What is the 'tip credit' and why does Mayor Betsy Hodges not like it?

Minneapolis is weighing a new minimum wage for businesses, but Mayor Hodges doesn't want to see a "tip penalty" included.
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With Minneapolis weighing the introduction of a new minimum wage for city workers, Mayor Betsy Hodges made it clear this week that any proposal featuring a "tip credit" won't fly with her.

The city is in the process of holding listening sessions to get public feedback on what a new minimum wage for the city should be. Those come amid the ongoing campaign by workers for a $15 an hour minimum wage, which is opposed by many in the city's restaurant and bar industry.

And while the city will make its recommendations for a minimum wage (greater than the state's $9.50-an-hour for large employers and $7.75 for small businesses) later this year, Hodges doesn't want the new minimum to include a so-called "tip credit" (which is sometimes referred to as a "tip penalty" by critics).

What is tip credit?

Tip credit basically means that workers in the service industry, predominantly wait staff, have their tips included in their wages.

This means employers can pay their workers a small base wage that's under the minimum, then rely on tips to bump them up above the legal threshold.

Currently, the federal minimum wage for tipped workers in America is just $2.13 an hour, with tips used to get workers over the $7.75 overall minimum wage.

There is no tip credit in Minnesota, according to the Department of Labor and Industry. Workers must be paid at least the minimum wage for all their hours worked.

However if Minneapolis implements its own minimum wage, there could be provision for this to be offset using tip credit.

Mayor Hodges says a proposal to that effect is currently making the rounds at the city council.

Why does Mayor Hodges not want it?

In a post this week, the mayor says that a new citywide minimum wage with a tip credit would "harm the work we're doing ... to actually close the income gap between low-wage and other workers."

"Contrary to some popular perceptions, wages for tipped workers in the restaurant sector are in fact low: so low that nationally, 46 percent of tipped workers rely on federal public benefits," she claims. "Tipped workers are almost twice as likely to live in poverty than other workers."

CityPages this week spoke to a Twin Cities restauranteur (who remained anonymous) who said that with tips, his workers are already making between $17 and $20 an hour, and argues a new $15 minimum wage could be devastating for his business.

But Hodges says those earning more than $15 with tips account for only around 10 percent of servers in the region, saying the stereotype that all tipped workers "work in high-end bars and fine-dining restaurants" making more than $15 an hour with tips is false.

She cited Bureau of Labor Statistics figures, which in May 2015 found that the average wage for restaurant servers in Minnesota was $10.11.

The Pioneer Press reported in 2015 that around 47 percent of Minnesota's minimum wage earners work in the state's restaurants and bars – more than any other single industry.

Hodges also argues that tip credits penalize women, who make up two-thirds of tipped workers and who she claims are three times as likely to live in poverty as other workers, and more likely to suffer sexual harassment.

There have been several studies to support this claim, including this one in Boston last year which found tipped workers – most of them women – have to tolerate "a surprisingly large amount of sexual harassment in order to feed their families on tips." They are also more susceptible to wage theft by unscrupulous employers.

Will Minneapolis get a new minimum wage?

While Minneapolis looks to go the way of other cities such as Seattle, Palo Alto, Portland (Maine), New York and San Diego by breaking away from state minimum wage levels to implement their own, there are efforts to stop it.

There will be pushback from the business community, with MPR reporting that while some businesses "grudgingly" back a higher minimum wage (albeit probably not $15), others – particularly restaurants – remain reluctant about the prospect of higher costs particularly when tipped workers are included.

Hodges has previously said there is enough support to enact a new minimum wage among Minneapolis City Council members, so that shouldn't be a roadblock once an agreed level has been reached following the public feedback.

But there are moves being made at the state level to curtail the city's efforts.

Last month, multiple lawmakers – most of them Republican and most based outside the Twin Cities – authored and introduced the Uniform State Labor Standards Act into the House and Senate. It would preempt local governments from creating their own rules for safe and sick time, minimum wages, or other employment benefits.

The bill advanced through House and Senate committees earlier this month.

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