The End of Bar/Restaurant Tipping: Making Sense of Initiative 77

The Washington Post recently published an article about the June 19 ballot measure that will allow voters to determine whether tipped employees (bartenders, servers, barbacks, bussers and food runners) will continue to receive the tipped minimum wage ($3.33 per hour) or ease toward receiving the regular minimum wage ($12.50 per hour, soon to be $13.25 per hour as of July 1).

While the issue is often presented as being a progressive measure to increase wages and combat sexual harassment, it’s a complicated issue, and one not cut cleanly along traditional ideological and political lines. It’s also not the first murky pay-related measure that has hit the restaurant industry over the past few years.

What is the tipped minimum wage?

Tipped employees currently earn $3.33 per hour in addition to tips. Between wages and tips, tipped employees must receive a minimum of $12.50 (the current minimum wage) per hour worked over the course of each week. If (wages + tips) / (hours worked) is less than $12.50, an employer must pay the employee to make up the difference. Accordingly, tipped employees are already earning, at the minimum, the regular $12.50 minimum wage. This minimum amount between tips and the tipped hourly wage will continue to increase with the scheduled minimum wage bumps, the next of which is to $13.25 on July 1, 2018.

Why is this Initiative being pushed?

It’s not entirely clear, but here are some of the reasons being presented:

• Sexual Harassment: Proponents of the Initiative argue that tipped employees are subjected to harassment and put in the position of losing out on tips if they stand up to said harassment. I don’t know exactly to what extent customers harass bar and restaurant employees. I’ve asked employees at venues I own if they’re subjected to harassment from customers. The general sentiment from these conversations is that harassment occurs occasionally, and that it’s unclear whether it occurs because customers feel emboldened to harass employees due to the tip system. Studies have suggested that restaurant workers have been disproportionately subjected to sexual harassment, but it’s difficult to verify a causal relationship between servers and bartenders being harassed and the tip system.
• Wage theft: Diana Ramirez of the Restaurant Opportunities Center (one of the main sponsors of Initiative 77) claims that certain employers don’t ensure that their employees make the full minimum wage if their tipped wages ($3.33 per hour) plus tips don’t amount to $12.50 per hour. She specifically calls out IHOP in Columbia Heights for failing to live up to this requirement. I can’t speak to the payroll practices of IHOP in Columbia Heights, but considering how lucrative it can be for employees to sue bad actor employers, this seems like a strange rationale. Additionally, if employers intend to break the law and pay sub-minimum wage rates, they don’t need a tipped wage system to do it.
• More wage theft: Back to the issue of blurred political lines, the Labor Department under President Obama in 2011 issued a directive clarifying that restaurants were not allowed to distribute tips to non-tipped employees. Essentially, this means that servers and bartenders cannot be required to share tips with managers, cooks, dishwashers, or any employee who is either paid the full hourly minimum wage or receives a salary. This is not as straightforward as it sounds. At the end of their shifts, servers and bartenders provide “tip-outs” to various employees. For instance, servers are often required to provide a percentage of their tips to the bartenders. Similarly, they must often provide a percentage of their tips to food runners and bussers, assuming of course that said employees receive less than the full minimum wage. And bartenders often must provide a portion of their tips or sales to their barbacks. The argument made by the Obama DOL was that business owners shouldn’t have the power to seize tips from employees earning the tipped minimum wage and distribute them to employees receiving the full minimum wage since the tips were meant for the servers and bartenders. This is a seemingly progressive, common sense rule. However, the opposing argument is that servers and bartenders generally make significantly more money than cooks, dishwashers and even managers, and that these other employees are important parts of the service process as well, so why not include them in the tip distribution? Further, cooks and dishwashers tend to be the lowest paid employees in the restaurant, and are more likely to be minorities than than servers and bartenders. Including them in the tip pool would increase their wages, and bridge the pay gap between them and the front-of-house staff. The Trump administration is currently attempting to roll back this rule. Granted, restaurant owners could theoretically use this as a cost-saving measure at the expense of tipped employees. For instance, restaurants could simply decrease manager or cook salaries and supplement these wages via inclusion in the tip pool, which could keep their net income at the same level while decreasing the take home amounts for servers and bartenders. Alternatively, restaurant owners could maintain current cook pay rates and include them in the tip pool, thus leveraging this potential change to provide higher compensation for kitchen employees. It’s unpredictable how it would play out.

Full Minimum Wage + Tips?

There’s not going to be a scenario of servers and bartenders earning full minimum wage plus tips. If servers, bartenders and barbacks/bussers/food runners receive full minimum wage, the tip system in D.C. will end. If the initiative is passed expect to see notices on menus (a few years down the road) explaining ~20% price increases and no more tip lines on credit card receipts. As an example, at Mission, a restaurant I co-own in Dupont Circle, if the wage rate for wait staff in 2017 had been full minimum wage ($12.50) rather than tipped minimum wage ($3.33), it would have increased labor costs by $272,734.69. Restaurants will of course need to increase prices in order to survive financially, and customers won’t be able to afford to pay these increased prices if the current tip system were to stay in place.

Who would benefit financially from Initiative 77?

For Initiative 77 being a supposedly progressive proposal, it puts a tremendous amount of control in the hands of business owners. Instead of paying servers and bartenders $3.33 per hour and allowing them to keep roughly 80% of their tips (15–25% generally goes to barbacks, bussers and credit card fees), owners would be able to determine exactly how much to pay these employees. Servers and bartenders should be careful in assuming that restaurant owners will automatically set pay rates with the goal of matching the tip era income. There’s no reason to think that all restaurant and bar owners necessarily agree that the current amounts earned by servers and bartenders is the appropriate market rate. It’s not something that owners have had to even consider previously, since the market rate is set mainly by customer discretion. Not as much in how much they tip, but where they decide to go — i.e. customers are essentially dictating that a server/bartender at a busy, high revenue restaurant should earn X, whereas employees working the same positions at less trafficked restaurants should earn significantly less. Of all the restaurants and bars that are struggling financially, this initiative would present the opportunity to eliminate tipping, increase prices, and not necessarily pass on all of those increases to the (formerly) tipped employees.

Restaurant Hardship

Many restaurant advocates claim that forcing restaurants to abolish the tipped minimum wage will create a higher restaurant closure rate due to increased costs. Increasing prices by 15–20% seems like an easy way to compensate for the higher staff costs. Granted, customers might initially suffer from sticker shock, but sooner rather than later they’d likely realize that price increases were counterbalanced by eliminating gratuity. The real concern is chaos.

Rip the band-aid off

Initiative 77 calls for easing into full minimum wage for current tipped employees. Tipped wage increase requirements would occur as follows:

• July 2018: $4.50
• July 2019: $6.00
• July 2020: $7.50
• July 2021: $9.00
• July 2022: $10.50
• July 2023: $12.00
• July 2024: $13.50
• July 2025: $15.00

If tipping were to be eliminated, I’d prefer it happen immediately such that all employees begin receiving full minimum wage, with all restaurants consequently eliminating tipping. It would come with significant difficulties, but at least everyone would be on the same page and operating in uniformity. Under the proposed plan, 2019 through 2024 look very confusing. Is it really the assumption that in 2024 restaurants will pay servers and bartenders $13.50 (this would be below the real minimum wage) on top of full gratuity they receive from customers? Even $9, nearly 3x the current rate likely wouldn’t be tenable for many establishments, as customers would have to bear the burden of both increased menu prices and the need to tip. It seems clear that somewhere during this period restaurants will slowly start preemptively abolishing tipping and move toward paying all employees the full minimum wage. Customer confusion would likely become a serious problem, as certain restaurants would begin operating without gratuity while others maintained the current system. Prices would likely be 15–20% higher at the gratuity-free establishments, and they’d likely even be 5–10% higher at the tipped establishments since they’d have to make up for the steadily increasing tipped labor costs. This is to say nothing of employees, many of whom work at multiple establishments and would need to deal with entirely different pay structures between restaurants using the two different systems.

New Payment Structures:

The idea of abolishing tips and switching to an exclusively hourly-based wage system for (formerly) tipped employees sounds simple, but it’s actually quite complicated. There’s a certain simplicity about tips — if a restaurant is busy and earns high revenues, both the restaurant and the tipped employees will benefit. In a gratuity-free environment, hourly rates would need to be set not only based upon an employee’s skill and experience, but there would also likely need to be variable pay rates based upon the day of the week and even which shift an employee is working (brunch vs. lunch vs. dinner vs. late night). If a restaurant has highly variable revenue on different nights of the week (most do), fixed pay rates could potentially render certain slower nights of the week (Sun, Mon, Tues) unprofitable. Certain menu items at restaurants can be loss leaders, but days of the week generally cannot. A fixed rate could also create difficulties in staffing weekend nights. Who would want to work a Friday or Saturday night if they could earn the same rate working Monday lunch? The variable pay system isn’t perfect either — what if there were a high revenue corporate buy-out on a Monday night? Would the staff pay rate remain at the lower Monday rate or be bumped up to take into account the higher revenue? Would there be a “rainy night” pay rate that takes into account the resulting decreased revenues? Yes, one-off staffing cuts can help alleviate this issue, but they won’t alleviate the issue entirely given that there’s generally a baseline level of staff needed to operate. What if busy holidays such as July 4 or New Year’s Eve or St. Patrick’s Day fell on a Sunday? Would employees still receive the lower Sunday pay rate on those days? This only scratches the surface of business and legal issues resulting from the likely necessary variable-rate pay system.

The margin between a successful restaurant and bar and an unsuccessful one is thin, and it’s a new struggle each week. Many popular, heavily-trafficked and critically-acclaimed restaurants don’t survive — see Ripple, Del Campo, Range, etc. Most restaurants are also not owned by large corporate entities that have entire departments that can restructure compensation models for a large portion of their employees. A large percentage of the people tasked with making sense of this will be owner-operators or chef-operators whose expertise is generally in food and service, not financial modeling. This will be a difficult burden to bear, particularly considering that Initiative 77 will likely decrease the take home pay for the employees it affects. Even Union Square Hospitality Group, perhaps the most highly-regarded hospitality company in the country, has struggled to make the new system work. Ultimately, this means that the law should be changed only if you believe that customer-on-tipped employee sexual harassment is currently a significant problem, is caused predominantly by the tipping model, and cannot be effectively fixed by means other than disbanding the current restaurant pay model. For the sake of both restaurants and employees, it would be worthwhile to look into other ways to address the issue, such as by increasing the number of females in senior management positions, creating best practices for fielding sexual harassment complaints, and training both managers and tipped employees how to confront situations with problem customers. Otherwise, Initiative 77 could very well create a scenario in which employees earn less, employers are burdened with unbearably complex pay structures, customers are confused and the problem of sexual harassment remains unaddressed.