Low-wage workers and their supporters in New York received good news when the state enacted a new minimum wage bill in 2016. Minimums for New York City and the counties of Long Island and Westchester are now slated to be $15—and will be phased in by 2022 at the latest. The balance of New York State has annual increases scheduled for a final phase-in to $12.50 on the last day of 2020.
Until rather recently, minimum wage policy and debate often left out the subminimum wage workforce that relies on tips as part of their wage. In 2016, New York could have joined the ranks of the seven states that do not allow tipped workers to be paid a sub-wage, but wound up leaving them out of the new policy. In late 2017, however, Governor Cuomo unveiled a proposal to examine how economic justice would be strengthened if the state eliminated the subminimum wage (also known as the tipped minimum wage). As a result, the NYS Department of Labor has scheduled public hearings across the state beginning in spring 2018. This brief examines the merits of such a policy for the State of New York.
First some background. Tipping is a custom imported from aristocratic Europe in the nineteenth century. It was originally opposed by Americans as undemocratic (Segrave 2009). The practice took root after the Civil War when business interests such as the Pullman Train Company hired former slaves and argued that they should not be paid a wage but compensated almost entirely through customers’ tips (Bates 2001). While Pullman workers won the right to a standard minimum wage when the first national minimum wage law was enacted in 1938, restaurant and other service workers did not. The law contained an exemption for businesses not engaged in interstate commerce, including restaurants and retail.
The subminimum wage was institutionalized in the 1966 amendment to the Fair Labor Standards Act (FLSA). The 1966 amendment covered more workers under the FLSA umbrella, extending protections to hotel, restaurant, and other service workers who had previously been excluded. However, it also codified a two-tiered split in the nation’s wage floor as it allowed for a subminimum wage to be paid to workers who “customarily and regularly receive tips.” These workers comprised much of the newly protected workforce. The two-tiered system is dependent upon the tip credit provision—which represents how much of a worker’s wage an employer can avoid paying out of pocket as long as customer tips plus the subminimum wage they do pay add up to the regular minimum wage.
The tip credit is the customer-subsidized portion of the wage bill—the difference between the regular minimum and the subminimum wage. At the federal level, the regular minimum wage is $7.25 per hour and the subminimum wage for tipped workers is $2.13 hour. Thus, in the 18 states that use the federal minimum wage, employers can take advantage of a $5.12 tip credit. In 1991, when the federal $2.13 subminimum wage was established, the tip credit amounted to 50 percent of the regular minimum wage. Today, the federal tip credit represents 71 percent of a tipped worker’s wage, letting employers rely on customers to pay the bulk of their tipped worker labor costs. The federal minimum wage policy is woefully outdated, which is why a majority of states do not follow it.
On the other end of the spectrum, there are seven states that do not allow for a subminimum wage to be paid to tipped workers (also referred to as a “no-tip credit provision”)—and most of these states have regular minimums above $7.25 per hour—including California ($11.00) and Washington State ($11.50). In between, there are the 26 states (including Washington, D.C.) that still have a two-tiered minimum wage policy, but with a subminimum wage higher than $2.13, representing an array of partial-tip credit provisions.
Currently, in Upstate New York the regular minimum wage is $10.40, in Long Island and Westchester it is $11, and in New York City it is $12 for businesses with fewer than 10 employers and $13 for businesses with 10 or more employees. The subminimum wage for most of New York is $7.50 and $8.65 ($8 for smaller restaurants) in New York City—which amounts to a tip credit provision ranging from $2.90 to $4.35. In other words, customer tips subsidize 28 to 33 percent of a tipped worker’s hourly pay. In 2022, the tip credit across all of New York is scheduled to be 33 percent of the state’s regular minimum wage, which represents a tip credit ranging from $4.15 to $5.00.
States that have set a subminimum wage above the federal $2.13 have many compelling reasons to do so. As reported in Allegretto and Cooper (2014), Robbins, Vogtman and Entmacher (2014), and in several reports by the National Women’s Law Center, National Employment Law Project, and Restaurant Opportunities Centers United (2016), tipped workers, especially restaurant workers in the $2.13 states, are overwhelmingly a low-wage workforce that enjoy few workplace benefits and live disproportionately in poverty. Low job quality for tipped workers is often exacerbated by various workplace issues such as sexual harassment, discrimination, and unreliable schedules that can result in large fluctuations in pay. New York is now considering eliminating the subminimum wage and joining the ranks of Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington. These states have thriving restaurant industries, where diners still tip at rates comparable to those in states where wait staff are paid subminimum wages. In these states, gratuities function as they are often intended to by customers—as a monetary “thank you” for good service, not as a replacement for employer-paid wages.
This paper examines the merits and expectations of eliminating the subminimum wage (e.g., eliminating the tip credit provision) in New York. The two-tiered wage system as described above is not well known or understood by the general public, nor are the unique aspects and challenges faced by those workers who rely on tips to make a living wage. This report delves into those issues, with a focus on the full-service restaurant industry as they employ most of the tipped workforce. The main points of this brief are summarized below.
- The two-tiered wage system in all of its variations is not widely known or understood by the general public. At the federal level (followed by 18 states) the regular minimum wage is $7.25 and the subminimum wage for tipped workers is $2.13, which amounts to a tip credit—the portion of wages paid via customer tips—of $5.12 or 71%.
- Currently, Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington do not allow a subminimum wage for tipped workers. Employment growth in the full-service restaurant industry has outpaced private sector growth for each of these states over the past five years—by an average of five percent.
- Tipped workers in New York are typically low-wage earners. The median hourly wage for tipped workers in New York is currently $11.16. Bartenders and servers, who make up the largest share of the tipped workforce, typically earn about $11.00.
- The median age of tipped workers in New York is 35 and the vast majority (77 percent) is at least 25 years old. The tipped workforce across all industries in New York is majority female (52 percent), and of those women more than one in three (37 percent) have children. The tipped restaurant workforce is dominated by women (57 percent).
- Tipped workers live in poverty at more than twice the rate of other working New Yorkers—15 percent compared to 6.2 percent, respectively.
- The average full-time, year-round, female tipped worker is paid 78 percent of what her male counterpart earns. Over the course of a lifetime this amounts to a gender tax of $261,000. Even as most wait staff are female, males are more likely to work at high-end establishments. A higher base pay for tipped workers will help ameliorate this gender-based pay inequity.
- The subminimum wage policy is difficult for regulators to enforce and creates unnecessary liabilities for employers: restaurant wage theft lawsuits comprise approximately 23 percent of the total Fair Labor Standards Act cases in New York City. The figure for Los Angeles, a comparable city that has no subminimum wage, is only eight percent.
- The seven states that do not allow for a subminimum wage have thriving restaurant industries, where diners still tip at rates comparable to those in states where wait staff are paid subminimum wages. In these states, gratuities function as they are often intended to by customers—as a monetary “thank you” for good service, not as a replacement for employer-paid wages.
- The subminimum wage for tipped workers can be eliminated with a minimal impact on the costs of business for full-service restaurant. By the time it has been fully implemented, New York’s 2016 minimum wage increase policy will have increased average restaurant operating costs by about 7.1 percent. Had that policy included raising the base pay of the tipped workforce to the full minimum wage (i.e., eliminating the subminimum wage), full-service restaurants would have incurred an additional 1.2 percent increase in operating costs.