A year ago, the loudest argument in the debate over creating a local minimum wage in Minneapolis was over tips. Now St. Paul is looking to institute a local minimum wage, and again the loudest argument is over tips.
And while those who want all workers to be on the same wage scale — a campaign its backers are calling One Fair Wage — many tipped workers in the restaurant industry fear that without a tip credit, they might lose their tips, their jobs — or both.
The St. Paul City Council is expected to resolve the dispute by this fall. But somewhere beneath the rhetoric is another topic that hasn’t generated nearly as much conversation: tip culture itself. That is, the strangeness of having one class of worker — restaurant servers and bartenders — receive so much of their pay not from a boss but directly from the customer.
After all, if tipping is connected to the social ills that opponents of a tip credit argue it does — from a troubling racial history to the encouragement of sexual harassment — how does a system that retains tipping in restaurants address those issues? Shouldn’t the argument be over getting rid of the practice of tipping altogether?
The local debate
Tip credits are a way of setting a lower hourly wage for tipped workers with the idea that they’ll make up the difference in tips. While Minnesota is one of seven that doesn’t have a tip credit in its state minimum wage, a local minimum wage could allow restaurants to require servers to count their tips to make up the difference between the state minimum hourly wage of $9.50 and whatever wage the cities require. Under this system, if tips were not adequate to fill the gap, the employer would be legally obligated to cover that difference.
Restaurant owners and many of their servers argue that the margins in restaurants are so narrow that owners might not be able to remain profitable if they have to start tipped workers at the higher hourly rate. They also say the bigger issue is getting so-called back-of-the-house workers — cooks, dishwashers and other non-tipped staff — higher pay, not servers, many of whom who do plenty well with tips.
In fact, full-service restaurants would likely have to pay servers well above minimum wage in order to keep their best producers, though their pay would likely be somewhat less — though more predictable — than they could make with tips added in.
Opponents of the tip credit, however, say not all servers do as well as those in higher-scale restaurants. They also point to instances where owners do not make up the difference or where tipped workers are assigned to tasks where tips are not generated, yet still get the lower hourly wage.
Arguments pro and con were evident during the debate over Minneapolis’ local minimum wage. The politics of the issue made it unlikely council members would support a tip credit, but the fact that Minnesota does not permit a tip credit in the state minimum wage law was the primary reason that city staff recommended that no tip credit be included in the city ordinance.
If St. Paul follows Minneapolis’ lead, a move that would put pressure on other cities in the region to follow suit, would a move away from tips ultimately be the result?
The politics of tipping
For backers of One Fair Wage, who oppose a tip credit, the politics of the issue are complicated. While they might wish for a world without restaurant tips, they’d rather not talk about it all that much.
That’s because the threat of a loss or reduction of tips is one of the motivating factors for the restaurant workers who’ve organized in favor of city tip credits. And anything that exacerbates the fear of lost income for restaurant workers hurts local minimum wage backers, a group that in Minnesota has been led by the Restaurant Opportunities Center, $15 Now, and unions such as the Service Employees International Union.
During a presentation in St. Paul in January, Saru Jayaraman, cofounder of the Restaurant Opportunities Center and director of the Food Labor Research Center at the University of California-Berkeley, acknowledged the contradiction in one-wage camp.
While she sees tipping culture as disturbing on many levels, she’s also careful not to empower tip-credit proponents, which are led by what she termed “the other NRA” — the National Restaurant Association.
“We’ve watched that whole idea — that tips are going to go away if wages go up,” Jayaraman said. “We’ve watched the Restaurant Association over the last several years develop that idea and develop the fear around that idea.”
She acknowledges that tips aren’t going away anytime soon and says there are advantages to moving away from a two-tiered wage system: one that relies on tips for basic pay and one with a single minimum wage supplemented by tips. She points to data that suggests tips do not go down in states without tip credits, and that reports of sexual harassment are lower in the seven states without tip credits.
Other models
At the same time activists have been campaigning to end tip credits, there have also been attempts to try different pay models for restaurants. One of those is to have eateries add a service charge to all tabs. Though the money is retained by the owner, it is often used to increase pay rates for servers who previously received tips and to raise wages for back-of-the-house employees, such as cooks and dishwashers.
“The disadvantage we see is that if service charges are not regulated by law, [and] we have seen unscrupulous employers do unscrupulous things with service charges,” Jayaraman said. “Others make sure the entire 20 percent or 17 percent goes to workers but who provide a very detailed, transparent outline of how that money is spent.”
There’s also the “hospitality included” model. “The same way you walk into Macy’s and you buy something and the cost you pay for that perfume or whatever includes the cost of the person who served you who showed you the different perfumes; … the cost of the rent,” said Jayaraman said. “It includes everything. It’s all included. That’s how other customer-service businesses do it.”
Jayaraman said one of the benefits of the system is that it eliminates the power of customers who think they can harass servers because they control so much of their income. “The customer is not king,” she said.
New York restaurant owner Danny Meyer is perhaps the most prominent practitioner of abolishing tipping. In an op-ed in The Washington Post about the move, he wrote: “We did it to decrease the pay gap between servers and cooks and to provide transparency into the true cost of operating a restaurant,” Meyer wrote. “More significantly, we did it to provide our employees with the professionalism that is standard in most other industries.”
Still, Jayaraman said others who have experimented with non-tipping models ultimately returned to tipping. “We’re not there yet,” she said of any changes to the tipping model.
“We just want to make sure everyone gets a wage. It seems like a very simple first step.”
Dan Swenson-Klatt, who owns Butter Bakery Cafe in south Minneapolis, is a member of an offshoot of ROC that represents restaurant owners called RAISE.
“It’s always been the organization’s stance publicly to say that you don’t have to be there yet but we want to get there,” he said.
Getting rid of tip credits and subminimum wages is the first step. “Removing that credit is their first line of importance in getting to no tips,” he said. “At the heart of RAISE is a culture in a restaurant industry that doesn’t need to have tipping as a way to pay people.”
The Seattle example
Seattle was the first large city in the country to create a higher minimum wage. Because it was first, and because the outcome wasn’t certain, the city allowed smaller restaurants — separate restaurants and restaurant groups with fewer than 500 employees —to have a tip credit. But the credit phases out in January of 2020.
The different rules for restaurants in Seattle has resulted in several different models for compensating restaurant workers. Smaller restaurants still eligible for tip credits have made few changes to their tipping practices. But larger groups have been shifting to a service charge model by which a flat charge is added to bills. While some also include tip lines on their credit card slips, others do not. Unlike tips, which by law stay with the server, service charges go to the owner.
The spread of service charges was part of the reason unions and worker groups in Washington pushed for a successful statewide initiative in 2016 to increase the minimum wage and require paid sick leave. The initiative attempts to regulate service charges by requiring disclosure on menus and receipts the percentage of the bill that goes “directly to the employee or employees serving the customer.”
And yet, one Seattle restaurant owner who had not yet moved to service charges said the initiative language would be easy to get around. “What if a restaurant, which is currently paying sick days, health insurance and meals on top of wages just says ‘all service charges go to the benefit of the servers’ and then uses that money to make up for tips, but also to cover those expenses, thus lowering the employee benefit costs per hour,” the owner said.
Instituting a service charge model in Minnesota would also not be without complications. Joel O’Malley, a labor and employment law attorney with the firm Nilan Johnson Lewis, said state administrative code allows a restaurant to impose a service charge. But it also requires that the restaurant must inform the customer on menus and bills that “the charge is not a gratuity.”
“If the restaurant wants to keep the service charge and do with it what it wants or distribute it the way it wants to … the service charge has to meet certain statutory requirements,” O’Malley said. The purpose is to inform customers that the money “is being kept by the restaurant and doesn’t belong to the servers themselves.”
Right now, the state even dictates the size of the font to be used to make such declarations. But what if — as in Seattle — a restaurant would simply argue that the money flows to the servers because it is used for pay and benefits?
O’Malley said such questions fall into a gray area, since the section of law has never been litigated. “There’s been no testing like you would expect in other areas of law of what sorts of language you can get away with and how far you can push it.”
A long way into the future
Because the phase-in period for the Minneapolis wage is so lengthy — employers with fewer than 100 workers won’t have to pay $15 until the summer of 2024 — there is less incentive to change tipping models. A few restaurants have moved to non-tipping pay models, though mostly because of philosophical, not economic, reasons.
Danny Schwartzman, who owns Common Roots Cafe in the Wedge neighborhood of Minneapolis, is active in the Main Street Alliance, which advocates for progressive economic policies. Like Swenson-Klatt, he made the switch to non-tipped employees a year ago. “I just decided to make the leap and go fully tip free,” Schwartzman said. “It was a scary thing but for me it was the right thing to do.”
He increased prices about 15 percent, with the intent of paying his employees at least $15 an hour, keeping health benefits and vacation and still making the business work.
Swenson-Klatt had been a teacher before deciding to start Butter Bakery Cafe 12 years ago in his Kingfield neighborhood of Minneapolis, and he partners with Nicollet Square and Beacon Interfaith Housing to train and employ young adults transitioning from foster care and homelessness.
He said it was natural for him to consider issues such as higher pay and benefits for lower-paid workers. But he still needs to make a profit. Working with his employees, Swenson-Klatt calculated that tips provided about 10 t0 13 percent of his workers’ pay, with more going to counter workers than to cooks, bakers and dishwashers. That information was what he used to calculate an increase in prices. Despite some confusion, customers have been supportive.
As he reaches the first anniversary of the change, Swenson-Klatt now realizes he fell a little short in calculating the pricing he needed to charge for food and drinks, and will make some price adjustments.
“We got close, but in the end we came up just a wee bit short; it just wasn’t the right set of numbers,” he said. “In the 12 years I’ve been doing this I have always told the staff there are points in the life of this business that it’s worth risking a bit of a loss to get to the next place.”
In an industry where the norm is low margins, Schwartzman said there’s a lot of motivation to keep costs as low as possible. “That’s the model and there are a lot of good people within it who are trying to do something different,” he said. “But that’s what everyone is competing against. In that reality, changing anything is certainly noticeable. Big picture: It would be great to see an industry where we’re competing on a level playing field and everyone is pricing-in a basic standard of living for employees. But that’s seeing a long way into the future.”
Both Swenson-Klatt and Schwartzman acknowledge that their counter-service restaurants present different, somewhat simpler, challenges than those that would face the owner of a full-service restaurant.
Indeed, only a few table service restaurants in the Twin Cities have tried — and at least three have returned to traditional tipping system. The sibling restaurants Upton 43 and Victory 44 tried a hospitality-included model in 2016 but reverted to tipping only a few months later. More recently, Bardo restaurant opened with a service charge model, but then switched to a plus-tip model.
“Though this original model was ultimately quite effective and most workable for the restaurant and its bottom line, we considered it in the best interest of our employees and guests to change to more socially standardized system,” wrote Bardo general manager Morgan Hawley.
Schwartzman said he’d like to see customers who agree his values make dining decisions with that in mind, even if he knows that might be wishful thinking. “That unfortunately isn’t what people think about when they think about going out to eat.”
