OCEAN CITY — For an industry already struggling because of the ongoing pandemic, a proposed increase in the federal minimum wage and the elimination of the tip credit could signal the end for many restaurants.
Part of the Biden Administration’s proposed and fiercely-debated next federal COVID-19 stimulus package is the Raise the Wage Act, which includes a gradual increase in the federal minimum wage from $7.25 per hour to $15 per hour and the elimination of the tip credit. As its name suggests, the tip credit is a means by which hospitality industry business owners ensure tipped employees earn the mandated minimum wage.
Few would dispute the benefits of a mandated increase in the federal minimum wage for hospitality workers struggling in the midst of the ongoing pandemic, but the associated elimination of the tip credit could signal the death knell for many businesses. It’s complicated, but in layman’s terms, the tip credit allows employers to count employee tips as a portion of the minimum wage.
In simplest terms, if an employee earns $4 per hour on the clock, but makes $20 per hour in tips, the employer is responsibly for only paying the $4 for a total of $24. However, if the tip credit was eliminated, the employer would have to pay that same employee the mandated $15 per hour.
The hospitality industry fiercely opposes the proposed minimum wage hike in general, and the elimination of77 the tip credit specifically. The National Restaurant Association, the Restaurant Association of Maryland and, locally, the Ocean City Hotel-Motel-Restaurant Association (OCHMRA) have all come out strongly opposed to the measure.
Phillips Seafood, a major national corporation with its roots in Ocean City, provided some data to illustrate just how harmful the elimination of the tip credit could be for its businesses. President and Chief Operating Officer Dean Flowers presented the data during meeting of restaurant owners and allied industries last week.
In one example presented, a server works 30 hours per week at an hourly rate of $3.63 for a total paycheck of $108.90. That same server claimed $600 in tips for a net total of $708,90 for the week. Under the current formula, that server earned an effective pay rate of $23.63 per hour.
In another example which illustrates the potential impact of the elimination of the tip credit, a different server earns the same $3.63 per hour on the clock, but claims $150 in tips for the pay period for a total of $258.90 for the week. That adds up to an hourly rate of $8.63. However, if the tip credit was eliminated, the employer would have to make-up $191.10 for that employee to reach the mandated $15 per hour.
That’s just for one employee. For a big corporation such as Phillips, the average pay rate for all tipped employees was nearly $21 per hour in 2019, the pre-COVID year that was used in the example. Revoking the tip credit and raising the minimum wage to $15 would cost the company an additional $1.37 million per year.
Of course, Phillips is a major corporation with thousands of tipped employees, so the examples given are on a large scale. However, the formula would be the same and the impact no less for a small Mom and Pop restaurant with far fewer tipped employees. In an industry already operating at thin profit margins even before COVID, the proposed hike in payroll expenses could be make-or-break for many.
OCHMRA Executive Director Susan Jones reached out to association members last week encouraging them to contact their representatives in Washington to voice their displeasure with the proposed elimination of the tip credit. Jones said the proposed federal minimum wage hike and the associated elimination of the tip credit was a bargaining chip in the debate of the next federal stimulus package.
“We are hearing this act is part of a bargaining tool in politics,” she said. “We cannot sit by quietly and wait to see how things turn out. That is now how we operate. Having just sat in on a call with representatives from Senator Cardin and Senator Van Hollen’s office, I feel it is imperative our senators hear from constituents to understand the ramifications of eliminating tipped wages. It will be a devastating blow to the restaurant industry already reeling from an economy raked by the pandemic.
In its own statement released in opposition to the proposed changes, the National Restaurant Association agreed the elimination of the tip credit could be a final nail in the coffin for many businesses.
“The Raise the Wage Act imposes an impossible challenge for the restaurant industry,” the statement reads. “The industry has laid off 2.5 million workers as a result of the pandemic and one in six restaurants have shuttered. During a pandemic is not the time to impose a triple-digit increase in labor costs. Far too many restaurants will respond by laying off even more workers or closing their doors for good. A nationwide increase in the minimum wage will create insurmountable costs for many operators in states where restaurant jobs are most needed for recovery.”
