% of the adult minimum wage, or $11.64 per hour)
*Different rates apply to certain counties and municipalities in this state. Some are noted in a section below. Get more info here.
These are the 2021 minimum hourly wage rates, maximum tip credits, and minimum cash wages for states where tipped employees receive more than the federal tipped minimum wage:
Arizona**: $9.15 tipped employee minimum wage; $3.00 tip credit (basic combined cash and tip minimum wage rate = $12.15)
Arkansas: $2.63 tipped employee minimum wage; $8.37 tip credit (basic combined cash and tip minimum wage rate = $11.00)
Colorado**: $9.30 tipped employee minimum wage; $3.02 tip credit (basic combined cash and tip minimum wage rate = $12.32)
Connecticut:
Delaware: $2.23 tipped employee minimum wage; $7.02 tip credit (basic combined cash and tip minimum wage rate = $9.25)
District of Columbia: $5.00 tipped employee minimum wage; $10.00 tip credit (basic combined cash and tip minimum wage rate = $15.00)
Florida: $5.63 tipped employee minimum wage; $3.02 tip credit (basic combined cash and tip minimum wage rate = $8.65)
Hawaii: $9.35 tipped employee minimum wage; $0.75 tip credit (basic combined cash and tip minimum wage rate = $10.10). Note: The tip credit in Hawaii is only allowed if the combined amount the employee receives from the employer and from tips is at least $7.00 more than the state’s general minimum wage).
Idaho: $3.35 tipped employee minimum wage; $3.90 tip credit (basic combined cash and tip minimum wage rate = $7.25)
Illinois: $6.60 tipped employee minimum wage; $4.40 tip credit (basic combined cash and tip minimum wage rate = $11.00)
Iowa: $4.35 tipped employee minimum wage; $2.90 tip credit (basic combined cash and tip minimum wage rate = $7.25)
Maine: $6.08 tipped employee minimum wage; $6.07 tip credit (basic combined cash and tip minimum wage rate = $12.15)
Maryland**:
Massachusetts: $5.55 tipped employee minimum wage; $7.95 tip credit (basic combined cash and tip minimum wage rate = $13.50)
Michigan: $3.67 tipped employee minimum wage; $5.98 tip credit (basic combined cash and tip minimum wage rate = $9.65) Note: Michigan’s scheduled Jan. 1, 2021, minimum wage increase was postponed due to high unemployment numbers.
Missouri: $5.15 tipped employee minimum wage; $5.15 tip credit (basic combined cash and tip minimum wage rate = $10.30)
New Hampshire: $3.26 tipped employee minimum wage; $3.99 tip credit (basic combined cash and tip minimum wage rate = $7.25)
New Jersey:
New Mexico**: $2.55 tipped employee minimum wage; $7.95 tip credit (basic combined cash and tip minimum wage rate = $10.50)
New York**: Pay structure by county, number of employees, and type of tipped employee. See here for 2021 rates or below for more details.
North Dakota: $4.86 tipped employee minimum wage; $2.39 tip credit (basic combined cash and tip minimum wage rate = $7.25)
Ohio: $4.40 tipped employee minimum wage; $4.40 tip credit (basic combined cash and tip minimum wage rate = $8.80) Note: These figures apply to employees of businesses with annual gross receipts of more than $323,000.
Pennsylvania: $2.83 tipped employee minimum wage; $4.42 tip credit (basic combined cash and tip minimum wage rate = $7.25)
Rhode Island: $3.89 tipped employee minimum wage; $7.61 tip credit (basic combined cash and tip minimum wage rate = $11.50)
South Dakota: $4.725 tipped employee minimum wage; $4.725 tip credit (basic combined cash and tip minimum wage rate = $9.45)
Vermont: $5.875 tipped employee minimum wage; $5.875 tip credit (basic combined cash and tip minimum wage rate = $11.75) Note: A tipped employee in Vermont is an employee of a hotel, motel, tourist place, or restaurant who customarily and regularly receives more than $120.00 per month in tips.
Wisconsin: $2.33 tipped employee minimum wage; $4.92 tip credit (basic combined cash and tip minimum wage rate = $7.25)
West Virginia: $2.62 tipped employee minimum wage; $6.13 tip credit (basic combined cash and tip minimum wage rate = $8.75)
**Different rates apply to certain counties and municipalities in this state. Some are noted in the section below. Get more info on Arizona here or New York here.
These are the 2021 rates for states where the tipped minimum wage is the same as that required under the federal Fair Labor Standards Act ($2.13 per hour):
Alabama: $2.13 tipped employee minimum wage
Georgia: $2.13 tipped employee minimum wage
Indiana: $2.13 tipped employee minimum wage; $5.12 tip credit (basic combined cash and tip minimum wage rate = $7.25)
Kansas: $2.13 tipped employee minimum wage; $5.12 tip credit (basic combined cash and tip minimum wage rate = $7.25)
Kentucky: $2.13 tipped employee minimum wage; $5.12 tip credit (basic combined cash and tip minimum wage rate = $7.25)
Louisiana: $2.13 tipped employee minimum wage
Mississippi: $2.13 tipped employee minimum wage
Nebraska: $2.13 tipped employee minimum wage; $6.87 tip credit (basic combined cash and tip minimum wage rate = $9.00)
North Carolina: $2.13 tipped employee minimum wage; $5.12 tip credit (basic combined cash and tip minimum wage rate = $7.25) Note: A tip credit is not permitted in North Carolina unless the employer obtains from each employee, either monthly or each pay period, a signed certification of the amount of tips received.
Oklahoma: $2.13 tipped employee minimum wage; $5.12 tip credit (basic combined cash and tip minimum wage rate = $7.25) Note: For businesses with 10 full-time employees at any one location who have gross annual sales of $100,000 or less, the basic minimum rate is $2.00 per hour.
South Carolina: $2.13 tipped employee minimum wage
Tennessee: $2.13 tipped employee minimum wage
Texas: $2.13 tipped employee minimum wage; $5.12 tip credit (basic combined cash and tip minimum wage rate = $7.25)
Utah: $2.13 tipped employee minimum wage; $5.12 tip credit (basic combined cash and tip minimum wage rate = $7.25)
Virginia: $2.13 tipped employee minimum wage; $5.12 tip credit (basic combined cash and tip minimum wage rate = $7.25)
Wyoming: $2.13 tipped employee minimum wage; $5.12 tip credit (basic combined cash and tip minimum wage rate = $7.25)
Keep in mind that Alabama, Louisiana, Mississippi, South Carolina, and Tennessee do not have state minimum wage laws. And while Georgia has a state minimum wage law, it does not apply to tipped employees.
New York has several minimum wage increases slated for 2021 and beyond.
For the hospitality industry, the tipped minimum wage for December 31, 2020, through December 30, 2021, is as follows:
As of July 1, 2020, the tipped minimum wage is $8.10 for employers with 4 to 20 workers, and $8.40 for employers with 21 or more workers. If the tipped minimum wage wages plus the worker’s tips do not equal at least the full minimum wage, the employer must make up the difference.
Information about current overtime wages can be found here.
Since California doesn’t allow a tip credit, tipped minimum wage for both Los Angeles City and Los Angeles County is the same as the general minimum wage in those areas, which is set at $14.25 (for businesses with 25 employees or less) and $15.00 (for business with 26 employees or more). On July 1, 2021, the minimum wage for businesses with 25 employees or less will be raised to $15.00.
For more information about local wage increases in every California city (as well as other cities with their own regulations), see UC Berkley’s Inventory of US City and County Minimum Wage Ordinances.
Meanwhile, in Canada, most provinces and territories don’t have a tipped minimum wage. Workers who receive regular tips are paid the same as non-tipped workers.
The general minimum wage in each region of Canada is different. Below are the rates for 2021.
Alberta: $15.00 effective as of October 1, 2018.
Manitoba: $11.90 effective as of October 1, 2020. This figure is adjusted annually on October 1 based on inflation.
New Brunswick: $11.70 Effective as of April 1, 2020. This figure is adjusted annually on April 1 relative to the Consumer Price Index.
Newfoundland and Labrador: $12.15 effective as of October 1, 2020. On April 1, 2021, the minimum wage will be increased by 25 cents to $12.40. Then on October 1, 2021, minimum wage will increase by another 25 cents to $12.65.
Northwest Territories: $13.46 effective as of April 1, 2018.
Nova Scotia: $12.55 effective as of April 1, 2020. The provincial minimum wage will increase to $12.95 on April 1, 2021.
Nunavut: $16.00 effective as of April 1, 2020. This figure is reviewed annually on April 1.
Prince Edward Island: $12.85 effective as of April 1, 2020. The PEI minimum wage is set to increase to $13.00 on April 1, 2021.
Saskatchewan: $11.45 effective as of October 1, 2020. The provincial minimum wage is adjusted annually on October 1 relative to the Consumer Price Index.
Yukon: $13.71 effective as of April 1, 2020. This figure is adjusted annually on April 1 relative to the Consumer Price Index.
A few provinces still have a lower wage for tipped employees (because what fun would it be if everyone followed the same rules?!).
British Columbia has a separate wage for liquor servers, which is $13.95 per hour as of June 1, 2020. The province plans to phase out the liquor server minimum wage on June 1, 2021 when it will be equal to the regular minimum wage of $15.20 per hour.
Ontario liquor server minimum wage applies to “employees who, as a regular part of their employment, serve liquor directly to customers, guests, members or patrons in licensed premises and who regularly receive tips or other gratuities as a part of their work.” From October 1, 2020 to September 30, 2021, Ontario’s liquor server minimum wage is $12.45 per hour.
Quebec has a separate wage as well for employees who receive tips, which is $10.45 as of May 1, 2020. This rate will be increased on May 1, 2021.
As a restaurant owner, labor is one of your most substantial costs. Rising wages – whether for tipped or non-tipped employees – will lead to an increase in these costs, which will cause shrinking profits in the short term. And the more staff you have, the more pain you’ll feel.
Beyond government-legislated increases in labor costs, you may also need to increase wages for your entire team so that you can maintain a fair pay gap between more experienced, non-tipped staff and staff making tipped minimum wage plus significant daily tips.
You may also consider creating a new or adjusting an existing tip pool for more even distribution across your team – just make sure you’re up to date on the tip pooling laws in your state. You’ll also need to adjust your restaurant payroll for reporting tip credits, as well as for higher contributions to workers’ compensation and liability insurance.
Shrinking profits don’t need to be your long-term narrative if you can adapt. Find ways to keep costs down, and streamline your operations.
Restaurateurs debate this topic with passion. Some argue that a wage increase for servers and bartenders means a more dependable income that is less dependent on the customers they serve on any given day. Others suggest that a rise in tipped minimum wage could have a long-term negative effect on tips.
The argument against raising tipped minimum wage goes like this: if employers increase menu prices to offset additional labor costs, customers may react by tipping less or dining less – both of which affect a tipped employee’s overall wage. And if employers make cuts to shifts or operating hours, tipped employees could see fewer working hours.
Some research even suggests that raising tipped wage doesn’t increase workers’ total earnings because tips fall as wages rise.
For servers and bartenders, income can vary widely depending on the venue type and location. Fine dining servers in a big city like San Francisco are going to make a lot more in tips than a server in a small town diner, since they will yield vastly different sales (among other factors).
In 2019, U.S. News estimated that waiters and waitresses earned an average salary of $26,800, while restaurant cooks made $28,700 and bartenders made $28,000. But this isn’t the whole picture, since an estimated 40% of tips are never reported.
However, it’s important to note that the COVID-19 pandemic has dramatically reduced the number of tips restaurant workers are bringing in. In fact, a study by One Fair Wage and the Berkeley Food Labor Research Center found that over 80% of workers (83%) report that their tips have declined during COVID-19. And this has been a sharp decline with nearly two thirds (66%) reporting that their tips have declined by at least 50%. It’s important to keep in mind that many tipped workers are likely to continue to feel the effects of this reduced income in 2021 and beyond.
Ongoing controversy rages over what some see as a two-tier wage system that should be eliminated. This is a conversation that is set to continue well into 2021, as the Congressional Democrats have introduced legislation that aims to bring the minimum wage to $15.00, and to continue increasing the tipped minimum wage until 2027 when the tipped minimum wage would be eliminated entirely.
There’s no question that the new minimum wage legislation could have a big impact on restaurants. However, it’s not all bad news. Preparing for and dealing with rising tipped minimum wage may reveal creative ways to cut costs that will ultimately help your business thrive. You just have to know where to look for them.
Below are five ways to deal with the rising cost of labor.
To deal with higher costs many restaurateurs often do one of two things:
But these tactics are risky business. You could chase away customers and lose quality servers and bartenders – which isn’t ideal in an industry as competitive as the restaurant industry.
So if raising prices and firing staff aren’t the best solutions, what is?
Here are five practical strategies you can use right now to help you deal with rising restaurant minimum wage:
Here we’ll tell you how to implement these strategies to better respond to the reasons for increased labor costs, make more money, and ultimately see less of a shrinking profit margin in the long run.
This is number one on the list because – even though it may seem obvious – reducing fixed operating costs often skips our attention because fixed costs aren’t constantly fluctuating, like other costs in the restaurant business that have to be continually managed.
But small, fixed costs really add up – and minor adjustments can leave you with more room in your budget.
Is another cable provider offering a promotional deal that will save you $100 a month for switching? Would hiring different night cleaners cut several hundred dollars from your weekly bill?
Also, look at your expenses and determine which ones are necessary versus which ones are luxury: extra TV channels your bar doesn’t use or knife sharpening services. Some restaurants have back-of-house staff sharpen their own knives, saving the business from outsourcing.
Last, look at your inventory (try to contain your excitement).
Inventory management may be time-consuming, but it’s one of the best ways to figure out what you’re spending on your cost of goods sold (CoGS) – every month and during certain holidays or special events – and how you could be more efficient. Turn to your POS to help with your deep dive into these costs, in terms of how much you’re using and where you may be able to order less.
While knee-jerk price increases aren’t a great idea, you can raise prices mindfully with the right approach. Plan price increases according to your POS sales data by analyzing:
When you analyze sales data alongside the cost of your inventory, you can increase prices of high-volume, high-margin items only. Coffees and sodas, for instance, sell at a higher volume and at a higher margin, but the rise in price will also put less of a burden on your customers’ pockets.
Tier pricing is also a great option. Tier pricing lets you charge customers different prices for different options. For example, you likely have customers who order their meals to go and others who want a sit down dining experience. With tier pricing, you would charge your to-go customers less and give them smaller portion sizes.
It’s also a good idea to check out your competitors. Do a competitive analysis of restaurants that are similar to yours and note what they charge for comparable items. Do some competitors sell their Thai chicken wrap for $2 more? Customers in your area may have already come to expect the higher price tag, but you’re just not taking advantage of it.
Sometimes you have to spend money to make – and save – money.
Your restaurant POS system should be your money-saving hub. With POS data and analytics, you can give your business the tools it needs to deal with rising labor costs.
Knock off some low-hanging fruit simply by reviewing your labor reports and analytics. Surprisingly, a lot of restaurant owners (39%) are not using their POS to view labor reports. Restaurateurs who don’t use data to make scheduling decisions for servers and bartenders are missing out on some efficiencies that could save them significant costs.
Check your labor reports regularly against seasons, holidays, times of day, etc. to make sure you schedule the exact amount of staff when you need them – and not when you don’t. You may have over projected your kitchen staffing needs during last year’s Super Bowl event, but your labor report can remind you not to schedule as many bartenders in the future. Some POS systems integrate employee scheduling software to make this process a lot easier on you.
You can also save in smaller ways that will build up over time. Stagger server start times – when everyone is just starting dinner and only ordering drinks – and end times, when you know the rush starts to taper off. Scheduling the bulk of your dinner staff just an hour later and cutting them an hour earlier can save on a lot on labor costs in the long run. Plus, servers don’t typically want to be on the floor when there aren’t tips to be made, so these changes may be appreciated.
Have you ever noticed how grocery stores display their produce? Certain items are usually always in your line of sight – on shelves or special displays. And for good reason: these are high-margin items that store owners want you to buy.
You can and should do the same with your menus. Place high-margin items where they’re the most visible to the customer. But where exactly is the best place to put them?According to Aaron Allen – a global restaurant consultant and expert on the psychology of menu design – when we look at a menu our eyes go to the middle first, then the top right, and finally the top left. This is known as the Golden Triangle, and you should place meals with the highest profit margin there.
But perfecting your menu isn’t only about putting menu items in the right place. The psychology of design includes choice of color, storytelling, the use of nostalgia, clever descriptions, decoy dishes, and the number of options.
Decoy dishes are expensive items placed at the top of menus so diners perceive other items as better value for money.
As for the number of options, conventional wisdom suggests that more choice is better – but this isn’t always true. Too much choice can cause stress and lead to customers not making a decision at all. That’s why smart restaurateurs limit choices by offering only seven dishes in each section, so diners feel in control.
It’s no secret that staff turnover rates in the restaurant industry are high. In 2019, restaurant turnover rates were 75% – the highest of any industry.
But here’s the thing: retaining staff is one of the best ways to keep your labor costs down over the long-term. If you invest and look after your current team, they’ll be happier, work harder, deliver better customer service, and look after you and your bottom line.
But what can you do to keep your staff happy? Here are two ways:
For new hires, you may believe in the “get your hands dirty approach.” You give employees quick training and then let them jump in the deep end. But mistakes can – and do – happen, which can cost you money.
Instead, make sure to cover your bases from the start:
Your employee handbook is your point of reference for employees. It provides employees with all the information they need about how things work in your restaurant, from the day they start – which will save your business from human error that could otherwise cost you a lot money.
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How would you feel if you always put your blood, sweat, and tears into a job, but were never recognized or rewarded?
(Never mind. As a business owner, you know all too well.)
Your servers and bartenders will be more likely to stay if you recognize them for hard work and excellence. And, if you reward them for their excellence, they’ll repeat their excellent behavior. Over. And over. And over. Again.
For you this means a better customer experience and more profits.
But how do you recognize and reward such excellence? Here are some ways:
Nothing rewards an employee more than professional advancement – and you’ll be creating some genuine loyalty in the process.
You can’t control the state of tipped minimum wage. As wages continue to rise, you’re guaranteed to see increased labor costs that impact your bottom line.
But the long-term impact doesn’t have to lead to shrinking margins or unhappy servers. If you focus on what you can control within your business and take a strategic approach, you can tip the scales, remaining a profitable business and a great place to work.
Dana is the former Content Marketing Manager at TouchBistro, sharing tips for and stories of restaurateurs turning their passion into success. She loves homemade hot sauce, deep fried pickles and finding excuses to consume real maple syrup.
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