TOPICS > Economy

Rethinking wages for tipped workers

March 26, 2016 at 5:40 PM EDT
Due to low federal minimum wages for tipped workers, many grapple with poverty rates. Seven states, however, pay tipped workers full minimum wage before tips. And with minimum-wage hikes looming, some restaurants are pioneering no-tipping policies, eliminating gratuities in favor of higher hourly wages for workers. NewsHour's Alison Stewart reports.


It’s the standard practice for restaurant dining in America: You order. You eat. You pay. And you tip.

More than 4 million American workers rely on tips to make a living, and more than 60 percent of them are employed in the foodservice industry usually as servers or bartenders.

In most states, tipped workers –employees who receive at least $30 per month in tips–earn a base pay significantly lower than the minimum wage. At the federal level, minimum wage for tipped workers is $2.13 an hour, which hasn’t increased in 25 years.

The rationale is that tipped workers will make at least minimum wage through the tips left by their customers.

Shannon Sorenson, a waitress in Wisconsin, said the instability of tips makes it difficult for her to plan financially.

“There are some days the tips are amazing,” she told PBS NewsHour Weekend. “There’s days that, you know, I’m making probably compared to someone with a four-year degree. But then there’s other days that I’m making nothing. It’s so tough.”

When tips aren’t enough to make minimum wages, employers are supposed to make up the difference. But, according to the Department of Labor, there were at least 1,500 cases of tip credit violations in the past three years.

Some states like Minnesota, have eliminated the separate wage structure and now require employers to pay tipped workers the full minimum wage as base pay, regardless of tips. That means more money for tipped workers’ bottom line.

“What we see in those states is that the poverty rate among tipped workers is dramatically lower than in the states where they’re getting $2.13 per hour as their base wage,” David Cooper of the Economic Policy Institute said.

“What that tells us is that, even though, in theory, these folks in the other states are supposed to be getting at least the normal minimum wage, something isn’t adding up.”

But restaurant employers in Minnesota say that paying tipped workers more has made the cost of running a restaurant unmanageable. It has also increased the wage disparity between the serving staff and the kitchen staff, who don’t earn tips.

The move has prompted some restaurants to address the wage issue in another way: by paying servers a higher hourly rate, but eliminating tipping altogether from their restaurants.


Read the full transcript of this segment below:

LESA MELBY: Hello gentlemen, how are you today?

ALISON STEWART: Lesa Melby has been a waitress at “Grandma’s Restaurant Company” in Duluth, Minnesota, for 34 years.

ALISON STEWART: How many tables can you handle comfortably?

LESA MELBY: Kind of a lot.

ALISON STEWART: A lot? How many?

LESA MELBY: I can comfortably do probably nine.

ALISON STEWART: Wow. That’s impressive.

ALISON STEWART: Melby relies on tips as a core part of her income. But she also gets paid Minnesota’s state minimum wage of 9 dollars an hour.

ALISON STEWART: If you have a day when you get completely stiffed on tips, you will still take home your minimum wage.

LESA MELBY: right. Right.

ALISON STEWART: The federal minimum wage is 7.25 an hour. But in 43 states employers are allowed to pay tipped workers less — some as little as $2.13 an hour, a federal wage which has not increased in 25 years.

The rationale is that customer tips are supposed to make up the difference between 2.13 an hour and the minimum wage.  And if the tipped employee doesn’t receive the minimum wage through tips, employers are required to pay the difference. In the industry it is called “topping up.”

In seven states, including Minnesota, “topping up” is not an issue because those states require employers to pay tipped workers the full minimum wage. Tips are considered additional income.

ALISON STEWART: Right next door to Minnesota, here in Wisconsin, it’s a different reality. The minimum wage for tipped workers in Wisconsin is $2.33 an hour.

ALISON STEWART: Shannon Sorenson lives in Eau Claire Wisconsin, about an hour’s drive from the Minnesota border. She’s been working as a waitress for about 6 years and her current employer pays her a little more: 3 dollars an hour before tips. She recently switched to working part time.

SHANNON SORENSON: There are some days the tips are amazing. There’s days that, you know, I’m making probably compared to someone with a four-year degree. But then there’s other days that I’m making nothing. It’s so tough. I got the car payment, I got the bill payment. Oh, I got the car insurance payment too. Oh wait, I also need to eat too.”

ALISON STEWART: Do you think you could survive being a server in Wisconsin full-time?

SHANNON SORENSON: It would be a very stressful life. Very stressful. Living paycheck to paycheck. Never really knowing what I’m going to make. I don’t want that.

ALISON STEWART: Now Sorenson wants to finish her college degree and pursue a career in interior design. She likes being a waitress and her bosses but she rarely makes enough to support herself.

SHANNON SORENSON: People just don’t understand how much work goes into being a waitress. And just the days I don’t get a lot of money, it’s just so hard. And everything becomes more expensive, so it’s harder and harder.

ALISON STEWART: David Cooper has been studying tipped labor for the Economic Policy Institute, a nonpartisan, Washington think tank. Cooper says almost 15-percent of tipped servers earn less than the federal poverty line. But in states that pay higher base wages, tipped workers, like Lesa Melby in Minnesota, are faring better.

DAVID COOPER: What we see in those states is that the poverty rate among tipped workers is dramatically lower than in the states where they’re getting the $2.13 per hour as their base wage. So, what that tells us is that, you know, even though, in theory, these folks in the other states are supposed to be getting at least the normal minimum wage, something isn’t adding up.

ALISON STEWART: Even though employers are supposed to “top up” and make sure tipped workers earn the full minimum wage, Cooper says, they don’t always do so.

DAVID COOPER: You have to do this additional calculation of adding up their tips, and counting their hours, and making sure that the base wage plus tips equals the full minimum wage. And it’s complicated. And it’s also complicated for employers, too. Because the law isn’t entirely clear about how to do this calculation.

ALISON STEWART: The federal labor department has looked into this question.  In the past three years, tip credit violations were found in over 1,500 investigations resulting in nearly 15.5 million dollars in back wages being identified.

ALISON STEWART: Employers are supposed to match up to the minimum wage if you don’t make it.

SHANNON SORENSON: I did not know that.

ALISON STEWART: What if someone said to you, “wow, we’re going to be just like your neighbors over there in Minnesota and you’re going to get minimum wage as your base salary, plus your tips”?

SHANNON SORENSON: I would love that. I actually know some people who used to work in Minnesota as a server, and then they came over here. And they realized that they’re only making $2.33, and they’re like, “I’m literally losing thousands of dollars by coming over here in Wisconsin.”

ALISON STEWART: At the Butter Bakery Café, in Minneapolis, Minnesota, waiter Andrew Dunn says being paid the state’s required 9-dollar-an-hour minimum wage before tips is a crucial safety net.

ANDREW DUNN: The amount I’m working is the maximum that I can work right now. And I pay all my bills, but not a lot more. So it would be very hard to have my base wage slip below the minimum wage. We have those slow mornings, where hardly anybody comes in, and your tips are really low.

ALISON STEWART: In terms of the percentage you take home, on your best day, what percentage is base wage and what percent is tip?

ANDREW DUNN: On the best day, I would say that my base wage is about half, and my tips are about half, and on the worst day, my base wage is about three-quarters of what I take home, and my tips are about a quarter.

ALISON STEWART: Butter Bakery Cafe is not a full service restaurant, so there is less opportunity for tipping servers. Owner Dan Swenson-Klatt says paying his workers a living wage has always been a priority.

DAN SWENSON-KLATT: Currently, I have to pay a little more, because they don’t see the same level of tips.  If I knew they were getting a lot more tips, I might look at dropping my base wage a bit more. Cause ideally it’s about what they make total, the total compensation.

ALISON STEWART: At Grandma’s Restaurant Company in Duluth, where servers can make a higher amount of tips, Lesa Melby is afraid that her customers will tip her less if they learn of her minimum wage increases.

LESA MELBY: I make more money off of my tips than I do my paycheck. And if people are going to think that I’m getting a higher minimum wage, they’re going to start tipping less or not at all.

ALISON STEWART: And Grandma’s regional manager Tony Boen says that the requirement to pay servers minimum wage has had unintended consequences at their six restaurants. For one, it has increased the wage disparity between the serving and kitchen staff.

TONY BOEN: The mandated minimum wage increase was giving an increase to our most highly compensated employees, at the peril of our cooks and the guys in the back of the house, who don’t make tips. So we needed to find a way, and we still need to find a way, to bridge that wage disparity. So that’s a huge challenge for us. How can we do that?

ALISON STEWART: They’ve raised prices to cover the higher labor costs for their 400 to 600 employees, the number fluctuates depending on the season. But Boen says that’s not enough to keep up with ongoing mandatory minimum wage jumps. The next one will be in august from 9 to 9.50 an hour.

ALISON STEWART: Have you ever had a customer say, “Hey, why are your prices going up?”

TONY BOEN: No. They don’t say that.

ALISON STEWART: What do they say?

TONY BOEN: They just don’t come. We’ve cut jobs. We’ve cut hours. We closed three restaurants that became unprofitable due to minimum wage, plus some other factors but that was a huge factor.

ALISON STEWART: On the other hand, employment in the hospitality industry in states that pay full minimum wage to tipped workers actually saw stronger growth from 1995 to 2014 than in states that pay less.

ALISON STEWART: When we talk about raising the minimum wage, what can we do to help the restaurant owner?

DAVID COOPER: I think, as long as you phase in those increases over time, it gives businesses time to adjust. When you raise the minimum wage, all of the competitors are also facing that additional labor cost. So, presumably, they should be able to pass that additional cost on through higher prices, and no one’s going to be at a competitive disadvantage.

I think that the tipping system creates some unique challenges there because at a higher-end restaurant, they know that the clientele probably has a little more money to spend; they can absorb those price increases a little more easily. At a, you know, more family dining restaurant, it might be a little harder to absorb those increases.

ALISON STEWART: Some restaurants are addressing the wage issue by paying servers like other employees: wait staff receive a higher hourly rate, but the restaurant has a no tipping policy.

ERICK HARCEY: Rib-eye, seat 9.

ALISON STEWART: That’s how chef and restaurant owner Erick Harcey runs his two Minneapolis restaurants. Customers at his “Victory 44” and “Upton 43” are told they should not leave a tip.

ERICK HARCEY: A lot of it was just sort of trying to get in front of some of the change, the policy. The minimum wage is going up.

ALISON STEWART: Servers at his restaurants are paid a starting base salary of 17 dollars an hour. To cover the cost, he raised his prices 18 percent — about the equivalent of a tip at his restaurant. The no tipping policy also helps him pay the kitchen staff higher wages.

ERICK HARCEY: For the servers, it may have averaged out slightly. Some are making more. Some maybe slightly less, but it’s guaranteed. But for the cooks, the dishwashers, the hosts, they’re making substantially more than they have in the past.

WAITRESS: We are gratuity-free so the number here is your total for the evening.

ALISON STEWART: How are you going to know when this has been a success?

ERICK HARCEY: I feel it’s a success already.


ERICK HARCEY: The success I’m gauging is the feedback from the guests. They’re just — they love the experience.

And when they leave and say, “You know what? This was phenomenal service,” they’re not, “oh, it was better because there was no tips.” they’re just stating, “This was great service.” and then, at the end of the night, I, you know, I count my cash in the register. That’s the success.

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Chasing the Dream: Poverty and Opportunity in America is a multi-platform public media initiative that provides a deeper understanding of the impact of poverty on American society. Major funding for this initiative is provided by The JPB Foundation. Additional funding is provided by Ford Foundation.