Washington, D.C., Residents Vote to Eliminate the ‘Tip Credit’

 

By Eli Freedberg, Steven Kaplan and Helga Spencer © Littler June 26, 2018
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On June 19, residents of the District Columbia voted to approve Initiative 77, which will incrementally phase out the "tip credit" that many employers use as an offset towards their minimum wage obligations to employees who also earn tips in connection with their work. 

Presently, the minimum wage in the District of Columbia is $12.50 per hour. However, establishments like restaurants, where tipping is common, only have to pay tipped employees $3.33 per hour—provided that the employees' direct wages and total tips add up to $12.50 an hour by the end of the week. 

If the food service worker does not earn enough in tips to reach the $12.50 per hour threshold, then the restaurant owner has to make up the difference. Initiative 77 ends this practice.  

Initiative 77 incrementally reduces the tip credit an employer can use each year starting as early as next month. By 2025, employers will have to pay all employees $15.00 per hour without any offset or tip credit to account for the employees' tip compensation. Beginning on July 1, restaurant employers must pay their tipped employees a direct wage of $4.50 per hour. Every July through 2025, the initiative requires that restaurant businesses increase their tipped employees' direct wages by the following amounts:

Minimum WageDirect Wage OwedTip Credit
July 2018:  $13.25$4.50$8.75
July 2019: $14.00$6.00$8.00
July 2020:  $15.00$7.50$7.50
July 2021: $15.00$9.00$6.00
July 2022: $15.00$10.50$4.50
July 2023: $15.00$12.00$3.00
July 2024: $15.00$13.50$1.50
July 2025: $15.00$15.00$0.00

The proponents of Initiative 77 included advocacy groups like Restaurant Opportunities Centers United and the celebrity-driven "One Fair Wage" organization. These groups argued that elimination of the tip credit would introduce a measure of predictability and stability to restaurant worker wages, especially at smaller business. They also asserted that the elimination of the tip credit could also improve working conditions for women. 

The business community and many food service workers who support the current "tip credit" model as incentivizing great service and maximizing tip-related earnings countered that these employee rights groups created a straw man by making it seem like tipped workers did not earn the full minimum wage—whereas in truth the law required all employers to ensure that all tipped workers, including those whose direct wages were offset by a tip credit, earned at least the minimum wage when including the tip compensation. This community also noted that a large proportion of these workers earned significantly more in tips than they were guaranteed by the minimum wage laws. Those opposing the initiative also cautioned that the measure would be destructive to an industry that is already beset by razor-thin profit margins, increased real estate costs, and increased costs of goods. These businesses further argued that an additional increase in labor costs would lead to increased prices, lower demand and an elimination of jobs.

Next Steps

The battle within the District of Columbia does not end with the passage of Initiative 77, because the law heads to Capitol Hill for congressional review in accordance with the District of Columbia Home Rule Act of 1973. If Initiative 77 survives the congressional review period (30 days), it still faces an uphill battle with the D.C. Council, where a majority of council members have publicly opposed it, as has D.C. Mayor Muriel E. Bowser.

Indeed, reversal of a public vote on the elimination of the tip credit is not unprecedented, and restaurateurs and other employers whose employees earn tips in the District of Columbia should look northward to Maine for a glimmer of hope. In 2016, Maine's voters approved a ballot measure that would have phased out the tipped minimum wage by 2024. But months after passage, restaurant workers and bartenders said patrons were confused and tipping them less, even though the law had not yet gone into effect. Their voices, plus galvanization of the hospitality industry, led lawmakers to reverse the ballot measure in July 2017 and Maine's employers still can apply a tip credit.

National Impact

The impact of Initiative 77 will be felt outside of the confines of the District of Columbia. Currently, seven states—Alaska, California, Minnesota, Montana, Nevada, Oregon and Washington—and Guam, either never adopted or have already eliminated the tip credit. Other states, such as New York and Massachusetts, have also been engaged in high-profile battles over the elimination of the tip credit. The success of Initiative 77 should provide wind to the sails of those hoping to eliminate the tip credit.

Nevertheless, the success of Initiative 77 should galvanize the business community and solidify an alliance with servers who are concerned that the loss of the tip credit will lead to either the loss of jobs or the implementation of no-tipping policies to offset the inevitable increase in costs. In any event, there is more to come. 

Eli Freedberg is an attorney with Littler in New York City. Steven Kaplan and Helga Spencer are attorneys with Littler in Washington, D.C. © 2018 Littler. All rights reserved. Reposted with permission.

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