Everyone loves the party game/icebreaker “two truths and a lie.”

Can you identify which of the following is NOT true about tipped wages?

  1. A $15 minimum wage would be a pay cut for many tipped workers like servers and bartenders.

  2. Eliminating tipped wages would be good for tipped workers because their wages would be stable.

  3. Customers will not tip the same amounts or at all if tipped workers start earning $15 an hour.

A.) True. Tipped workers are employees whose earnings are comprised of wages paid by their employers and tips from customers. If a tipped worker doesn’t earn enough in tips to reach the federal minimum wage, by law their employer must pay them the difference. Most tipped workers are servers and bartenders in the restaurant industry. 

Several states and Congress are considering eliminating the tipped minimum wage and forcing all workers to receive a new minimum wage of $15 an hour. However, this would be a pay cut for many tipped workers who earn above $15 an hour. According to the National Restaurant Association on a national level, median hourly earnings for servers range from $16 to $22, depending on experience level. Anecdotally, servers say they earn $25 to $50 an hour.

B.) False. Eliminating the tipped minimum wage and raising the minimum wage to $15 an hour, would hurt tipped workers in a number of ways. Restaurants have razor-thin profit margins of usually between 3 and 5 percent. They would likely try to offset dramatic labor-cost increases from a $15 minimum wage for all of their workers –including staff that previously earned mostly tips — in ways that are bad for employees and customers: reduce hours, cut jobs, introduce automation as well as raise menu prices, cut portion sizes, substitute quality ingredients with cheaper ingredients, and institute mandatory service charges.

Restaurant workers in New York City were shocked when the city’s $15 minimum mandate took effect in late 2015. Hundreds of restaurants were forced out of business and the city experienced its first year of a decline in the number of restaurants since the Great Recession. Furthermore, according to a survey of nearly 500 hundred restaurants representing 14,000 workers, 77 percent of full-service restaurants reduced employee hours and 36 percent eliminated jobs in 2018. Another 75 percent of limited-service restaurants plan to reduce employee hours and 53 percent plan to eliminate jobs in 2019 as a result of the wage increases.

C.) True. When customers pay more for their meals because of higher prices or see mandatory service charges added to their bills, they are discouraged from leaving tips or tipping as generously. According to a Census analysis, higher mandatory tipped wages lead to decreases in tips.

For more information on this topic, listen to this IWF podcast.