Don’t Forget The Tip (and Consider Leaving Cash)

Under current federal law, the minimum wage is $7.25 an hour. For tipped employees, like restaurant servers, who work in states other than Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington, their wage is likely to be even lower since under federal law an employer is allowed to take a “tip credit” (provided it meets certain requirements) against the minimum wage and pay that employee a “tipped wage” of only $2.13 an hour. (This practice is also permitted under state law other than in the seven listed above, although many states have set a higher tipped wage (and minimum wage). For example, under current law, the minimum tipped wage is $7.50 per hour while the full minimum wage in New York is $9.00 per hour.) Unlike the regular minimum wage of $7.25 per hour, which has increased periodically over the last 30 years, the federal tip wage has been stuck at $2.13 for over 20 years – losing 40% of its value in real terms over that period.[1] As a result, restaurant servers, who are predominantly women, are three times more likely to live in poverty than other Americans.[2]

Consumers may not realize that servers are dependent on the tips they receive to pay their bills. Additionally, when a customer pays by credit card (including the tip), it is permissible under federal law for the employer to reduce the employee’s tip to account for the processing fee that the credit card company the employer, as long as the deduction does not cause the employee to earn less than the minimum wage. For example, where a credit card company charges an employer a 3% processing fee, the employer may deduct the same 3% (paying the tipped employee only 97% of the tips) without violating the law. When a server is earning the sub-minimum wage of $2.13 an hour, a 3% reduction in tips can be significant. Receiving no tip at all can be devastating.

While some states are considering eliminating the distinction between tipped and non-tipped wages and pressure on Congress to increase the minimum wage would likely also include an effort to increase the federal tipped wage may eventually be raised, that day is not here yet, a fact you should keep in mind when you dine out or order take-out.