How to Legally Screw People: 101
Tip credits in the Hospitality Industry
Restaurant Opportunities Centers (ROC) is calling for a nation-wide strike on Monday May 1. They contend that working conditions in the restaurant industry are generally oppressive and that sub-par wages have contributed to widespread poverty; I couldn’t agree more. ROC are opposing “policies and rhetoric” of the Trump Administration but the unethical treatment and taxation methods that restaurant workers are subject to started long before Trump took office.
I’m old enough to remember when waiting on tables guaranteed I’d make enough money to pay my bills. That ended with “Reaganomics”. In my youth, when all my friends were lucky enough to live at home while attending university, I was working to pay rent and bills. After the death of my mother when I was 16, I had to figure out, quickly, how to make money to survive. Working in hotels, bars, and restaurants became my fail-safe. Without them, I would have perished. I’ve worked in more bars and restaurants between Toronto and New York than you’ve forgotten. Between temp stints, catering, and other odd and soul-sucking jobs, I’d estimate that I was a bartender/waitress/hostess for nearly fifteen years. I fared way better in Toronto, where a capitalist economic system doesn’t have carte blanche to screw the poor and middle class. Working at most establishments in New York, however, was hell — especially once “Reaganomics” kicked in.
In August of 1982, the Tax Equity and Fiscal Responsibility Act (TEFRA), took aim at the service industry. It was one of the most draconian tax law reforms in U.S. history and it targeted restaurant and bar workers who earned tips. Besides mandating that bar and restaurant owners keep track of tips, they were reclassified as part of a worker’s salary. Thanks to Reagan, tips became “taxable wages”.
Employers were able to consider tips as part of the worker’s salary — thus reducing the amount of wages they actually had to pay to their staff. Employers no longer had to worry about paying the minimum wage. The practice, called a “Tip Credit” has created a byzantine tax code with hundreds of contingencies that operate to remove money from the pockets of those who need it most.
Just how complicated is it?
Minimum hourly rates became a combination of actual salary and “tip credits” and it’s different in every state. Also, the rates vary depending on the number of employees and type of establishment. The result? When Reagan’s new tax structure for tipped workers took effect my paycheck went from about $112 dollars one week, to $2.68 the next. That’s right, two-dollars and sixty-eight cents.
Since I didn’t make enough money with my paltry $2.01 an hour salary and tips combined, I didn’t, literally, make enough in combined tips and salary that week to pay FICA, (social security and Medicare), which is calculated on a hypothetical amount of tips earned [different for every state and employer] so the money was taken out of my paycheck the following week. And so on and so on… It means that one never gets a paycheck that is enough to cover much more than a few Happy Meals or a movie ticket. Oh sure, there will be days where you do better but the inconsistency is daunting and averages out to be a hand to mouth existence in most cases. As long as employers can claim that your tips plus your meager salary equal the minimum wage they’re off the hook in terms of paying you an actual salary. How does that work? The house assumes you’ve made a certain amount of money in tips — usually 8% of the gross take — whether you do or not. As long as they can work out the numbers to satisfy the minimum hourly wage for the amount of hours you work, the employer is covered. Ah, capitalism at it’s finest. And keep in mind the federal minimum wage has been $7.25 an hour — unchanged since 2009.
Thanks to Reagan, employers were relieved of having to pay tipped workers — not only a living wage — but a wage that was sufficient enough for the government to deduct taxes from. Think about it. A majority of service workers don’t make enough money to pay taxes and yet, the government is taking more money from them than they can make to survive — plus, they’ve made it legal for employers to pay less than minimum wage in their respective states. It’s irrational when you take it apart:
“… If this process leaves you [the employer] with insufficient funds to collect the employee’s FICA tax, your obligation to withhold the uncollected portion ends. In contrast, any outstanding income tax collections should be withheld from your next payment of wages to the employee.” (Employer Payroll Tax Obligations for Tipped Employees)
And the worst part? Two dollars and thirteen cents an hour has been the “tipped minimum wage” for 23 years. It’s only been recently this wage has budged and it’s still much lower than what non-service workers make.
Reagan’s supply-side, voodoo economics precipitated the myth of restaurant and bar workers as ingrates who made so much money in tips they were able to maintain homes in multiple countries along with shadow bank accounts. It coincided with his depiction of welfare recipients, as “welfare queens” — thieves who enjoyed multiple benefits by fraudulent methods. It created a false narrative of poor people bilking taxpayers. Reagan’s cabinet was also dominated by ultra-conservative businessmen — sound familiar? Their rhetoric authenticated perceptions that served to demonize the poor and those who struggled with no access to social mobility. It’s the ramifications of this rhetoric that have legitimized inferior salaries and working conditions for an industry whose numbers are dominated by immigrants and minorities. There’s a great line in the movie, The Big Short, that depicts events leading up to the 2008 crash, where the narrator says: “…We’ll all be doing what people always do when the economy goes south: blaming immigrants and poor people.” It’s the de facto Republican modus operandi to blame the poor and immigrants for all economic fiascos.
And if you don’t think the Republicans went to extraordinary lengths to codify taxation that gouges tipped workers in perpetuity, try to wrap your head around some of the tax legalize in the “Fair Labor Standards Act” (FLSA). It’s daunting in it’s irrational complexity. It should be called: How to Legally Screw the Poor: 101.
Here’s how the “Tip Credit” works — right from the horse’s mouth
Tip Credit: Section 3(m) of the FLSA permits an employer to take a tip credit toward its minimum wage obligation for tipped employees equal to the difference between the required cash wage (which must be at least $2.13) and the federal minimum wage. Thus, the maximum tip credit that an employer can currently claim under the FLSA section 3(m) is $5.12 per hour (the minimum wage of $7.25 minus the minimum required cash wage of $2.13). Under certain circumstances, an employer may be able to claim an additional overtime tip credit against its overtime obligations.
Do you see the figures we’re discussing here? Minimum wage set at $7.25 an hour minus the required cash wage of $2.13 means that the employer only has to contribute $2.13 an hour to your paycheck if he can claim that you made the difference in tips. And this is all based on conjecture. The reality is that getting tipped appropriately is never, ever a guaranteed outcome. One is literally depending on chance and the kindness of strangers to pay the bills. Kathryn Casteel, at FiveThirtyEight, profiled Rebecca Fox, a 31-year-old New Jersey waitress, who still makes $2.13 per hour. She began at that rate 18 years ago and it’s now $6 less than the state’s minimum wage of $8.44 an hour. According to Fox, it doesn’t take much to propel your finances into chaos: “Let’s say your whole night is one big party and that party forgets to tip you for some reason. You’re going home with nothing.”
Confused? You’re meant to be. It guarantees that no one takes the time or effort required to unpack how biased and irrational this labyrinthine legislation is. The bigger problem is that this egregious taxation structure has been normalized by Democrats and Republicans alike. We’ve standardized shockingly prejudicial legislation that targets the poor, minorities, and vulnerable — in general, those without resources or sufficient advocacy. The inequity of how minimum wage is calculated for tipped workers has gone largely unchallenged. Trump is just picking up where Reagan left off, eroding, unions, workers rights, and fair wages.
Monday May 1 is Worker’s Day and thousands will take to the streets nationwide. Many will be immigrants and their allies. A general strike has also been called and collective force is one of the few ways we can mobilize against aggressive legislation that threatens to oppress all workers.
ROC United represents nearly 25,000 worker members, over 200 restaurant owner members and thousands of consumer members. To lift up the fight for better wages and working conditions for our nation’s 12 million restaurant workers, ROC is calling on restaurant workers, owners and consumers to participate in activities May 1, 2017, International Worker’s Day. Learn more.
