National Restaurant Association – Industry Brief
Young people across the country look to restaurants for their first jobs. Mandatory wage increases could further restrict opportunities for young and less-skilled individuals.
The most recent federal proposal to increase the minimum wage called for an increase from $7.25 to $10.10 over two and a half years — a nearly 40 percent increase — and automatically indexing the wage to inflation each year after that, regardless of economic conditions. The legislation also called for increasing the minimum cash wage for tipped employees under federal law until it reaches 70 percent of the federal minimum wage. This means the minimum cash wage for tipped employees would triple, in stages, to $7.07. The wage then would be adjusted each year based on inflation.
IMPACT OF MANDATORY WAGE HIKES
Alarmingly, the nation is experiencing the lowest labor participation rate in three decades. Unemployment in the U.S. remains at 5.9 percent. Teen unemployment is at 20 percent, with higher rates in some urban and rural areas. According to the U.S. Bureau of Labor Statistics, 9.3 million Americans are unemployed, and another 7.1 million are involuntarily working part-time. An astounding 698,000 persons are classified as “discouraged workers” by BLS and, therefore, are not accounted for in the unemployment rate. These are persons not currently looking for work because they believe no jobs are available for them. Collectively, 18.2 million Americans are unemployed, involuntarily working part-time or have given up on finding a job.
As businesses struggle to recover from the economic recession, dramatic, mandatory wage increases would place yet another financial burden on business owners who are already feeling the pressures of a weak economy and additional costs and regulatory complexity associated with the Affordable Care Act.
Restaurants are a critical provider of employment to millions of individuals. They are labor-intensive businesses that already devote about a third of their sales to wages and benefits. Pre-tax profit margins for restaurants typically range from 3 to 6 percent. Many restaurateurs would be forced to limit hiring, increase prices, cut employee hours or implement a combination of all three to pay for the wage increase. According to National Restaurant Association research, 58 percent of restaurant operators increased menu prices and 41 percent reduced employee hours following the 2007 minimum wage increase.
THE TIP CREDIT: WHY IT EXISTS
Tip-earning employees can be among a restaurant’s highest earners. National Restaurant Association research shows that on a national level, median hourly earnings for servers range from $16 to $22, depending on experience. This includes median tip earnings of $12 to $17 an hour, plus a median employer-paid wage of $4 to $5 an hour.
Accordingly, the federal Fair Labor Standards Act defines “wages” to include not just cash, but also tips and other credits and benefits. These earnings are also recognized for tax liabilities and federal benefits including Social Security, Medicare and unemployment.
Under strict conditions the FLSA allows employers to apply a limited portion of the tip earnings employees receive toward the employer’s obligation to pay the minimum wage. This is called a “tip credit.”
PROTECTING EMPLOYERS AND EMPLOYEES
Tip-credit law recognizes that employers offer employees the opportunity to receive gratuities. It also provides strong protections to ensure that tipped employees never earn less than the applicable minimum wage. Employers must meet certain conditions in order to claim any tip credit:
- A tip credit can be taken only against the wages of employees who customarily and regularly receive at least $30 per month in tips.
- If an employee’s earnings fall below the maximum permissible tip credit, the employer is responsible for providing the minimum wage difference through a cash wage. The employer must notify the employee of the tip credit taken.
- Employees must be allowed to retain all of their tips, except where tip pools are allowed.
- Employers must have records documenting that employees earned tips in an amount at least equal to the tip credit claimed.