MN Hospitality Advocate

MRA Addresses Tip Credit Discussion

Posted in General Advocacy, Restaurant Issues, Tip Credit by hospitalityminnesota on July 10, 2010

I have been so busy all week addressing the issue Tom Emmer raised with regard to tip credit that I have been remiss in getting the blog post on this very topic constructed.

Campaigns are by nature unpredictable, with issues and candidates thrust into the spotlight seemingly without notice. Earlier this week, Minnesota’s hospitality industry found itself in the middle of the race to replace Gov. Tim Pawlenty. By now I am sure that many, if not all, of you know that during a campaign stop in St. Paul, GOP-endorsed candidate Tom Emmer found himself discussing the issue of tip credit. (Click here for a July 5 article from the Star Tribune and here for a July 6 article from Minnesota Public Radio which depict how the issue has been covered by Twin Cities media). Although as an industry we appreciate the opportunity and attention being paid to the slim-margins we operate on each and every day, the manner in which the issue has been presented has caused the general public to be inundated with a great deal of misinformation.

I spent a great deal of time this week fielding calls from restaurateurs around the state seeking clarification on the required wages for servers and other employees. We have also, through conversations with the media and policymakers, sought to clarify the facts and tell the tip credit story.

As part of a broader discussion of how to best grow Minnesota’s economy, we welcome the opportunity to discuss the issue of tip credit. Our approach has always been to find a “go-forward” solution that does not incorporate take-backs or reductions. Instead, as demonstrated in our Super Wage proposal in 2009, we have sought legislation to level the playing field for all restaurant employees through the creation of a super wage for tipped employees. Click here for our Super Wage issue briefing provided to lawmakers during the 2010 legislative session.

In the midst of the hotly contested race for Governor, it is likely that this issue will gather attention for some time to come. Gubernatorial Candidate Margaret Anderson Kelliher has now seized on this issue and is proposing an increase in the state’s minimum wage. Read her proposal here. Emmer has arranged for a meeting with servers to discuss the issue, covered here.

The Association issued this minimum wage / tip credit statement to help clarify the issue:

First, we want to make it clear that the industry has never advocated for pay cuts. Our position for more than two decades of seeking to accomplish a tip credit has always been a going forward position. In other words, when the minimum wage increases in the future, Minnesota law should allow servers to continue to make what they are presently making, and not subject them to the increase. To be clear, our industry has not advocated reducing server pay at all.

Second, there is a great deal of confusion as to the present rate of pay for servers. In the interplay between state and federal law, the statute that most benefits the employee applies. Federal law says that any restaurant that is grossing above $500,000 per year annually is subject to federal standards. Today, while Minnesota’s minimum wage is $6.15 per hour, the federal minimum wage is $7.25 per hour. Thus, any restaurant grossing more than $500,000 per year annually or whose employees are engaged in interstate commerce is required to pay its servers $7.25 per hour. This covers the vast majority of servers in our state. For those restaurants performing at less than $500,000 per year and whose employees are not engaged in interstate commerce, the Minnesota minimum wage for smaller operations applies, which is $5.25 per hour. Most restaurants in Minnesota gross at least $500,000 per year or have employees engaged in interstate commerce, thus the higher $7.25 wage applies to the vast majority of servers in Minnesota.

There are a few key reasons why this is such a passionate issue for restaurant owners. Because Minnesota statute does not allow for a tip credit (the use of tip income to offset minimum wage), when either the federal or state government mandates a minimum wage increase, the restaurateur is forced to pay what are often the highest paid employees in her or his establishment a higher base wage. This uses up whatever available capital the restaurant has that might pay raises for back-of-the-house cooks, bussers and dishwashers. It does so without even providing an opportunity for the owner and his or her staff to have a conversation about compensation. Thus, minimum wage increases without tip credit create huge disparity between front-of-the-house and back-of-the-house.

Second, tipped employees work for tips and have the opportunity to function as their own entrepreneurs. The restaurant operator provides the facility, the cooks and support staff, designs the menu, provides the ambiance, advertises the business, pays for the light and heat, buys the point of sale system. This creates the opportunity for servers to make substantial income. For the restaurateur to continue to provide this opportunity, reinvest in the facility, offer benefits, and grow, he or she needs economics that work.

Third, tips ARE wages. One of the injustices of present law is that even though their customers give tips to servers, employers must still pay FICA (social security tax) and unemployment compensation taxes on these gratuities. Tips are considered wages for purposes of Social Security (FICA), Federal Department of Labor, Federal Unemployment Taxes (FUTA), Internal Revenue Service, Minnesota Workers’ Compensation, Minnesota Unemployment Compensation (SUTA) and the Minnesota Department of Revenue. The only instance in which tips are not considered wages is by the state when determining minimum wage compensation

Minnesota restaurant owners want nothing more than to create quality jobs and grow their operations, while serving their customers well. These are extraordinarily difficult times and it appears it will be years before restaurant traffic returns to previous highs. Restaurant owners need the flexibility to work with their employees to create productive work environments. Going forward, as the minimum wage increases, restaurant operators seek the reasonable provision to continue paying servers what they presently make, while ensuring that they make the minimum wage at all times.

David Siegel, CAE, IOM
Minnesota Restaurant, Lodging and Resort & Campground Associations and Hospitality Minnesota