The Unintended Consequences of Removing Tipped Minimum Wage in Montgomery County

Original Article:

  • Author: Rebekah Paxton

  • Publication Date: September 2023

  • Newspaper: The Center Square - Maryland

Earlier last week, the Montgomery County Council introduced legislation that would eliminate the use of the tip credit and raise the minimum wage for tipped restaurant employees by more than 300 percent. While the idea of boosting hourly wages seems well-intentioned, the Council’s plan could backfire spectacularly.

Indeed, it’s already been disastrous in neighboring Washington, D.C.

For starters, the push to eliminate the tip credit misunderstands how tipped workers earn a living. County law allows restaurants to pay tipped employees a $4 base hourly wage as long as their tip earnings put them at or above the regular minimum wage rate, currently $16.70 per hour for larger employers. In practice, tipped employees have the potential to earn far more than that, with many making as high as $50 per hour.

Without a tip credit, servers across the county could see a substantial reduction in their earnings. This move would also drive up the cost of doing business for restaurants, meaning many might be forced to cut back employees’ hours, lay off workers, or even shut down altogether.

When you factor in a rising minimum wage, employees are even worse off. A study done by the Employment Policies Institute showed that with a $ a tip credit ban, Maryland could lose well over 7,000 jobs. Another recent study found every $1 increase in the tipped minimum wage caused up to 6.1% employment loss.

Workers know what’s at stake. That’s why earlier this year, dozens of Maryland tipped workers came together to speak out against the state’s recent attempt to kill the tip credit. They were able to successfully stall the bill and preserve their livelihoods.

Unfortunately, tipped workers in Washington, D.C. haven’t been as lucky. These employees are facing lower earnings while even the most beloved establishments are struggling to stay afloat.

Zoe Doreau, a tipped worker in D.C., recently stated in an interview that “tipped workers are seeing less tips in their pockets.”  More than 80 percent of businesses indicated they will be forced to raise menu prices to accommodate higher wages. Seventy percent say they will have to implement alternative compensation models, such as tacking service charges on customers’ bills to cover higher hourly wage mandates.

Diners in D.C. aren’t so happy with the changes either. Local Reddit users have cataloged nearly 200 restaurants that implemented service charges. While service charges are a band-aid fix for restaurants trying to adapt to rising hourly wages, they aren’t the same as tips, and this distinction has not gone unnoticed. Many patrons are now aware that service charges are intended to cover server wages, resulting in a reduction in traditional tipping.

When restaurants eliminate tip credits and resort to higher menu prices and service charges, tipping generally decreases. States like California and Washington that have no tip credit have some of the lowest tipping percentages in the country.

Adopting this harmful policy could also drive countless businesses out of Montgomery County. When D.C. eliminated its tip credit this past year, businesses indicated that they would be forced to relocate or expand outside city limits. In an Axios report, one business owner said, “I’m not opening any more restaurants in D.C.”

Maryland policymakers heeded the warnings from tipped workers and backed off a bill that could have hurt thousands of employees. Now, it’s time for Montgomery County to do the same.