The Chicago City Council is considering an ordinance that would end the tipped minimum wage, fundamentally changing the business model of every restaurant in the city. Under the current law, the tipped wage in Chicago (different from the rest of the state) is $9.48 an hour. No tipped employee in Chicago makes less than the prevailing Chicago minimum wage of $15.80. If the combination of $9.48 an hour plus tips does not meet or exceed $15.80 for any hour they work, the employer must make up the difference.
The Illinois Restaurant Association in their material states that the “median full service restaurant tipped worker makes $28.48 per hour in Illinois.” The Association, primarily made up of Chicago restaurant owners, has traditionally opposed the elimination of the tipped minimum wage. On Sept. 20, the City’s Council Committee on Workforce Development signed off on a compromise agreed to by the Association to give Chicago restaurants five years to absorb a 66% increase in labor costs. Tipped restaurant workers will receive an 8% annual increase every July 1 starting next year through 2028. The measure goes to the full city council for a vote the beginning of October.
It was the Association’s contention that eliminating the tipped minimum wage would lead to “job cuts in the restaurant business.” They based their information on cities like San Francisco that have eliminated the tipped minimum wage and argue that for every $1 the minimum wage went up, the likelihood of a median-rated restaurant closing increased by 14%. They further argued that eliminating the tipped minimum wage would lead to widespread use of service charges in restaurants.
The Association surveyed 315 Chicago restaurants and 92% said menu prices would increase and 76% said they would have to decrease the number of tipped workers.
At this point, you may be asking about minimum wages and tip credit for the rest of the state. The federal minimum wage for all employees whether they receive tips or not is $7.25 an hour. The minimum wage in Illinois for 2023 is $13. Illinois law allows employers to claim a tip credit of 40% of the minimum wage. This means that Illinois employers may pay tipped employees an hourly wage as low as $7.80 an hour. As mentioned before, if this lower minimum wage plus tips the employee earns do not add up to $13, the employer must make up the difference. Now for a couple of definitions.
Tip pooling or tipping out: Many states including Illinois allow employers to require these. Employees subject to the pool have to chip in a portion of their tips that are divided among a group of employees. This group normally includes bussers, hosts and bartenders. The employees must be able to keep at least the full minimum wage even with tip pooling.
Service charge: Many predict we will see more restaurant service charges if the tip credit is eliminated. A service charge/service fee is collected in exchange for a product or service. Typically, it’s incurred at the time of the transaction and included in the bill. A service charge is not considered a tip. Many restaurants give at least part of the service charge to employees; it is the employer’s choice. Service charges have become very common in the food service industry as many restauranters add it to the bill for reasons like:
- Automatic gratuity for large parties
- Bottle service at a bar or nightclub
- Room service charge for a hotel restaurant
- Delivery fee for online deliveries
- Banquet or catering fee
Most consumers do not realize it, but restaurants are allowed to subtract a proportionate amount of an employee’s tip to cover the restaurant’s share of the credit card processing fee. For example, if the credit card company charges a 3% fee, the employer can legally reduce the employees tip by 3%. This is a good reason to reward your hard-working restaurant server with a generous cash tip.
Many people ask me if tips are taxable. The answer is yes. Employees must keep a daily record of the cash tips they receive and report them to their employer. Tips reported to the employer by the employee are included on the employee’s Form W-2, Wage and Tax Statement, for reporting on an individual tax return.
Restaurants need to file for tax purposes their total sales, charged sales, charged tips and total reported tips. Here is where it gets “dicey.” This report is organized in such a way as to highlight any shortfall of reported tips below 8% of gross receipts. If it is below the 8% threshold there is potential negative consequences for the restaurant and tipped employees.
As consumers, we can expect to see a domino effect with similar legislation in more cities and states. Evanston, a suburb of Chicago, has announced they are looking at a similar law. The main proponent of the proposals is the “One Fair Wage,” a labor advocacy group backed by the Service Employees International Union. There are current initiatives in Washington D.C., Michigan, Boston and New York. Seven states have eliminated the tip credit.
I, like most, have various opinions (not always positive) regarding the abundance of tip jars. I recently saw one that had the following note attached: “Money is the root of all evil. Cleanse yourself!”
I will keep you updated on the status of this issue.
About
Lincoln Land Community College offers credit programs in Culinary Arts, Hospitality Management and Baking/Pastry, and non-credit cooking and food classes through LLCC Community Education.
Cooking or food questions? Email epicuriosity101@llcc.edu.