A revised version of a proposed measure that voters never had the chance to vote on has caused heated discussions. Originally set to be on the 2018 ballot, the proposal aimed to eliminate the state’s “subminimum” wage, commonly known as a “tip credit,” where employers can pay tipped workers less, making up the difference if tips fall short. However, Republicans preemptively made changes to the law and later scaled them back during a lame-duck session, leading to years of debates among lawmakers. In 2024, the Michigan Supreme Court reinstated the original law, calling for the gradual phasing out of the subminimum wage.
In a recent bipartisan agreement reached just before a midnight deadline, the law was preserved instead of being eliminated. Governor Gretchen Whitmer signed the deal about 12 hours later. Advocacy group One Fair Wage, which advocates for higher base pay and an end to subminimum rates nationally, insists that workers are owed the higher wage legally since the original law was briefly in effect. The group is offering legal services to those impacted.
The complex nature of Michigan’s updated pay system, the negotiations involved, and the continued discontent are not unique to the state. Similar debates have occurred in other states where policymakers have aimed to increase pay for tipped workers or phase out subminimum wages. Employers have cautioned that higher labor costs could severely impact their already slim profit margins.
For example, Paul Andoni, owner of Shield’s Pizza in Troy, Michigan, estimated that complying with the original law would cost him an additional $90,000 yearly, potentially leading to a 20%-30% increase in menu prices. The National Restaurant Association argues that the tip credit benefits servers, customers, and restaurant owners by maximizing server earnings, ensuring sufficient waitstaff, and keeping menu prices affordable.
Some tipped workers are hesitant to do away with the two-tiered wage system, fearing that higher wages could result in reduced tips from customers or fewer customers due to increased prices. The landscape of gratuities has been evolving, with many restaurants increasing base pay to compensate for lower tips and offset rising costs. Consumer reactions to menu price hikes meant to cover these costs have sometimes been met with resistance.
The debate over pay laws for tipped workers continues not only in Michigan but also in other states grappling with similar issues.
Washington, D.C., is currently in the process of phasing out its subminimum wage. The decision to move in this direction was not an easy one for voters, as it took two election cycles to come to an agreement. Ultimately, the move was approved in 2022, after being rejected four years prior. As of now, the city’s tipped rate is set at $10 per hour, but it is scheduled to increase gradually and align with the standard minimum wage, which is currently set at $17. By 2027, the tipped rate will match the standard minimum wage. However, the restaurant industry in D.C. has already felt the impact of these wage hikes, with reports indicating a 3% decline in the workforce in 2024 compared to the previous year. A survey conducted by the reservation platform OpenTable revealed that over half of the dining establishments in the area have had to reduce employment levels.
On the other hand, despite the changes in wage policies, tip levels have not seen significant adjustments in states that have eliminated tip credits. For instance, in California, tipping practices have remained within the 15%-20% range. Saru Jayaraman, President of One Fair Wage, has expressed concerns about the current fragmented wage system, labeling it as unfair and unsustainable. She advocates for a level playing field for businesses of all sizes, where consumers are not burdened with directly paying workers’ wages but are able to provide tips as bonuses.
Despite efforts to phase out subminimum pay, it seems that this practice will persist in some states. Michigan continues to uphold subminimum wages, and Massachusetts voters rejected a proposal to replace it with a system that distributes tips evenly among workers. Only seven states, including Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington, have adopted universal pay floors, where tips serve as additional income. While 30 states have increased their minimum wages above the federal level, 20 have yet to do so, with the majority of them being supporters of the previous administration.
The current focus on tax cuts by the government has prioritized reducing taxes on various forms of income rather than mandating higher pay rates. Although some restaurant workers have expressed openness to tax savings on tips, the issue has been deemed a low priority overall. Critics of the proposal to eliminate taxes on tips argue that it could disproportionately benefit higher-earning service workers while offering minimal relief to those who heavily rely on tips. They suggest that such a policy could enable employers to save on payroll and taxes, potentially leading to an increase in tipped positions and reliance on customer gratuities.
Amidst these discussions, there are concerns from servers like Hendrien who fear that any changes to the current system could jeopardize the tips they rely on for income. This presents a challenge to activists like Jayaraman, who promote simpler alternatives that would ultimately benefit workers. While the idea of untaxed tips is appealing, some servers question its practicality if tips are not guaranteed.
