An age-old complaint about tipping is that it makes little sense to give someone a bonus for just doing her job. Why, frustrated customers grouse, am I tipping this waiter — or coat-check attendant, or valet-parking driver — for executing the very same task her employer is paying her a wage to do?
Here’s the thing many consumers don’t realize: That tip is her wage. Or at least most of her wage.
Federal law allows employers to claim credit for tips their employees receive and to pay workers far less than the standard minimum wage as a result. You, dear customer, are expected to make up the difference.
This carve-out of tipped workers has escaped much notice, even as minimum wage increases swept several states and cities around the country on Election Day. To give you a sense of how absent these tipped workers are from public debate, note that the federal tipped minimum wage has been stuck at $2.13 for 23 years. If the value of the federal minimum wage, now $7.25, has eroded over time, the value of the “tipped minimum wage” has been ground down to almost nothing.
Seven states require employers to pay the same minimum wage, using their own funds, to both tipped and nontipped workers. But the majority of states allow employers to include tips when determining whether workers received the minimum hourly pay guaranteed to all workers, which in practice means that they can shift most of their labor costs to customers.
This separate-but-unequal wage-floor system causes all sorts of problems, both for tipped workers and the rest of us.
Without a steady, decent base wage, tipped workers can experience major swings in income from shift to shift. True, servers at some high-end restaurants receive princely gratuities, but for the waitress assigned the graveyard shift at a 24-hour truck stop, the highly variable volume and generosity of customers introduce a lot of unpredictability into her ability to make rent.
Tipping also perpetuates some nastiness that we’ve otherwise tried to iron out of the labor system. Research has found, for example, that black workers receive lower tips than whites for equal quality of service, a form of pay discrimination we would not tolerate if employers were making the compensation decisions. Not to mention that subsisting on tips often requires tolerating sexual harassment and other bad behavior.
These are the arguments labor usually makes to justify ending the two-tier wage system. But even laissez-faire types should be wary of the distortions that tipped-wage law imposes on the private economy and public finances.
One well-known problem with the “tip credit” system is that it abets tax evasion. Allowing workers to collect most of their pay in dribs and drabs of cash, rather than through the payroll system, makes it much easier for workers to underreport income.
Even when workers and employers fully comply with the law, the allowance of a tip credit for part of workers’ wages still reduces tax receipts. In many states, tips are not subject to sales taxes; if restaurant workers’ pay were fully baked into menu prices, or even came through mandatory service charges (like the kind restaurants often apply to large parties), the entire meal cost would be subject to sales tax. In other words, shifting some of your wage bill into tips is a legal tax dodge — and one not available to most industries.
There’s also another, more subtle way in which the tipping system acts as a subsidy to restaurants: It obscures the true cost of dining out.
This is a concept economists refer to as “salience,” which usually comes up in discussions about taxes. Research has shown that when sales taxes are excluded from a product’s sticker price and are instead added at the register, consumers perceive those products to be cheaper — even when they know full well the sales tax is coming.
Decoupling labor charges from menu prices has the same effect, research has found. This means that on the margin, the tipped-wage system probably encourages Americans to eat out more, and order more expensive dishes, than they otherwise would. (This is one reason restaurants that have proudly banned tipping in favor of a living wage typically include a mandatory “service charge” on the bill rather than list service-inclusive menu prices. Or, often, they’re just higher-end joints whose regulars are less price-sensitive to begin with.)
Maybe making dining out appear artificially cheap helps the economy. Certainly restaurants, which account for 1 in 13 jobs, believe so. But industries that have to abide by different, more expensive labor rules might not agree.