Is Tip Sharing a Way to Combat Rising Minimum Wage Costs?

A little more than a year ago, Congress included in its Omnibus Budget bill an expansion of tip sharing for employers not taking a tip credit. Tip credit is a federal law that allows businesses with tipped employees to pay a lower, tipped worker minimum wage as long as that worker makes at least the non-tip minimum wage with tips factored in. Forty-three states and the District of Columbia allow employers to take a tip credit. California has not had a tip credit since 1972.

Tip pooling or tip sharing, is a common practice in the restaurant industry. The basic premise is that restaurants set-up a tip-pooling policy that determines what percentages of a tip goes to those employees involved in providing service. Legally service is defined as table service, so the person closest to the table is the greatest beneficiary of tipping. For those states where businesses can take a tip credit, service is defined as “front of the house staff” -- hosts, servers, bartenders, and bussers.

However, everyone working in a restaurant is involved in the service of providing food and beverage. In fact, restaurants define their meal periods as service -- breakfast, lunch or dinner service; sometimes there are additional service categories like sushi, raw bar, or late night. So excluding any employees from the definition of service doesn't really make sense.

Excluding people from service, namely “back of the house” employees -- cooks, dishwashers, etc., has exacerbated the income disparity between tipped workers, “front of house” employees, and those considered “back of house” – pretty much kitchen staff. Since servers or bartenders play the greatest role in providing table or bar service, they are typically the highest paid employees in a restaurant. This is especially true in San Francisco -- and other non-credit states where servers make $15 an hour -- soon to be $15.59 on July 1, 2019, plus their tips on top.

When a consumer leaves a tip, the consideration includes the food, ambiance, and service, but absent tip sharing, the only people rewarded are those providing direct table service. Those who place food on the table are making far more money than those making the food – and those making the food arrived hours before the meal service started to prep everything to conduct service. Oddly enough, the bartender who makes the drink that a server delivers can share in the tip, while the people who make the food delivered by the server frequently do not. So while everyone is talking about income inequality and the debate around tipped and non-tipped workers, most are unaware there’s a large wage gap that exists between those serving and cooking the food. But tip sharing could be a solution!

In a full-service restaurant, the only people making minimum wage are tipped workers. So when the minimum wage rises, tipped employees benefit from getting a raise and profit as menu prices increase to cover increased labor costs (they actually benefit regardless of why prices increase), while the “back of the house” staff that works just as hard to keep customers coming back, don’t see those increases. Studies show that when menu prices rise, tipped workers see their incomes increase, as consumers typically tip at a certain level as a common practice, regardless of menu price-point. And while this might be a great victory for the server or bartender, it further exacerbates the income inequality in restaurants.

The San Francisco Bay Area, like so many other large metropolitan areas, is experiencing a massive cook shortage in the restaurant industry. The problem has become so rampant, that it’s yesterday’s news in the industry. Restaurants are paying whatever they can to get cooks and offering any additional perks they can afford to keep them. But the reality is virtually no restaurant can afford to pay cooks the amount of money it costs to live in an expensive city. The amount a restaurant would have to raise their food prices to pay all their cooks in excess of $25 an hour, would cause consumer sticker shock and alienation.

But there’s a simpler solution -- tip sharing. It’s now legal for restaurants to do so. Most haven’t due to fear of a server revolt, but in reality, early adopters who have moved to tip sharing find that their employee morale is greater as there’s shared responsibility in performance. Yes, it’s a bumpy road getting to the other side, but it has allowed those restaurants to actually pay a lower base wage (still above minimum wage) to their back of the house employees while allowing those employees to enjoy higher wages than they did previously.

As the July 1 minimum wage increase approaches for San Francisco restaurants (and some other jurisdictions), there’s an opportunity to institute tip sharing. This can soften the blow of the increase, allows those who are due a raise to not get used to it, and quell the need to raise the wages of nontipped employees who rightfully feel they too deserve a raise since their colleagues aren’t doing anything more to merit the increase.

Since most jurisdictions, including San Francisco, have legislated their minimum wage to increase annually with CPI after reaching a particular threshold (most popularly $15), restaurants will need to find other ways to stem the tide of their growing labor costs. As the cost of living continues to increase, restaurants must find a way to better compensate back of the house staff without pricing themselves out of business. And since it’s highly unlikely the upward wage tide will be abated, tip sharing may just be the solution.