States establish wages for tipped employees in a variety of ways.  They may simply adopt federal minimum wage rates generally, including the $2.13 for tipped workers. They may set their own tip wage dollar amount. They may define wages to include tips, either without limit (in which case tipped employees could be paid nothing by the employer--the tips are the wage-- if it were not for the federal $2.13 that prevails because it is the higher employer obligation) or only up to a certain limit, the tip credit, leaving a minimum cash wage that the employer must pay.  

 

Five states--Louisiana, Tennessee, South Carolina, Alabama, and Mississippi--don't set state minimum wages at all for anyone, so the federal tip wage prevails for tipped employees.

 

In seven states and Guam, the employer cannot credit any portion of the employee’s average tip amount against the cash wage that must be paid, so the employee earns the full minimum age plus tips.  The states are Oregon (which passed its law in 1977), California, Alaska, Minnesota, Montana, Nevada, and Washington.  

 

In these no-tip-wage states, the hospitality industry currently 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 the 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 large sum, 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. 

 

                                             -- Brock Haussamen; revised November 2009