Sam Bloch
Debates over the tip credit have brought up challenging questions about race, class, and income. The resulting decisions could change restaurant culture forever.

Issues Labor Policy

The New York State Department of Labor on Wednesday concluded months of public hearings about whether or not to abolish the tip credit and put all workers—including those who receive tips—on the same minimum wage. Here in New York City, that would be $15 an hour by 2020.

Photographed above: Melba Wilson, a restaurateur in Harlem, surrounded by food service workers, owners, and business advocates who support New York’s tip credit, outside a hearing in Manhattan.

Currently in New York City, businesses are allowed to take a credit of $4.35 toward the city’s minimum wage of $13, and pay their tipped workers—in restaurants, that includes servers, bartenders and bussers—a sub-minimum wage of $8.65 an hour. That’s legal, because those workers make up the difference through tips. When that isn’t the case for workers, the business cannot take the tip credit and must pay them the full minimum wage.

The state’s seven hearings, which have also been held on Long Island, in Buffalo, and in Albany, have been acrimonious, and at times heated and rowdy, with speakers booed and cheered (usually at the same time) when they suggest that the tip-credit system can lead to sexual harassment and wage theft, or that it has origins in slavery.

In short, it’s a debate that very much turns on race, class, and income.

But for all the anger, no one can say what will actually happen if the state does drop the tip credit. Minnesota was the last state that succeeded in abolishing it, and that was in 1984. Maine tried to nix it in 2017, but the governor overturned the will of the voters and it ultimately failed. More recently, Flagstaff, Arizona and Washington, D.C. have voted to put all workers on the same wage, but those changes won’t take effect for years.

When a restaurant owner takes a tip credit, they’re taking advantage of a federal minimum-wage provision that allows them to pay their workers a wage as low as $2.13 an hour, so long as tips bring their take-home pay back up to the federal or state minimum wage, whichever is higher. The federal minimum wage is $7.25.

Graphic by The New Food Economy

Here’s what could happen if New York state decides to abolish the tip credit:

Governor Cuomo would claim crucial victories.

Eliminating the tipped wage could be a big win for New York Governor Andrew Cuomo, a Democrat. Last spring, he directed his Labor Department to take on the issues of wage equity. Among its recommendations to close the gender pay gap? Eliminate the sub-minimum wage.

Two-thirds of tipped workers are women, and even when their tips are combined with wages, they still earn less than men. Abolishing the tip credit would guarantee women a minimum wage, and keep them from having to depend on the whims of customers to make ends meet.

Graphic by The New Food Economy

Dropping the tip credit would also line the state’s coffers. Higher wages would result in higher payroll taxes for the state, said Ron Mathews, director of the New York City chapter of the New York State Restaurant Association, an industry group for restaurateurs. He was one of 349 registered speakers at the hearing on Wednesday, which was held at Hunter College before a panel of four Labor Department officials.

“The reality is, New York state stands to gain tremendous tax revenues and talking points for, let’s say, political gain and budgetary benefit,” Mathews testified.

New York’s Labor Department would catch a break.

Killing the tipped minimum wage could also ease things for Cuomo’s Labor Department because the tip credit is considered one of the major causes of wage theft.

In cases of wage theft, employers have often broken the law knowingly, maliciously hoarding their workers’ tips, or failing to pay servers a full minimum wage when tips don’t make up the difference. Of course, they can also do it unwittingly—for example, incorrectly applying the tip credit to overtime. At a previous hearing on Long Island, a wage-and-hour attorney described instances of employers admitting wage theft during depositions without realizing what they’d done.

“The two-tier system—the tipped minimum wage versus the regular minimum wage—puts pressure on very limited enforcement resources,” said M. Patricia Smith at Wednesday’s hearing. Smith was the New York State Labor Commissioner until 2010, when she was named solicitor of the United States Department of Labor, a position she currently holds. “It creates an unnecessary, complex system, it puts workers at a higher risk of wage theft, and even has unknowing employers violating the law.”

Chris Williams, a labor lawyer from Chicago, agreed with Smith. Between 2010 and 2015, he said, restaurants accounted for one-quarter of wage-and-hour cases filed in the Southern District of New York, a federal court which includes Manhattan. That’s compared to 10 percent of cases filed in the Central District Court of California, which includes Los Angeles.

“I think the reasonable hypothesis, and it’s kind of obvious, is that at least part of this restaurant litigation gap between these two restaurant-heavy cities could be explained by the continued use of the tip credit in New York, versus the one-fair-wage system in California,” he testified at the hearing.

Full-service restaurants in Manhattan would close.

John Reoli, a server at Veselka, the long-standing Ukrainian diner in Manhattan’s East Village—really, a classic New York City restaurant, where plastered club-goers can wolf down hearty stews and sweet potato pierogi 24 hours a day—testified that the wage hike would force the restaurant to become a server-free buffet.

It was jarring: A restaurant server begging the state not to raise his wages. But he spoke to something innate in New Yorkers: A love of restaurants, and especially iconic, pre-gentrification haunts, the kind that stir nostalgia among old-timers and kooky radicals, and turn on aesthetes who flock to a vision of the city, only to see it disappear. Lose your servers at those restaurants, and you stand to lose your restaurant’s identity.

Appetite City has sky-high commercial rents, which means full-service restaurants run on razor-thin margins. Restaurateurs at the hearing said a minimum-wage hike for servers, bussers, and bartenders would force them to lay people off or close up shop altogether.

Graphic by The New Food Economy

“The reality for restaurant owners is that the level of labor cost increase will be 73 percent in a business with margins of 5 or 10 percent,” said Mathews. “It equals trouble, closures, and job loss in the restaurant industry.”

Others testified that the state’s previous minimum-wage hikes for tipped workers—most recently to $8.65 an hour, implemented last year—have slowed the growth of full-service restaurants and liquor-licensed establishments in New York City.

“If you walk around the city, you’ll see the industry, and the city, are changing,” said Melissa Fleischut, director of the New York State Restaurant Association. “There are vacant storefronts. There are more fast-casual restaurants, and fewer full-service restaurants.”

Do wage hikes really lead to fewer Veselkas and more Chipotles?

At the Long Island hearing, Sylvia Allegretto, a University of California-Berkeley labor economist, testified that, in the seven states where tipped workers earn the full minimum wage, employment growth in full-service restaurants outpaced overall private-sector growth by an average of 5 percent.

But that’s not a perfect comparison. In those states, whenever there’s a minimum wage increase, all workers are affected. That means that any bump in menu prices, prompted by higher wages, are offset by customers’ higher purchasing power. Not so in New York, where in abolishing the tip credit, the state would raise only the wages of restaurant workers.

Servers would brace for a pay cut.

In prior hearings, scores of servers testified that they already earn well above minimum wage. The same was true in New York City. Reoli, the Veselka server, claimed average earnings of close to $30 an hour. He said removing the tip credit will end that.

Servers say that higher wages inevitably lead to higher menu prices. Outside of fine dining establishments, those prices will scare away customers, they say, and that means less tip money. Remaining diners will think they’re already paying too much for the food, or they won’t feel the need to tip servers if those servers don’t have to depend on tips to make a living.

Graphic by The New Food Economy

But is that actually true? Do tipped workers earn less when their wages rise? Smith, the former labor commissioner, doesn’t think so.

“You’ve heard claims that raising the tipped minimum wage, and eventually eliminating it, is gonna hurt tipped workers’ bottom lines,” she said. “I looked at the peer-reviewed economic studies, and it does not support that claim.”

The sceptre of Danny Meyer’s no-tipping model, which was introduced to correct wage inequity in his restaurants, and resulted in lost earnings for servers, loomed large: Coalitions of servers foisted signs and chanted “don’t touch our tips!” at a rally before the hearing. Even though the state insists the hearings are not a referendum on tipping, many perceive more tip bans as an inevitable outcome. Michael Saltsman, managing director of the Employment Policies Institute, a think-tank that campaigned against Initiative 77 in Washington, D.C., testified that one in seven restaurants would pursue a no-tipping model if the tip credit was eliminated.

That’s bad for tipped workers, said Sarah Ahn, an organizer with the Flushing Workers Center, which represents low-wage immigrant workers, and has advocated for raising the tipped minimum wage and increased wage theft enforcement. In Flushing, Queens, where at least one dim sum restaurant has adopted the model, servers complained that increased wages meant to compensate for lost tips resulted in lower overall earnings, she told The New Food Economy.

“That’s a decrease in wages, no matter what way you cut it,” she said. “The vast majority of our workers rely on tips.”

Deliverymen would get a boost.

Lawyers, advocates, and workers associated with Make the Road New York, an immigrant rights group that works closely with Latinos, said the tip credit makes their members vulnerable to exploitation. Kathy Amiliategui, an organizer, told of working with a restaurant server in Jackson Heights, Queens who didn’t know that $8 an hour was below minimum wage.

“When workers come ask for help, they always ask, ‘What should they pay me? What’s the minimum wage?’” she testified. “It’s a simple question, and yet for tipped workers, it’s an unnecessarily complicated answer. It’s nearly impossible for workers to enforce their labor rights when the minimum wage is so convoluted.”

Deliverymen are especially vulnerable to wage theft, according to Mel Gonzalez, an attorney with immigrant organization Make the Road New York. He testified that thousands of food delivery workers and other tipped workers in New York City could fit into eight possible minimum wage tiers, which allows employers to capitalize on the confusion, and misclassify their workers.

Graphic by The New Food Economy

On average, delivery workers of color in New York City are tipped less than white delivery workers, and earn under $11 an hour, said Mel Gonzalez, an attorney with the organization. That’s well below the minimum wage, but employers get away with it by convincing the workers that customers should be making up the difference, he testified.

Sexual harassment would decline.

Would ending the tip credit end sexual harassment? Probably not. But it would help.

Advocates, attorneys, and servers all point out that tips, dangled like a carrot, make women more vulnerable to sexual harassment from customers. If workers don’t depend on tips to earn a minimum wage—which in New York City would be $15 an hour—then they won’t have to put up with harassment from customers, the thinking goes.

Saru Jayaraman, director of Restaurant Opportunities Center (ROC) United, which pushed Initiative 77 in D.C., said tipped workers, who are predominantly women, suffer the highest rates of sexual harassment in the industry.

“We are the source of the largest number of charges to the EEOC,” she said. “And that is because a woman has to rely on tips to feed her family, she has to tolerate all kinds of inappropriate customer behavior, to do that.”

Noreen Farrell, executive director of Equal Rights Advocates, pointed to data that show over 80 percent of restaurant workers in New York have experienced “unwanted sexual attention,” as compared to 32 percent of workers in California.

“The difference is that New York’s two-tier system promotes sexual harassment, and it disproportionately affects women workers,” she said. “It incentivizes bosses to turn a blind eye to sexual harassment.”

Those statements—along with similar comments made by representatives from the National Organization for Women, and the ACLU Women’s Rights Projects—were greeted with boos, scoffs and spittakes from the audience.

Correction: An earlier version of this article erroneously identified Noreen Farrell as executive director of the Equal Rights Association. The organization is called Equal Rights Advocates.

Sam Bloch

Sam Bloch has written about arts, culture, and real estate for publications including The New York Times, L.A. Weekly, and Artnet. His essay about Los Angeles' "shade deserts" will be published by Places Journal this winter. Reach him by email at: samuel.bloch@newfoodeconomy.org

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