St. Paul Should Reject a Lower Minimum Wage for Tipped Workers

Since Becoming a One Fair Wage State More Than 30 Years Ago, Minnesota Has Consistently Rejected a Lower Minimum Wage for Tipped Workers

• Thirty-four years ago, in 1984, Minnesota abolished its subminimum wage for tipped workers, becoming a “one fair wage” state where tipped workers receive the full minimum wage directly from their employers like other workers.[i] Since then, Minnesota has rejected all efforts to return to the unfair subminimum tipped wage system that allows employers to pay tipped workers just a portion of the full minimum wage as long as tipped workers earn enough in gratuities to put them at or above the full minimum wage.
• Since 1984, Minnesota legislators have fought and defeated various efforts to weaken the state’s minimum wage law by establishing a lower minimum wage for tipped workers. For example, in 2008, when Governor Tim Pawlenty[ii] blocked efforts to raise the state’s minimum wage unless legislators also agreed to adopt a subminimum wage for tipped workers, legislators and advocates throughout the state held strong and rejected the governor’s proposal.[iii]
• Last year, Minneapolis rejected demands by the Minnesota Restaurant Association to exempt tipped workers from the city’s new $15 minimum wage ordinance, citing the harm that a two-tier wage system would have on workers.[iv]
• A tip credit in St. Paul would be equally harmful to its tipped workers, placing them at a disadvantage relative to their Minneapolis counterparts. As the name suggests, the Twin Cities share not only geographic proximity, but also similar economic trajectories and interests.[v] Since 2011, employment in the region’s leisure and hospitality sector has steadily increased, with jobs growing at an average annual pace of 2.4 percent.[vi] If this trend continues, tipped workers in both cities stand to experience similar benefits in terms of employment. However, if St. Paul were to adopt a tip credit, the base wage and earnings of Minneapolis tipped workers would soon likely surpass those of tipped workers in St. Paul.
• Despite claims to the contrary by powerful business interests, the restaurant industry in Minnesota and the Twin Cities has thrived under a One Fair Wage system,[vii] and employers have found the system manageable. In fact, according to the latest estimates by the National Restaurant Association and the Minnesota Restaurant Association, restaurant sales in Minnesota reached $9.7 billion in 2017, and restaurant employment is expected to grow 8.9 percent by 2028.[viii]

One Fair Wage Jurisdictions That Have Adopted a $15 Minimum Wage Have Also Preserved Their One Fair Wage Policies

• Other states and cities that—like Minnesota—have a One Fair Wage system have rejected the restaurant industry’s attempts to condition a transition to a $15 minimum wage on lowering the wage for tipped workers.
• For example, last year, Minneapolis firmly rejected[ix] a well-organized campaign by the Minnesota Restaurant Association[x] to exempt tipped workers from a $15 minimum wage in the city. Other local jurisdictions—such as Los Angeles, San Francisco, and the many other cities and counties in California that have adopted their own $15 minimum wage ordinances—are currently transitioning to higher wage floors without rolling back One Fair Wage in the process.[xi] Similarly, the One Fair Wage states of California and Oregon—which adopted $15 and up-to-$14.75 minimum wage laws, respectively—are in the process of phasing in their higher minimum wages while also preserving wage parity for tipped and non-tipped workers.
• Contrary to claims by certain business groups, the restaurant sectors of these One Fair Wage jurisdictions are thriving. In California, for example, restaurants posted an estimated $82.2 billion in sales in 2017 and restaurant employment is expected to grow by 10 percent by 2028, according to projections by the National Restaurant Association.[xii] In Oregon, restaurant sales in 2017 are estimated at $7.8 billion and restaurant employment is projected to increase by 12.9 percent over the next decade.[xiii] And in San Francisco in 2015, a year after the city began transitioning to a $15 minimum wage, the Golden Gate Restaurant Association reported that the restaurant industry was thriving,[xiv] with sales and employment growing faster than in 2014—the year San Francisco adopted a $15 minimum wage. Today, San Francisco’s economy continues its positive trajectory, with the city’s unemployment rate dropping to 2.6 percent in November 2017[xv] (nearly 50 percent lower than its jobless rate three years earlier in 2014),[xvi] and restaurant employers voluntarily raising wages and benefits above the legal minimum in order to attract and retain talent.[xvii]

Contrary to Restaurant Industry Claims, the Majority of St. Paul’s Tipped Workers Earn Very Low Wages

• Servers and bartenders comprise the majority (52 percent) of the approximately 84,650 tipped workers in the Minneapolis-St. Paul-Bloomington metropolitan area.[xviii] Of these, only a small share (the top 10 percent) earn total hourly wages (base wage plus tips) close to or more than $15, while the bottom 90 percent typically earn low wages, roughly in the $10 to $13 range (Table 1).

Table 1. Hourly wages for select tipped occupations in the St. Paul metropolitan area

• According to the latest Bureau of Labor Statistics (BLS) data, between November 2014 and May 2017 (when the data was collected[xix]), the median hourly wage for restaurant servers was $10.29 including tips, and the average wage was $12.77, also including tips.[xx] Bartenders had similar hourly earnings. During this same period, the applicable minimum wage in Minnesota was between $8.00 and $9.50 per hour.[xxi]
• This means that in St. Paul and surrounding areas, servers typically earn between $0.79 and $4.77 per hour in tips—large enough to lift them above the minimum wage, but far below the types of high tips that the restaurant industry claims to be the norm (Table 2).

Table 2. Most restaurant servers in St. Paul earn only slightly above the minimum wage

• Alison Diffendal’s story (Box 1) corroborates the BLS estimates. Alison, who works as a server at Bakers Square in St. Paul, often earns just $4 per hour in tips, which is substantially less than the $8.50 to $15.50 in hourly tips that the restaurant industry claims to be typical for servers.[xxii] Her experience with tips illustrates the experience of many other servers in St. Paul who work for a restaurant chain.
• A base hourly wage of $15, combined with tips, would allow many tipped workers in St. Paul to earn a better wage, especially those without dependent children. According to the Economic Policy Institute, in the St. Paul metropolitan area, single adults without children needed to earn an annual income of $36,972 in 2017, just to attain a modest standard of living.[xxiii] Assuming full-time, year-round work, this translates to $17.78 per hour. [xxiv] For workers like Alison, who are raising one child, the annual income needed to afford a decent apartment and other basics was $67,969 in 2017, or $32.68 per hour.
• The BLS wage data suggests that only a small number of servers—likely at high-end restaurants—earn total hourly wages (including tips) that are substantially above the minimum wage. As the data shows, the top 10 percent of servers earn total hourly wages over $20 an hour[xxv] (Table 1).
• The median hourly wage for restaurant servers in St. Paul is already 52 percent lower than the median hourly wage for all workers.[xxvi] If St. Paul rolls back its One Fair Wage system, the wage gap between tipped workers and the average worker will widen further.
• Moreover, other tipped workers vulnerable to low pay would see lower wages if St. Paul abandons its One Fair Wage policy. Car wash workers, bellhops, parking lot attendants, and airport workers who assist elderly or disabled passengers earn very low wages[xxvii] and average even smaller tips than restaurant workers.

Box 1: Alison Diffendal, Tipped Worker at Bakers Square in St. Paul

The Tipped Subminimum Wage and the Precariousness of Tipped Work Are Linked to Higher Rates of Poverty for Tipped Workers

• As a result of low pay and the precariousness of tipped occupations, tipped workers are twice as likely to live in poverty as other workers. According to analysis by the University of California and the Economic Policy Institute, while the poverty rate for non-tipped workers in the U.S. was 6.5 percent during the period analyzed (2010–2012), the poverty rate of tipped workers was 12.8 percent.[xxviii] Restaurant servers and bartenders, who comprise the largest share of all tipped workers, had an even higher poverty rate of 14.9 percent.[xxix]
• In states with a tip credit system, poverty among tipped workers is more prevalent. According to data from 2010-2012, while the poverty rate for non-tipped workers ranged from 6.0 to 7.0 percent in states with a tipped subminimum wage, for tipped workers the poverty rate jumped to more than twice that rate—between 12.5 and 14.5 percent. Poverty among servers and bartenders in those states was even more alarming: 18.0 percent in states that follow the federal tipped rate of $2.13, and 14.4 percent in states with tipped subminimum wages between the federal tipped floor and the full minimum wage. This means that in states with a tip credit, tipped workers are more than twice as likely to live in poverty. In comparison, the poverty rates for tipped and non-tipped workers in One Fair Wage (equal treatment) states, while still in need of improvement, did not diverge as greatly from one another (Figure 1).

Figure 1: Because of low pay and unreliable schedules, tipped workers (especially those in states with a tip credit) have twice the poverty rate of non-tipped workers [xxx]

• Tipped workers are forced to live on unpredictable incomes and schedules. Their take-home pay fluctuates widely depending on the seasons, the shift they are given, and the generosity of patrons. On average, tipped workers in Minnesota work 29.5 hours per week and restaurant servers work just 26.3 hours per week.[xxxi] In comparison, the average number of hours worked for all employees in the private sector in Minnesota was nearly full-time (34.1 hours per week) in 2017[xxxii]—a significant difference that reflects the precarious nature of tipped occupations, particularly in the restaurant industry.
• The lack of stable incomes for tipped workers makes it difficult to plan a family budget. Were St. Paul to adopt a tip credit, the tenuous living standards of many tipped workers would be exacerbated, particularly when compounded by climbing rents[xxxiii] and other basics costs[xxxiv] in the Twin Cities. As discussed above, the Economic Policy Institute estimates that in 2017, single workers in the St. Paul metropolitan area needed $17.78 per hour to pay for the basics, while single parents raising one child needed $32.68 per hour. By 2024, they will need to earn an hourly wage of $20.97 and $38.54, respectively.[xxxv]
• Due to the dual pressure of low or precarious pay and high costs of living, nearly half of all tipped workers in the U.S. are forced to rely on public benefits. According to research by the University of Berkeley and the Economic Policy Institute, nationwide, around 46 percent of tipped workers and their families rely on public programs—a significantly higher share than the 35.5 percent of non-tipped workers and their families who also rely on these programs.[xxxvi]

Preserving a One Fair Wage System in St. Paul Is a Matter of Basic Fairness and Gender Justice; Abandoning It May Exacerbate Sexual Harassment

• Because the majority of tipped workers are women, rolling back the One Fair Wage system in St. Paul would have a disproportionate impact on the incomes of women and female-headed households. Nationwide, there are over 4 million workers employed in predominantly tipped occupations, two-thirds of whom are women.[xxxvii] Among restaurant servers—who represent nearly half (48.9 percent) of tipped workers—women account for 70.3 percent of workers.[xxxviii] In Minnesota, the latest available detailed census data shows that women make up an overwhelming 80.1 percent of restaurant servers.[xxxix]
• Allowing a tip credit in St. Paul would roll back progress on the gender wage gap, and intensify its pernicious effects on women’s economic security. Women in Minnesota earn 17 percent less than men, according to a recent report by the American Association of University Women,[xl] which—compared to the 27 percent gap in 1999—is a slight but important improvement over recent years.[xli] The gender pay gap reflects, in part, gendered occupational segregation,[xlii] such as the overrepresentation of women in low-pay occupations, including restaurant servers. With the adoption of a subminimum tipped wage in St. Paul, the gender pay gap could widen, as tipped workers would be guaranteed only a minimum wage paid directly by their employer equal to the state’s lower wage floor—currently $9.65 per hour, or 35.7 percent lower than the target rate of $15. This would, in turn, not only reverse progress on closing the wage gap in the state and the city, but also leave women in tipped occupations dependent on tips for a bigger portion of their income and, as a result, more vulnerable to poverty and economic insecurity.
• Sexual harassment is rampant in the accommodations and food services industry. Both research and anecdotal evidence point to higher rates of sexual harassment in service sector industries—particularly in the accommodations and food service industry, which includes full-service restaurants—than in other industries. Analysis of sexual harassment charges filed with the Equal Employment Opportunity Commission (EEOC) between 2005 and 2015 shows that over 14 percent of all sexual harassment filings originated in the accommodations and food service industry—the highest among the 20 industries identified in filings.[xliii] Other research shows a connection between the sexualization of women’s bodies and gratuities, with more attractive (and usually white) female servers reporting higher tips, compared to their peers.[xliv] In addition, allegations of sexual harassment by celebrities, renowned chefs and other high profile individuals have prompted media investigations of the pervasiveness of similar conduct among ordinary people. For example, the New York Times recently published a story on sexual harassment in the restaurant industry, based on interviews with more than 60 servers and bartenders from around the country. While these tipped workers’ experience with sexual harassment varied, they nonetheless reported two common reactions: Feeling compelled to tolerate this behavior in order improve their odds of earning a decent tip; and feeling powerless to reject this behavior from customers.[xlv]

The Lower Subminimum Wage for Tipped Workers is a Unique, Unfair, and Unnecessary Subsidy for Employers in the Restaurant Industry

• The intended purpose of tips is to reward good service rather than to serve as a substitute for the wages directly paid by employers. In states where a tip credit is allowed, however, tips have become a means for employers to transfer responsibility for paying employees’ wages onto the customer. This mainly benefits employers in the restaurant industry and other service industries where the majority of tipped workers are employed. No other industries are subsidized this way.
• Employers in the restaurant industry are among the most avid users not only of the tipped subminimum wage, but also of the standard minimum wage, and they are among the least likely to offer workplace benefits—such as health insurance, paid sick leave, and paid holidays—making the industry one of the least generous.[xlvi]
• The restaurant industry is one of the most profitable sectors of the economy. According to the National Restaurant Association, nationwide industry sales were expected to reach $799 billion in 2017—equivalent to 4 percent of the U.S. gross domestic product.[xlvii] The industry employed 14.7 million workers last year, or roughly 10 percent of the nation’s workforce, a number that is expected to increase by nearly 11 percent by 2027.[xlviii] These figures suggest a healthy and profitable industry that could withstand the gradual elimination of the tipped subminimum wage at the national level.
• In Minnesota, despite equal treatment for tipped workers, the restaurant industry is similarly profitable and thriving (see the first section of this report). The St. Paul City Council should not change its law to adopt an unfair and unnecessary tip credit system.

Minnesota Is One of Seven States Without a Tipped Subminimum Wage; These States Have Fast-Growing Restaurant and Hospitality Sectors

• Seven states, including Minnesota, do not have a tipped subminimum wage. The seven One Fair Wage states are California, Nevada, Washington, Minnesota, Alaska, Oregon, and Montana. And, as noted above, many local jurisdictions—including Minneapolis, Seattle, and various cities and counties in California—that have adopted a $15 minimum wage have done so without adopting a lower minimum wage for tipped workers.[xlix]
• Analysis of restaurant data shows that One Fair Wage states represent some of the fastest-growing states for the restaurant and hospitality sectors. See NELP and ROC-United’s report, The Case for Phasing Out Maine’s Subminimum Wage for Tipped Workers, for additional details.[l]

A Growing Movement Is Advocating for—and Winning—One Fair Wage—It Would Be a Mistake for St. Paul to Move in the Opposite Direction

• A growing national movement for One Fair Wage has brought to the fore the need to abolish the subminimum tipped wage with increasing success. In November 2016, this movement won its first significant victory in three decades, when voters in Maine and Flagstaff, AZ, approved the gradual elimination of the subminimum wage for tipped workers through ballot initiatives[li]—though, in the case of Maine, business groups successfully lobbied the state legislature to roll back One Fair Wage just a few months later.[lii]
• At the federal level, the current bill in Congress that would raise the federal minimum wage to $15 also includes a gradual phasing out of the lower tipped minimum wage.^[liii] Introduced by Senator Bernie Sanders in the Senate and Representative Bobby C. Scott in the House, the Raise the Wage Act has the support of 200 members of Congress, including Minnesota Senator Amy Klobuchar, and Minnesota Representatives Keith Ellison and Betty McCollum, all of whom are original cosponsors.^[liv]
• In June 2017, soon after introducing the Raise the Wage Act in the U.S. House and while Minneapolis debated raising its minimum wage to $15 without exempting tipped workers, Ellison wrote, “Unlike the federal government, Minnesota has been for more than 30 years one of the few states that does not have a separate, subminimum wage for tipped workers. That is something I am proud of and I know many other Minnesotans are, too.”[lv]
• Today, there are nearly a dozen upcoming or future minimum wage campaigns at the state and local level calling for raising the minimum wage to $12 to $15 along with the elimination of the tipped subminimum wage.

The Tipped Subminimum Wage System Is Difficult to Monitor and Enforce; It Would Add Undesired Complexity to St. Paul’s Wage Law

• In jurisdictions without One Fair Wage, employers are required by law to make up the difference between tips and the minimum wage if employees’ total hourly earnings do not bring them to the full minimum wage. However, the complexity of the tipped credit system and the scarcity of public and private enforcement of wage laws makes this requirement difficult to monitor and enforce.[lvi]
• Not surprisingly, the U.S. Department of Labor found an 84 percent noncompliance rate among the nearly 9,000 full-service restaurants it investigated from 2010–2012. Violations included tip credit infractions and other forms of wage theft, resulting in $56.8 million in back pay for affected workers.[lvii]
• Paul should reject calls to adopt a tipped subminimum wage in the city. Doing otherwise would add undesirable complexity to its wage laws, making compliance more difficult for employers in the city and life more precarious for tipped workers.

Conclusion

Tipped workers in St. Paul need and deserve $15 as their base wage. Moving to a tip credit system would hurt tipped workers and make it harder for them to make ends meet and to provide for their families. Both data and the experience of workers demonstrate that tipped workers typically earn just a few dollars above the minimum wage, and as a result have significantly higher levels of poverty than the rest of the workforce. A tip credit system would also introduce unnecessary complexity to St. Paul’s wage law, which would make the law harder to enforce and wage theft more likely to occur. Since the overwhelming majority of tipped workers are women, a tip credit system could widen the gender wage gap and exacerbate their experience with sexual harassment—with especially pernicious effects on female-headed households.

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