The State of Tipped Minimum Wage in the Restaurant Industry

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 know rising minimum wage has been a big focus for the foodservice industry in 2018 – and for good reason. The State of Rising Minimum Wage for Restaurants research report found that of the surveyed restaurant owners, 77% have seen shrinking profits because of the minimum wage increase earlier this year.

But there’s another conversation happening alongside the minimum wage debate, one that affects restaurants more than any other business. And that’s around tipped minimum wage.

What Is Tipped Minimum Wage?

Tipped minimum wage is an hourly pay rate for employees who receive tips on a regular basis, which is lower than general minimum wage.

The rise of general minimum wage across New York, California, Florida, Michigan, and 14 other states hasn’t significantly affected the tipped minimum wage. Yet.

As some states consider removing minimum wage exemptions for tipped employees, more changes to labor costs may arrive in your state in the coming months.

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:

• How rising minimum wage affects tipped minimum wage
• Which states have seen changes to tipped minimum wage
• How rising tipped minimum wage affects restaurants and employees
• How to prepare for increased labor costs
   

Who Is Considered a Tipped Employee?

The Department of Labor (DOL) defines a tipped employee as someone who “customarily and regularly receive 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.

How Rising Minimum Wage Affects 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.

What Is a Tip Credit?

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

What You Need to Know about the Tip Credit

• Employers need to notify employees that they are being paid a tipped minimum wage either verbally or in writing
• If the tips earned by the employee aren’t enough to bring them to minimum wage, the employer must make up the difference
• States often set their own tip credit, which can be higher than the federal maximum of $5.12 (just like state minimum wage can be higher), but the tip credit cannot reduce a wage to less than $2.13 per hour
• Overtime has to be calculated based on the full minimum wage, not the tipped minimum wage
   

Did You Know?

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 $7.35 – federal tipped minimum wage has stayed the same.

Which States Have Seen Changes to Tipped Minimum Wage?

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:

1. States that require employers to pay tipped employees full state minimum wage before tips
2. States that require employers to pay tipped employees a base minimum wage above federal tipped minimum wage of $2.13 per hour (tip credit amount varies)
3. States that have the same base minimum wage payment as federal tipped minimum wage of $2.13 per hour (tip credit amount varies)

Here’s where tipped minimum wage and/or the tip credit have risen in each of the three categories:

Tipped Minimum Wage in States Where Tipped Employees Receive Full State Minimum Wage

These states don’t allow a tip credit. Tipped workers make the same as non-tipped workers. When the minimum wage rose earlier this year, restaurateurs also had to raise the wage for tipped employees.

Alaska: $9.84

California*: $10.50 (25 employees or less); $11 (26 employees or more)

Minnesota*: $9.65 (more than $500,000 in annual gross revenue); $7.87 (less than $500,000 in annual gross revenue)

Montana: $8.30

Oregon*: $10.25

Washington*: $11.50

*Different rates apply to certain counties and municipalities in this state. Some are noted in a section below. Get more info here.

Tipped Minimum Wage in States Where Tipped Employees Receive above Federal Minimum Wage

Arizona**: $7.50 (tip credit: $3)

Colorado: $7.18 (tip credit: $3.02)

District of Columbia: as of July 1, 2018, $3.89 (tip credit: $9.36)

Florida: $5.23 ($3.02)

Hawaii: $9.35 (tip credit: $0.75; only allowed if the combined amount the employee receives from the employer and from tips is at least $7 more than the state minimum wage)

Maine: $5 (tip credit: $5)

Maryland: as of July 1, 2018, $3.63 (tip credit: $6.47)

Michigan: $3.52 (tip credit: $5.73)

Missouri: $3.935 (tip credit: $3.925)

New Mexico: no change for state tipped minimum wage, but local wages in several cities and counties has increased

New York**: $7.50 (for tipped food service workers; tip credit: $2.90)

Ohio: $4.15 (tip credit: $4.15)

Rhode Island: $3.89 (tip credit: $6.21)

South Dakota: $4.425 (tip credit: $4.425)

**Different rates apply to certain counties and municipalities in this state. Some are noted in a section below. Get more info on Arizona here or New York here. 

Tipped Minimum Wage in States Where Tipped Employees Receive Federal Minimum Wage

There was no increase for tipped workers in these states. Even though New Jersey did see a rise in general minimum wage, the tip credit also rose.

New Jersey: $2.13 (tip credit: $6.47)

New York City tipped minimum wage: The details

Thanks to a New York State bill dating back to 2016, the New York City minimum wage for tipped foodservice workers has increased in 2018.

For large employers of 11 workers or more, tipped minimum wage paid by the employer is $8.65 (the tip credit is $4.35). Tipped minimum wage for these workers is set to increase to $10 by December 31, 2018 (the tip credit will be $5).

For small employers of 10 workers or less, the tipped minimum wage paid by the employer is $8 (the tip credit is $4). This is set to increase to $9 by December 31, 2018 (the tip credit will be $4.50) and $10 (the tip credit will be $5) by December 31, 2019.

Long Island and Westchester also increased their tip credit in 2018 from $2.50 to $3.50, with more changes to come in the next four years:

• 2019: $8 (tip credit: $4)
• 2020: $8.65 (tip credit: $4.35)
• 2021: $9.35 (tip credit: $4.65)
• 2022: $10 (tip credit: $5)
   

The remainder of New York State will see increases to the tipped minimum wage and/or tip credit for the next four years:

• 2019: $7.50 (tip credit: $3.60)
• 2020: $7.85 (tip credit: $3.95)
• 2021: $8.35 (tip credit: $4.15)
• 2022: TBD (tip credit: TBD)
   

Chicago tipped minimum wage: The details

In 2014, Chicago City Council passed an ordinance to raise the general minimum wage to $13 over the next five years. But this increase affects tipped workers differently.

On or before June 1 of each year between 2014 and 2019, the city has increased tipped minimum wage. As of July 1, 2018, Chicago’s tipped minimum wage will be $6.25 and the tip credit is $5.75.

Los Angeles tipped minimum wage: The details

California has more local minimum wage laws than any other state, so it’s no surprise that LA is doing its own thing.

But, since California doesn’t allow a tip credit, tipped minimum wage for both Los Angeles City and Los Angeles County is the same as its general minimum wage, which is set at $10.50 (for businesses with 25 employees or less) and $12 (for business with 26 employees or more). Both of these wages will increase on July 1, 2018 to $12 for small businesses and $13.25 for large businesses.

For more information about local wage increases in every California city (as well as other cities with their own regulations), visit Swipeclock’s Minimum Wage Changes 2018 State Guide.

Tipped Minimum Wage in Canada

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, with some planned increases later in 2018.

Provinces and Territories with No Tipped Minimum Wage

Alberta: $13.60 (will increase to $15 on October 1, 2018)

Manitoba: $11.15 (will increase to $11.35 on October 1, 2018)

New Brunswick: $11.25

Newfoundland and Labrador: $11.15

Northwest Territories: $13.46

Nova Scotia: $11

Nunavut: $13

Prince Edward Island: $11.55

Saskatchewan: $10.96

Yukon: $11.51

Provinces with Tipped Minimum Wage

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 as of June 1, 2018 is $11.40. But the province plans to phase out the liquor server minimum wage, annually increasing the wage at a greater rate than regular minimum wage until 2021 when they will be equal.

• June 1, 2019: $12.70 per hour
• June 1, 2020: $13.95 per hour
• June 1, 2021: $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.” As of January 1, 2018, this lower wage is $12.20, with a planned increase to $13.05 on January 1, 2019. 

Quebec has a separate wage as well for employees who receive tips, which increased to $9.80 on May 1, 2018.

How Rising Tipped Minimum Wage Affects Restaurants

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. You’ll also need to adjust 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 adapt, find ways to keep costs down, and streamline your operations.

How Rising Tipped Minimum Wage Affects Employees

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 earningsbecause tips fall as wages rise.

So How Much Do Servers Make, Really?

Some say servers and bartenders are the highest paid employees in the restaurant industry, when you factor in tips. But how much does a server really make?

Of course, 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).

A recent study by TSheets showed that Connecticut was the best place to be a tipped worker with an average tip rate of 18.58% and a minimum wage of $10.10 per hour. Wyoming, on the other hand, was the worst with an average tip rate of 15.91% and a minimum wage of $2.13. 

U.S. News estimates that servers made an average of $19,990 in 2016, with the highest-paid servers earning $38,460 and the lowest-paid servers earning $17,090. But this isn’t the whole picture, since an estimated 40% of tips are never reported.

According to a New York City Hospitality Alliance survey, servers in New York City make an average of $25 an hour with tips. That’s nearly double the minimum wage for non-tipped workers.

Of course, there are always stories of servers pulling in even more. Ever hear of the case of the $100,000 waitress?

Are More Changes Coming for Tipped Minimum Wage?

Ongoing controversy rages over what some see as a two-tier wage system that should be eliminated. Some restaurateurs say the practice of tipping encourages a culture of sexual harassment that predominantly affects women, since 69% of servers and bartenders are women.

Others argue that while employers are required to ensure employees are making minimum wage with tips, businesses don’t do a good job of making up the difference.

As a result, some states have already removed the tip credit and more states are considering doing the same. 

When Maine voted in favor of eliminating the tip credit in 2016, the outcry from restaurant workers against that move was so overwhelming that state legislature voted to restore the tip credit in 2017, where it remains today.

Despite what happened in Maine, three other states are publicly considering getting rid of the tip credit: Minnesota, New York, and Washington, D.C (District resident recently voted to phase out tipped wage but the Congress and the D.C. Council could still void the measure).

Whether you have a restaurant in these states or not, it’s important to pay attention to these decisions, because the movement may be at your door next.

But 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.

Here are five ways to deal with the rising cost of labor.

How to Prepare for Increased in Labor Costs

To deal with higher costs many restaurateurs will do one of two things:

• Raise menu prices across the board
• Fire staff

 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:

• Reduce your fixed costs
• Experiment with new pricing strategies
• Invest in the right technology
• Redesign your menu
• Focus on staff retention

Here we’ll tell you how to implement these strategies to save on labor costs, make more money, and ultimately see less of a shrinking profit margin in the long run.

1. Reduce your fixed costs.

This is number one on the list because – even though it may seem obvious – reducing fixed 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.

2. Create a smart pricing strategy.

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:

• Which items sell best 
• Your most popular menu modifiers
• Which items sell best during certain times of the day

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.

3. Invest in the right technology.

Sometimes you have to spend money to make – and save – money.

Your POS 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 overprojected your staffing needs during last year’s Super Bowl event, but your labor report can remind you not to schedule as many bartenders this year. 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 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.

4. Perfect your menu design – with psychology.

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 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.

5. Focus on retaining staff.

It’s no secret that staff turnover rates in the restaurant industry are high. From 2015 to 2016, staff turnover rates were above 70%.

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 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: 

Proper Training

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:

• Train employees on how to properly use your POS
• Be clear about your customer service standards
• Implement a staff shadowing procedure
• Provide new staff members with an employee handbook

 
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. 

Recognize and Reward Employees

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:

• Introduce an employee of the month award to motivate your employees
• Create a daily reward for the server who has the highest sales or most upsells at the end of their shift
• Provide small rewards like a free meal or even public recognition for their efforts
• Show that there’s room for advancement (Could a server be promoted to a manager position?)
• Invest in career development (Would a bartender benefit from taking a mixology class or entering a bartending competition?)

 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.

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