The Consequences of a Subminimum Wage

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Debate ensues over the consequences of eliminating an exemption to the federal minimum wage for tipped employees.

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Not all employers pay their employees the federal minimum wage. The Fair Labor Standards Act (FLSA) only requires an employer to pay a tipped employee $2.13 per hour in direct wages, if that amount combined with tips equals the minimum wage.

But does such a loophole benefit tipped employees? One civil rights advocate, Michelle Alexander, argues that paying tipped employees, such as restaurant servers, a subminimum wage not only harms those employees, but also perpetuates a tipping system that fosters racial and gender inequities by promoting customer biases.

Some legislators who share Alexander’s concerns related to the tipping system have recently advocated closing the FLSA loophole to address the existence of a subminimum wage for tipped employees.

Both chambers of the U.S. Congress, for example, renewed efforts to pass the Raise the Wage Act, which would guarantee that all employers pay tipped workers the full federal minimum wage for the first time in history. And by gradually increasing the federal minimum wage to $15 an hour by 2025, the Act also promises to increase the wages of one-third of all Black workers and one-quarter of all Latino workers in the United States.

Prior to the COVID-19 pandemic, Black women who worked as tipped employees received on average nearly $5 less an hour than their white male counterparts. In addition, women in the restaurant industry in states that permit the FLSA’s subminimum wage reported twice the rate of sexual harassment.

In the aftermath of the pandemic, some tipped employees have come to expect far fewer tips and even greater harassment. For instance, 83 percent of restaurant workers reported receiving fewer tips since the outbreak of COVID-19, and nearly half of all restaurant workers reported a noticeable change in the level of unwanted sexual comments from customers.

Independent of efforts to renew the Raise the Wage Act, President Joseph R. Biden issued an executive order to eliminate the subminimum wage for tipped employees who are also federal contractors. According to the White House, eliminating the subminimum wage “ensures tipped employees working on federal contracts will earn the same minimum wage as other employees on federal contracts.”

But some advocates directly oppose the Act. For instance, the National Restaurant Association—the largest food service trade association in the world—argues that the subminimum wage combined with the tipping system provides tipped employees “with greater earning potential.” According to research from the National Restaurant Association, tipped employees at full-service restaurants earn a median of $27 an hour, and the highest paid tipped employees make $41.50 an hour.

The restaurant group also denies the claim that tipped employees make less than the minimum wage. It contends that “the FLSA provides strong protections for workers and ensures that tipped employees never earn less than the local minimum wage.”

Some legislators share the National Restaurant Association’s concerns. Senator Doc Marshall (R-Kan.), for example, suggests that a subminimum wage is appropriate in some states, given that “what you can buy with the dollar in Kansas is different than what you could buy with the dollar in New York City.”

Nonetheless, today seven states exceed the federal requirements of the FLSA by mandating that employers pay tipped employees a full minimum wage with tips on top.

Although the FLSA technically requires employers to “make up the difference” if tips combined with direct wages do not equal the federal minimum wage, employers often engage in wage theft. According to one report, more than 83 percent of restaurants investigated by the U.S. Department of Labor’s Wage and Hour Division had some type of wage violation from 2010 to 2012. In that same period, the Wage and Hour Division recovered more than $56 million in back wages for nearly 82,000 workers.

And despite the National Restaurant Association’s claims, research by the Restaurant Opportunities Centers United—a national nonprofit dedicated to improving workers’ wages and working conditions—suggests that the subminimum wage for tipped employees contributes to their financial hardship. According to the association, tipped employees are twice as likely to suffer from poverty and depend upon food stamps compared to the general population.

Since being introduced in January 2021, the Raise the Wage Act appears to have stalled in both the U.S. House of Representatives and the U.S. Senate amid continuing debate. Although most U.S. residents support increasing the minimum wage to $15 an hour, it remains to be seen whether any legislation raising the minimum wage would fully include tipped employees for the first time in U.S. history.