• Prior to the November election, the legislature chose to “adopt and amend” two citizen-initiated proposals, including the minimum-wage increase.
  • A bill has been introduced to keep the “tip credit,” which allows employers to count a certain amount of tips as part of an employee’s salary.
  • There is mixed evidence about whether the tip credit is productive or not.

 

With the lame duck legislative session in full gear, policymakers are taking one last chance to tweak state law before the newly elected representatives take over and a new governor is seated. One issue at the forefront: a pair of ballot initiatives it enacted in September.

After each received enough petition signatures to appear on the November ballot, the legislature approved both in September with an eye towards amending them later in the year. Ballot initiatives passed via a statewide vote require a supermajority (three-quarters of each chamber) to amend or overturn. But those approved by the legislature only require a simple majority.

One primary concern being examined is the elimination of the “tip credit.”

One fair wage proposal

The minimum wage law, originally submitted as a ballot proposal, will amend Michigan law in two substantial ways. The most controversial would gradually increase the state’s minimum wage, currently $9.25, over the next several years. Beginning in 2019, the minimum wage is scheduled to increase to $10, and would climb to $12 by 2022.

But the legislature’s immediate concern is the second change, which would eliminate the so called “tip credit” for employers. Here’s how it works: Federal and state law allows employers to pay a significantly lower wage to employees who receive tips, as long as their average hourly earnings over the workweek still meet the minimum wage. If tips do not reach that threshold, employers are required to “back” the wage, or pay the difference as part of the employee’s salary.

Michigan’s law, enacted in 2014, allows employers to pay tipped workers 38 percent of the state minimum wage (now $3.52; the federal minimum is $2.13). Under the initiated law, that tip credit would be eliminated in 2024, with employers having to pay a larger percentage each year.

The nation is divided on what portion employers should pay. Seven states require employers to pay tipped employees the full minimum wage, and five have a minimum wage higher than Michigan’s (see the map below). Of states with a lower minimum wage for tipped employees, 26 set it higher than the federal minimum, while 17 states have a minimum wage set at or below the federal level. Michigan’s rate ranks 27th highest nationally; higher than the federal minimum, but relatively low compared to states with a tip floor higher than the federal level.

National tipped minimum wages

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The national disparity in tipped wages is demonstrated quite well in the Great Lakes region. Minnesota requires tipped employees to be paid the full minimum wage. A few states require a larger portion to be paid by employers; Illinois is at 60 percent, while Ohio requires employers to pay half. Wisconsin and Pennsylvania have a separate state minimum, but it is within $1 of the federal requirement. And Indiana has not raised the floor from the minimum federal level, only requiring employers to pay $2.13.

Why is the tip credit so divisive?

Advocates on both sides of the issue have strongly held opinions about the tipped minimum wage. At the heart of the issue, however, is a lack of effective data supporting either side, and a number of complicating factors that make it difficult to determine what the exact effects would be.

Proponents of the tipped wage say it is good for employees, as they have the ability to earn higher wages. Under current rules, exemplary service can lead to better pay for the best employees, but if the tip credit was removed, restaurants could shift to a no-tip policy, lowering the ceiling on earnings. It would also be damaging to business, those in favor argue, as the choice between raising prices and hiring fewer workers could put many restaurants out of business, favoring larger companies that can automate more work. In other words, by equalizing earnings for all employees, there’d be less incentive for the best workers to do their best. And restaurants, stuck paying higher wages, might opt for fewer of these more expensive workers.

Opponents of the tipped wage counter that removing the tip credit would not eliminate tipping entirely, and the average worker would net larger salaries than they might otherwise. This is compounded by the fact that it can be difficult to ensure employers comply with wage-backing laws.

They also argue smaller businesses would benefit, as the cost of complying with the tipped minimum wage can be difficult when employees work both tipped and non-tipped positions. Not only that, there is some evidence conflicting with the idea that wage increases hurt restaurants.

Part of the problem with this debate is that much discussion occurs in the abstract, and looks too closely at the “average” restaurant and employee. Who benefits, and who pays the costs, differ greatly due to a number of factors. Bartenders and servers in more expensive restaurants, for example, may earn higher than the average rate of tips now than they would under a reduced tip system. Conversely, those working server jobs where the restaurant typically has to increase hourly wages to satisfy the tip-credit requirements will likely see increases in their paycheck.

Where does the Legislature go from here?

The proposed change as introduced would revert back to old rules; employers would be required to pay tipped employees 38 percent of the full minimum wage, and backfill pay if tips plus salary did not equal the minimum. But despite the complicated nature of the tip credit, there has been very little discussion beyond the top level justifications.

Some proposed changes could be productive for the state; but rushing decisions in the lame duck session is hardly the way to discuss the issue. It leaves open the chance for policy errors; one question left unasked is whether the tip credit should stay at 38 percent despite other changes. Is a $1 increase in the tipped minimum by 2022 too much? Or should there be a larger increase, given that the difference between the minimum wage and the tipped minimum wage will increase by $1.50, further stratifying the two wage rates? The discussion has focused on a binary solution, while there are actually several approaches to the issue.

This problem is magnified by the rushed nature of the previous legislation. In 2014, the tipped minimum wage was set at $2.65 state-wide, relative to the $7.40 minimum wage. The legislature at the time opted to change the sub-minimum wage from a fixed amount to one tied to the minimum wage, because they also indexed it to inflation. But the percent rate chosen was not well-discussed. In fact, the legislation took 20 days to pass from introduction to the governor’s signature. The tipped minimum, as a result, has been set at a rate that has not been discussed in full.

While the fact that the ballot initiative received more than 300,000 signatures is not proof there is a problem, it does show that there is public sentiment for some change. Reversing course quietly in the lame duck is not the type of policy-making that is likely to lead to the best solution.

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