Do Restaurants Have to Pay Minimum Wage?

Couple dining, paying server with digital tablet credit card swiper at restaurant table
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Whenever states raise the minimum wage, as several have in 2019, there is some confusion about what applies to restaurant workers. Many servers receive $2.13 an hour, the federal minimum wage for tipped workers, but some states now require that restaurants pay them the flat minimum wage. In other states, the tipped wage has gone up but remains less than the flat minimum wage.

Beyond this, there are questions of whether restaurants have to pay employees the difference when tips don't add up to minimum wage, and whether employers can take any of their employees' tips. Finally, there is the question that has divided politicians for decades: Does the minimum wage hurt or help restaurants and their employees?

What Is Minimum Wage?

The federal minimum wage was established under the Fair Labor Standards Act (FLSA) of 1938, as part of President Franklin Delano Roosevelt's New Deal. The goal of the federal minimum wage, which was originally 25 cents per hour, was to ensure that workers were paid a livable wage (one that would keep them out of poverty). Along with the establishment of a minimum wage, the FLSA also introduced overtime pay, ensuring that certain employees who worked more than 40 hours a week were paid time-and-a-half.

Since its introduction, the minimum wage has been adjusted regularly by Congress, However, the current minimum wage of $7.25 an hour has not changed since 2009, leading some to argue that it isn't keeping pace with inflation. Had the minimum wage been increased to reflect the cost of living and general inflation, it would be more than $11 an hour in 2019. In 1938 the average person making minimum wage could support a family while remaining out of poverty. Today, in contrast, a worker who makes minimum wage earns $15,080 annually, assuming that he or she works five days a week, 52 weeks a year, without missing a day. The poverty line for a family of two in 2019 is $16,910.

Who Gets It?

To understand how tips and minimum wage interact, it helps to know the basic history of tips. Tipping as a means of income was established in 1942, when the Supreme Court affirmed that any tips given to employees belonged solely to the employees, meaning their employers or managers could not claim that money for the business. In 1965, the government began taxing employee tips as part of their wages and, in 1966, the government instituted a lower minimum wage for tipped workers. At this point, tips were effectively considered a major part of waitstaff pay. Finally, by 1988, restaurants were required to pay their share of FICA taxes on the reported tip income of their waitstaff.

As of 2019, everyone who works in a restaurant, no matter the state, must be paid a minimum of $7.25 an hour when tips are included. Depending on the local state minimum wage laws, restaurant servers can be paid what is known as a "minimum cash wage." While the federal minimum cash wage is $2.13 per hour (and higher in some states), there is a provision that, if a tipped employee does not make the federal minimum wage of $7.25 an hour, the employer must make up the difference. So, if you were a restaurant server who worked an eight-hour shift during a snowstorm, you might only earn $10 in tips, or the equivalent of $1.25 an hour. Your employer would be required by law to pay you the $48 difference ($6 x eight hours) to ensure that your hourly rate meets the federal minimum wage.

Do Changes in Minimum Wage Laws Affect Tipping?

Recent raises to the minimum wage in different states have resulted in different wage rates for tipped employees. For example, in Colorado, the minimum cash wage for restaurant servers is $8.08 an hour as of 2019. In Idaho, the minimum cash wage is $3.35 an hour. In Alaska and California, there is no tipped wage; servers are paid the regular minimum wage of $9.89 and $11 an hour, respectively.

Eliminating the tipped minimum wage, as they have done in Alaska and California, might look good on paper. After all, who can get by on $2.13 an hour? But some restaurant workers in states with a raised tipped wage or a flat minimum wage say they make less overall than they did under the previous minimum. It happened in Maine, where a 2017 rise in the minimum wage and minimum cash wage correlated with a decline in tips for some. According to a server interviewed by Maine Public Radio, her tips dropped in part because customers had an inflated idea of her wages. “I had one table ... who left me $5 on $65 and said to each other, ‘Why are you tipping her? She’s making $12 an hour, now,'" she said.

The cost of living and median wages play a role as well, and these vary widely from place to place. For example, in New York City, the current minimum wage of $15 an hour still falls short of what's needed to get by in the Big Apple, where a living wage is estimated to be $17.46 an hour for one person. In contrast, the state of Michigan is noted for having one of the lowest costs of living—the fourth cheapest in 2019—meaning that its minimum of wage $9.45 an hour goes a lot further for restaurant employees. All of these factors play a role in what restaurant workers consider to be fair wages.

Does the Increase Hurt or Help Employees?

Other critics of a minimum wage increase, including the National Restaurant Association, claim that damage is done to the economy, resulting in job losses and increased prices for consumers, which is partially true. According to the nonpartisan Congressional Budget Office:

“Increasing the minimum wage would have two principal effects on low-wage workers. Most of them would receive higher pay that would increase their family’s income, and some of those families would see their income rise above the federal poverty threshold. But some jobs for low-wage workers would probably be eliminated, the income of most workers who became jobless would fall substantially, and the share of low-wage workers who were employed would probably fall slightly.”

Proponents of raising the minimum wage, including groups like Fight for 15 and the Restaurant Opportunities Centers United point out that the current minimum wage is not livable. For the restaurant industry, in particular, low wages are often coupled with a lack of affordable health insurance or other benefits such as retirement matches or health savings accounts. The low wages also disproportionally affect women and minorities, the restaurant industry’s largest employee demographics.

No matter if you are in favor of increasing minimum wage (and minimum cash wages) or against it, restaurant owners or managers need to know all the rules and regulations around tipped wages. It is good business sense to ensure workers make a living wage, as this will lower turnover and improve customer service. There is no one-size-fits-all solution to this dilemma. A restaurant owner needs to determine what is best for his or her business ​and its employees.