A new bill introduced by Sen. Tom Harkin, D-Iowa, would raise the cash wage by 220 percent for employees who earn tip income. State to state, the proposed measures have been even more severe. In Illinois, for instance, state Sen. Kimberly Lightford introduced a bill to eliminate the tip credit altogether.
Rarely has servers’ compensation been such a significant part of the political conversation about wages. Now that it is, it’s our responsibility to educate legislators about how much tipped employees actually earn and why the tip credit is important to the full-service restaurant industry. Unless their misperceptions are corrected, the consequences for restaurants — and the people they employ — will be dire.
In contrast to Europe, where service charges and salaries are the industry norm, servers in the United States receive a base wage that’s supplemented by tip income based on the service they provide. Part and parcel of tipping is treating tips as what they are: income earned on the job. That’s the way the U.S. Internal Revenue Service sees it.
Yet this new round of wage bills is supported by rhetoric that pretends restaurant employees survive on subminimum wages occasionally supplemented by “gifts” customers leave them.
The reality is that tipped employees don’t just survive on tip income — typically, they thrive. In my experience it’s not uncommon for even part-time table servers to pull in upwards of $40,000 a year. And when an employee’s tips don’t measure up to expectations — a rare occurrence — employers compensate for it as the law requires.
The compensation structure adopted by current law is a reflection of the actual business conditions that define the full-service restaurant business. Whether state legislators find it ideologically acceptable or not, it’s a fact that one-third of every food dollar goes to pay the cost of labor. After paying the bills, owners and operators face a profit margin of just 3 percent.
Despite these stark facts, more than 20 states have shrunk the portion of tips that restaurants can count as income. Seven have eliminated it entirely. That’s placed big burdens squarely on the backs of restaurants — and those burdens trickle down to employees when they can’t be offset through higher prices.
The state of Washington, for instance, has been turned upside down by its prohibition of the credit for tips. Many restaurants there have stopped hiring busboys and started assigning larger sections to fewer servers. Employees get fewer opportunities to provide customer service, which means customers get fewer opportunities to reward it.
Legislators like Sens. Harkin and Lightford should do their homework on these unintended consequences. Trinity University and Miami University economists have already shown that for each 10-percent increase in the mandated wage rate for tipped employees, work hours have dropped by more than 5 percent.
If passed, this new generation of proposals will force restaurants to implement one of a few undesirable alternatives. Some will do away with tips altogether and move to a European service-charge model, where the potential for a $20-an-hour tipped position will vanish. Others will continue the march toward more customer self-service instead of raising prices, creating an industry with less opportunity for servers.
When it comes to wages and tip credits, current law isn’t broken, and legislators like Sens. Harkin and Lightford shouldn’t try to fix it. If they persist, they’ll merely worsen the conditions that have already been imposed on a handful of states. Less employment, less service and lower compensation — is that any politician’s idea of progress?
Dick Rivera is chairman and chief executive of Rubicon Enterprises LLC, a Sarasota, Fla.-based restaurant management and investment company, and past chairman of the National Restaurant Association. He received a Golden Chain Award in 1989 when he was president and chief executive of T.G.I. Friday’s. He has also held other top leadership positions at Real Mex Restaurants Inc. and Darden Restaurants Inc.
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