In 1966, Congress approved the first minimum cash payment for tipped employees, a payment set at half the minimum wage (which at the time was being raised from $1.25 to $1.60).  Unions supported the tip wage because restaurant and bar owners had been counting all tips towards the minimum wage, with no legal obligation to pay a food server or bartender a cash minimum.  The federal tip minimum varied from 40% to 50% of the minimum wage until 1996, when Congress froze it at $2.13 (half of the then-current minimum wage of $4.25) and added the requirement that if an employee’s average tips did not bring the total wage up to the minimum, the employer would make up the difference.  The tip minimum has remained at $2.13 ever since, even through the minimum wage increases passed in 2007.

 

Most states have followed the example of the federal tip-wage minimum, setting cash minimums ranging from $2.13 up to more than $5.  

 

Seven states plus the territory of Guam have minimum wages for tipped employees that are the same as the prevailing minimum wage; that is, the employer cannot credit any portion of the employee’s average tip amount against the cash wage that must be paid, and the employee earns the full minimum age plus his/her tips.  The states are Oregon (which passed its law in 1977), California, Alaska, Minnesota, Montana, Nevada, and Washington.   The regulations in these states that prohibit the use of tips as a credit against the cash wage emphasize and clarify the obligation of the employer, but legally, tipped employees are protected by the regular minimum wage—just like the workers in the restaurant’s kitchen--unless a state law creates an exception. 

 

Such a law specifies not only a minimum tip wage but also a maximum for how much employers can deduct from average tips even if the general minimum wage goes up.  For example, Arizona requires a minimum tip wage of $3.75 and a maximum tip credit of $3.00.  Arkansas set its tip wage at 42% of the minimum wage and its tip credit at 58%. 

 

In the no-tip-wage states, the hospitality industry seeks tip credit legislation so that restaurant owners can count a portion of tips as wages.  They argue that because employers are required to treat the tips as wages in other respects--reporting them and paying social security and unemployment taxes on them--they should not have to pay and process a full payroll wage on top of that. 

 

Those who oppose the tip credit argue that employees should not be required, as they are in most states, to subsidize the employer’s wages out of his or her tips.  They argue that while the payment of a full minimum wage on top of the sizable tips that servers can receive may seem like a lot, in fact such tip receipts are highly variable over the course of a day, a week, and the seasons, as well as among different restaurants.  Their preferred minimum wage law is one in which tipped employees are not mentioned at all. 

                                             -- Brock Haussamen; revised August 2007