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The Benefits of The Tip Wage

Restaurant and table settings

OVERVIEW

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Tip income includes not only cash, but all income earned by way of tips. Tip wages are essential to employees, employers, and consumers in a well functioning restaurant industry.

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According to recent research by the National Restaurant Association, skilled hospitality employees generally earn between $19-25 dollars per hour and have made clear many times that they support a tipped minimum wage on which both employees owe income and FICA taxes and employers pay taxes for Social Security purposes, Medicare purposes, and unemployment purposes.

GOOD FOR EMPLOYEES

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Employees get a wage increase each time a restaurant increases their menu prices because customers are generally tipping a percentage of their total bill. When menu prices increase, so do employee’s tips. This helps account for cost of living adjustments as a result of inflation.

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Tipped employees generally earn an average of $8-$14 more than the current minimum wage of $11.50/hour.

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Employers face strict penalties if they take a tip credit without meeting the legal requirements for doing so.

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Under the current system, all tipped employees are guaranteed the same minimum wage as all other employees in the event that their tips do not cover minimum wage requirements as.

Server with customer

Conclusion:

The system works for tipped employees as they are the highest wage earners in a restaurant and this model has driven job growth for supporting positions such as cooks, dishwashers and host/hostesses.

Table inside restaruant overlooking outside

GOOD FOR BUSINESS

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Under the current business model, the Rhode Island restaurant industry has grown to over 2,800 eating and drinking locations.

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Restaurants have the highest amount of entrepreneurship of any industry in the state.

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Restaurant owners must invest in their business to provide employees with the opportunity to make tips.

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Restaurants operate with an average of 2-3% of profit per year and thus make razor-thin bottom line profit. This is based on the well balanced business model of the restaurant industry. This is considered normal economic profit and is thus reflective of a healthy business model for consumers, employees, and employers.

Conclusion:

The system works for employers because it fairly compensates the employee and allows the employer to build and sustain their business. Additionally, this system keeps menu prices down for the consumer, which in turn, builds future business.

Providence, Rhode Island
Rhode Island State House

WHY?

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H.R. 582 – Raise the Wage Act was introduced by the House Committee on Education and Labor on January 16, 2019.
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This bill amends the Fair Labor Standards Act of 1938 for regular employees over a 7-year period, for tipped employees, and for newly hired employees, and for newly hired employees who are less than 20 years old.
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This bill would eliminate the separate minimum wage requirements for tipped and newly hired employees after a 7 year period.
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This bill would also increase the federal minimum wage from $7.25/hour to $15/hour by 2025.

Conclusion:

The Raise the Wage Act threatens to upend the current employment system of the restaurant industry by imposing universal employment standards to an industry with unique demands. The restaurant industry has not and should not be subject to universal business practices that will hinder business and institute a ceiling to wages earned by traditionally tipped employees.

CONSEQUENCES OF
ELIMINATING THE TIP-WAGE

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If the tip wage were to be eliminated, employers would be forced to pay their tipped staff an additional $7.61/hour to satisfy minimum wage requirements.
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This would result in a substantial increase to the operational cost of a business that currently utilizes the tip wage system.
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To compensate, employers would be forced to:

  • lay off employees;
  • raise the cost of their service; and/or
  • Slash wages for non-tipped workers who previously earned more than minimum wage.
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If unsuccessful and/or unwilling to make these changes, the razor-thin profit margin restaurants earn will be eliminated.

Conclusion:

Eliminating the tip-wage will result in lower wages for all employees whether tipped or not. Employers will be pressured to cut costs and/or raise the cost of their service. This will result in higher costs for customers which will

RI Hospitality Association™ . RI Hospitality Education Foundation™
RI Restaurant Association™ . RI Hotel and Lodging Association™

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