Is the Tip Wage Unfair?

Is the tip wage that restaurants pay to service staff such as servers and bartenders unfair? Perhaps. Before someone can judge the wage as fair or unfair though, that someone must understand the wage and how it is supposed to work. Many of the most outspoken critics of the tip wage I have talked to over the years do not understand how the wage is supposed to work. Hopefully, I can clear that up.

Restaurants and other businesses where employees customarily receive tips from customers may take a portion of the tips as a credit against the minimum wage. If an employee does not earn or report enough in tip income to equal the minimum wage, the business must in accord with the law, make up the difference up to the full minimum wage, which is currently $7.25 per hour.

Here is how it works. Lets say you are a server in a restaurant. The restaurant pays you the tip wage, of $2.13 per hour. You arrive to work one sunny afternoon, and you are fortunate enough to have guests seated in your section immediately. The bill for the table is $100.00, and they tip you a generous 20%, which is $20.00. The restaurant may require you to "tip out" the bartender and the servers a nominal amount, usually between 3% and 5% of your sales. (That "tip out" is called a tip pool and will be the subject of another post later. The practice is legal.) Lets say here you tip out 5%, so your tip earnings are actually $15.00 for that $100.00 bill. Lets also say that the table was your only table and you went home immediately after the guests. In this case, the restaurant will add nothing to your check. Why? Because you earned money from tips equivalent to or greater than the minimum wage. In this scenario, the restaurant must still pay the tip wage, so the server actually made $17.13 for the hour. This scenario is definitely not typical for a server during a day. Servers usually work shifts of about 4 to 6 hours a day, and their earnings from tips will depend upon the sales for the day and the restaurants tip pooling policy.

Lets look at the wage under a different scenario for a day. Let's say you are a waiter in a restaurant and you show up to work on a miserably cold winter day. You are at work for one hour and not a single guest comes in. Typically the restaurant pays you $2.13 per hour as a credit toward minimum wage. Today though, you will report no money in tips. What happens now? The restaurant must pay you the minimum wage for that hour, currently $7.25 per hour. Why? Because you did not earn enough tips to equal or exceed the minimum wage, and the restaurant must make up the difference between the tip wage of $2.13/hour that they must pay and the minimum wage.

So, is the tip wage unfair? My argument is that the wage is not unfair to service staff if it is applied in accord with the law. When it is properly applied, the wage is fair, at least in as much as the minimum wage set by Congress is fair. It is important to note that when Congress raises the minimum wage, restaurants may have to make up the difference. Let's say Congress raised the minimum wage to $15.00 per hour. Under the existing law, the restaurant would pay no additional money to the server in the first scenario, but under the second scenario above, the restaurant would pay $15.00 and not $7.25.

Based on actual payroll data for restaurants that I have seen, servers almost always make more than the minimum wage and it's often substantially more. The problem is that servers work fewer hours. Most restaurants do not need servers in every section all day and evening. Generally people eat lunch from 11:00 to 2:00 and eat dinner from maybe 6:00 to 9:00. Sure, there are some exceptions, but anyone who eats out regularly knows you go during off peak hours if you want immediate service. That's never going to change.

What seems unfair to servers is the requirement that health insurance eligibility depends upon hours worked. Given the cultural reality that restaurants are not generally packed all day every day, it is economically unlikely that servers get the thirty hours per week that makes them eligible for insurance subsidized by employers. Certainly some do, but it's generally the exception and not the rule.

Additional unfairness would likely result if the rules regarding tip pools are abandoned. There is just no need for it. Restaurants already gain a benefit from the tip wage. Allowing them to take a cut of tips as profit or to subsidize other employees is just plain wrong. Hopefully Congress will do the right thing.