The controversy over paying the full minimum wage to restaurant servers, explained

DC’s Initiative 77 ballot measure has led to a lot of hype and drama.

The nation’s capital has turned into the latest battleground in the fight over restaurant tips.

Voters in Washington, DC, head to the polls Tuesday to decide whether to approve Initiative 77, a ballot measure that would raise the city’s minimum wage to $15 an hour and phases out the sub-minimum wage for tipped workers, which is currently $3.33.

Initiative 77 is easily the most controversial measure on DC’s primary race ballot, placing the city at the forefront of a national feud over workers’ tips. Voters in the city have been subjected to months of loud, clashing messages over the alleged impact of eliminating a lower minimum wage for tipped workers.

On one hand, the restaurant industry warns that the initiative, if passed, will force businesses to close and slash jobs. On the other hand, labor rights groups say it will lift thousands of families out of poverty without harming the economy. Meanwhile, servers, bartenders, and consumers have been divided — and confused — about what would really happen.

It’s not hard to see why. There’s not much research on the impact of eliminating the tipped minimum wage, and only a handful of old examples to study. Only two other places — Maine and Flagstaff, Arizona — have recently abolished the practice, but lawmakers in Maine then reversed the measure before it went into effect.

Under federal law, businesses can pay certain workers less than the $7.25 federal minimum wage if those workers make most of their money in tips. This has traditionally included restaurant servers, bartenders, valets, and bellhops. Under federal law, they can pay these workers the tipped minimum wage — $2.13 an hour. If the worker doesn’t earn enough tips to make the full minimum wage, the employer has to make up the difference.

Under this system, the customer essentially subsidizes workers’ wages with gratuities. Some states require businesses to pay a higher sub-minimum wage to tipped workers than the federal one. Seven states banned the practice decades ago, or never allowed a lower tipped wage at all (California never did). New York and Michigan are now considering a similar ban.

Workers’ rights groups have zeroed in on the tipped minimum wage as one culprit in America’s growing income inequality. Job growth in the restaurant industry has outpaced other sectors of the economy and is expected to continue expanding. The District of Columbia is now poised to become the first major player in this modern economic experiment.

Most restaurant servers in the city barely make minimum wage

When someone eats out at a restaurant in the nation’s capital, the tip they leave behind is not just a show of appreciation — it actually pays most of the workers’ minimum wage. The restaurant owner only has to pay servers $3.33 an hour under the city’s labor laws. At the end of each week, if the tips don’t add up to the local minimum wage of $12.50 an hour, then the restaurant owner has to make up the difference. Initiative 77 will gradually hike the tipped minimum wage by $1.50 each year until it reaches $15 in 2025. By 2026, the minimum wage will be the same for all workers.

Despite the city’s thriving high-end dining scene, the median hourly wage for servers in the city is barely above the minimum wage, including tips. Tipped workers in the city are twice as likely to live in poverty and use food stamps as the rest of the city’s workforce.

Seven states — Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington — eliminated the two-tier system entirely decades ago, or never allowed the practice to start with. The Restaurant Opportunities Center, the nonprofit labor group pushing for equal wages for restaurant workers across the United States, points out that the poverty rate among tipped workers in those states is far lower than the poverty rate for tipped workers in other states. Employers pay the full minimum wage to the 1.2 million tipped workers who live in those states.

And they still earn some tips. Data about tipping rates is scarce, but one analysis of tips left on credit cards shows that customers in states without a lower tipped minimum wage still leave gratuities. Alaska had one of the highest average tipping rates (17 percent); California and Oregon had among the lowest. But even the states that ranked toward the bottom had at least a 15 percent tipping rate.

And not having a separate tipped minimum wage hasn’t seemed to hurt the restaurant industry in those states. The National Employment Law Project, a nonprofit labor policy group, has also weighed in. “The restaurant industry is strong in the seven states with no tipped minimum wage, demonstrating that it is economically feasible to phase out the tipped minimum wage without harming restaurant jobs or sales,” the group wrote in a 2016 report supporting Initiative 77.

The best comparison to the situation in DC would have been Maine, where voters approved a ballot measure in November 2016 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 hadn’t yet gone into effect. Their voices, plus fierce opposition from the National Restaurant Association, led lawmakers to reverse the ballot measure in July 2017. The tipped minimum wage in the state is currently $5 an hour.

Despite the lack of evidence to support the rosy outlook — or doomsday scenarios — pushed by various groups in the District of Columbia, the research that does exist gives an indication of what could happen when restaurants have to start paying workers themselves: Most of the workers will probably earn more, and customers will pay most of that cost.

Menu prices will go up, and most workers will probably earn more

Economists may not have studied the impact of abolishing the tipped minimum, but they have seen what happens when a state raises the tipped minimum wage.

The effects vary. One 2016 research paper from Maggie Jones, an economist at the US Census Bureau, analyzed W-2 data and concluded that when tipped minimum wages rise, employers pay a higher percentage of their workers’ hourly wages, but the workers’ tips decrease by just as much.

A 2015 paper by economists at Cornell University said that modest hikes in the tipped minimum wage do not lead to fewer jobs. “Even when restaurants have raised prices in response to wage increases, those price increases do not appear to have decreased demand or profitability enough to sizably or reliably decrease either the number of restaurant establishments or the number of their employees,” they wrote.

A 2014 paper by economists at Florida State University and the University of Miami Ohio found a strong link between higher tipped wages and higher overall earnings for restaurant workers, but also a drop in the number of restaurant jobs. They concluded that every 10 percent increase in the tipped wage increased a worker’s earnings by less than 1 percent, while reducing employment in full-service restaurants by less than 1 percent.

More recently, researchers at Virginia Commonwealth University, in partnership with the Restaurant Opportunities Center, studied the impact of New York’s minimum wage increase for tipped workers in 2015, the year it went into effect. Restaurant workers in New York saw their average salaries go up 6 percent that year, a larger increase than in neighboring states that didn’t increase wages.

Limited though it may be, this research suggests that Initiative 77 probably won’t destroy the city’s economy or force most restaurants to close, or do that much to pull low-wage workers out of poverty. Most of the city’s servers and bartenders will likely see a modest boost to their average income, and restaurants will probably eliminate some jobs. The change will definitely cost restaurants more money, and they will probably pass on most of that cost to consumers.

Congress has always treated tipped workers differently

The push to eliminate the tipped minimum wage highlights how America has historically treated tipped workers differently than the rest of the US labor force.

Congress didn’t include protections for them when it passed the Fair Labor Standards Act of 1938, which established the 40-hour workweek and a federal minimum wage. The law was amended in 1966 to include tipped workers, but they were still not considered the same.

Most importantly, the amendment created a sub-minimum wage for tipped workers: 50 percent of the federal minimum. Employers could count a worker’s tips toward the other 50 percent needed to make sure they earned minimum wage. This is known as a “tip credit.” On days when workers don’t make enough tips to earn the federal minimum wage, employers must pay the difference. The sub-minimum wage marked a major change to tipping culture in America, essentially turning customer gratuities into wage subsidies.

In 1996, Congress made another significant change. It set the minimum wage for tipped workers at $2.13 an hour, instead of calculating it as a percentage (half) of the federal minimum wage (at the time, the full minimum wage was $4.26). The move was viewed as a concession to the National Restaurant Association and House Republicans who didn’t want to hike the minimum wage.

Since then, Congress has raised the federal minimum wage — but not the minimum for tipped workers. That means that over the years, tips have become a larger share of workers’ incomes. Some states have raised the sub-minimum wage, but 18 states have done neither.

There hasn’t been much action at the federal level. Democrats in Congress introduced a bill in 2017 that would have raised the federal minimum wage and phased out the tipped minimum wage, but it didn’t get enough support. In 2014, the Obama administration suggested that it was time for the federal government to do away with the two-tiered system.

“The rules for tipped workers are complicated and can be confusing for employers and employees alike. One of the most prevalent violations is the failure to keep track of employee tips and therefore the failure to ‘top up’ employees if their tips fall short of the full minimum wage,” according to a report from Obama’s Council of Economic Advisers.

The system places too much trust in employers to make sure their workers are earning enough in tips to meet the federal minimum wage:

In practice, however, this provision is difficult to enforce. When surveyed, more than 1 in 10 workers in predominantly tipped occupations report hourly wages below the full federal minimum wage, including tips. (By comparison, just 4 percent of all workers report hourly wages below the minimum wage.) Raising the full minimum wage without also raising the tipped minimum wage could exacerbate noncompliance; the greater the difference between the tipped minimum wage and the full minimum wage, the more likely it is that tipped workers will not earn enough in tips to earn the difference.

The best case for raising the tipped minimum wage is to prevent wage theft. That’s largely because a lower wage for a certain group of employees creates a bookkeeping hassle. Employers are supposed to keep track of all the tips their employees earn each week to make sure they are paid at least the minimum wage. It’s easy to track tips on credits cards, but not cash tips that servers may pocket. Workers’ rights group says this leads many servers to earn less than minimum wage during slow shifts, and the Labor Department has limited resources to make sure managers are making up the difference.

The restaurant industry is the top offender of wage theft, according to data from the Department of Labor. In 2017, the agency reported 5,446 cases against the restaurant industry, leading to $42.9 million in back wages for 44,363. That’s twice the number of workers owed money than in the construction industry, which is the second worst offender.

The number of these cases continue to rise. The number of restaurant workers owed money in 2017 was more than double what it was in 2005.

Forcing all businesses to pay the same minimum wage would be one of the easiest solutions to bring down those numbers.