The Tipping Point

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For Breana Fulton, living off tips means watching the skies. A storm will mean hundreds of extra dollars in her paycheck in a given week, as passengers of grounded planes pack the airport restaurant at JFK where she waits tables. A stretch of good weather and on-schedule flights, though, and it will take twice as many shifts to pay the same monthly rent, gas, groceries, and cell phone bill.

Unpredictability is built into the finances of the approximately 4.3 million workers in America who live off tips. Shift schedules, diners’ generosity (or stinginess), and the weather all partly determine how much they take home each day. Factors as big as a slowing economy and as small as changes to the menu can cause an immediate decline in income. ("It would be whimsical, if it weren't soul-crushing," said one waiter.) And the hourly wage for tipped workers — below the federal minimum in 43 states, and just $2.13 in 19 of them — is a comically low safety net.

But momentum has been growing to reform tipping in the restaurant industry, and a new coalition of employers, including Shake Shack CEO Danny Meyer, has now joined with worker advocates in an ambitious effort to eliminate subminimum wage for tipped workers.

Their challenge is twofold: First, they’re up against the National Restaurant Association, the trade group nicknamed “the other NRA” for its deep pockets and aggressive lobbying. The group has emerged as one of the fiercest opponents of minimum wage increases across the country.

And second, reforming the tipping system means correcting the rosy image many have of tipped work, often based direct experiences waiting tables right out of school, interactions with servers at swanky bars and restaurants, or sensational tell-alls by former waiters.

“There’s a misconception that tipped workers are mostly college students or well-paid waiters in fine dining making $50,000, $60,000, $100,000 a year off their tips,” Saru Jayaraman, co-director of the Restaurant Opportunities Center, a worker advocacy group, told BuzzFeed News. “In fact, tipped workers are predominantly women, many working at places like IHOP and Applebee’s. And it’s important that we change that perception.”

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The history of America’s tipped wage is rooted in slavery. In writing the first minimum-wage protections in 1938, the government excluded a tipped workforce of servers, shoe shiners, domestic workers, and Pullman-car porters, along with other professions predominantly held by black workers.

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Instead, wages for these historically uncompensated workers would come from the generosity of customers, as the practice of tipping had by then made its way across the Atlantic from Europe, brought over by both immigrants and returning tourists.

Though the law governing tipped wages was indexed to the federal minimum wage in 1966, base hourly pay for tipped workers rose to just $2.13 in 1991 before it was decoupled and frozen in 1996. In 19 states, including Alabama, Georgia, Kentucky, Louisiana, Mississippi, South Carolina, Texas, and Virginia, $2.13 remains the base cash wage for tipped workers.

While seven states have eliminated their subminimums, 43 still have laws on the books that let employers pay a fraction of the federal floor of $7.25. What's more, there’s scant enforcement of the provision that employers make up the difference if tips don’t add up.

A 2014 White House study found that 1 in 10 servers receive wages below the federal minimum, and tipped workers interviewed called their ostensible pay stubs a “formality” or “nuisance,” since they’re typically worth little or nothing once taxes are withheld.

“They’re just pieces of paper that say VOID on them,” said Andrew Mehall, a coalition member who lived off tips for 10 years as a server in Detroit before becoming a partner in the Russell Street Deli there. “Maybe 10% of the time I would get a paycheck that didn’t go entirely to taxes.”

Christin Fernandez, a spokeswoman for the National Restaurant Association, said that if employees' base wages plus tips do not meet the federal minimum, employers are legally required to pay the difference.

"I hate to use that term, 'subminimum' wage. It should not be 'subminimum' under the law," she said. "Everyone, no matter what, should be making $7.25. We believe there is no subminimum wage, because employers have a responsibility to make their employees whole."

Fernandez added that the association offers "webinars, reading materials, and classes" for restaurant owners on how to comply with wage and tax law related to tips, since the requirements are notoriously variable and byzantine. In 1994, the IRS began rewarding employers for every dollar of tips a worker reports as income, a law intended to more effectively tax the largely cash economy. Fernandez said many restaurant owners need help understanding the tax credit.

"The problem is that the tipped credit in and of itself is a very complex issue," she said. "There is a lot of miscommunication. As an association, we are trying to educate our members as much as we can on compliance. ... I wouldn’t say it’s a difficulty, [but] the law varies from state to state. It’s a complex issue."

Fernandez said the National Restaurant Association fully supports restaurateurs who choose to voluntarily eliminate tipping at their establishments.

Danny Meyer, CEO of the Union Square Hospitality Group and Shake Shack.

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Shake Shack CEO Meyer, who also runs 13 fine-dining restaurants, made headlines for abandoning tipping and switching to "hospitality included" pricing late last year. Meyer is candid about the role of government in maintaining the status quo for tipped workers.

“As long as there’s an adjusted minimum wage for tipped workers, there’s no incentive for restaurateurs to do anything about it,” he told BuzzFeed News. “[It’s] a drug, and it’s hard to get off the drug.”

Meyer is also vocal about how wage law and tax rebates benefit restaurant owners at the expense of workers — especially since the IRS introduced the payroll credit for restaurants whose workers report tips as income. In practice, the system provides an incentive to maintain the tipping system; for big restaurant businesses, it's a large one.

“[A]s soon as I get off the drug of having an adjusted minimum wage, I have to forgo substantial dollars from the government I’ve gotten used to over the years,” Meyer said. “In the course of one year, we will be giving up 1.4 million real dollars in our pocket rebated by the federal government, paid for by you, [the taxpayer]. So there’s a huge incentive from the government not to get off the drug of tipping.”

But since he and 30 fellow restaurateurs have committed to doing just that, together with the Restaurant Opportunities Center (ROC) worker advocacy group, dozens of restaurants unaffiliated with ROC have followed suit, the most notable perhaps being Joe's Crab Shack. A seafood chain with 130 locations across the country, the franchise began testing a no-tipping system — with raised menu prices to match — at 18 locations last year.

With the tailwinds of fast-food worker activism behind them and a headwind of industry opposition to match, the self-titled RAISE coalition (a backronym for Raising Industry Standards in Employment) is at least making noise and at most raising pay, restaurant by restaurant, for workers who live precariously on the so-called “tipped edge.”

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So who lives off tips? The majority of workers affected by the subminimum tipped wage are women, mainly women of color, working at mid-market or low-end restaurants, with unpredictable hours.

Which means there's a gender equity argument for eliminating the subminimum in addition to a racial one. Not only does the tipped wage contribute to the pay gap, but in states where the tipped subminimum wage persists, women are twice as likely to experience sexual harassment in the workplace, ROC has found. Relying on customers for wages at the end of the night makes staff more willing to endure lewd comments or worse during a shift.

Demographically, tipped workers are nearly twice as likely to live in poverty as the rest of the workforce, according to numbers from the left-leaning Economic Policy Institute. They’re nearly twice as likely to rely on food stamps, and among those who have families, 40% of their children qualify for free lunches. Of the 10 lowest-paid jobs in America, seven are in the restaurant industry, according to the Department of Labor.

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The National Restaurant Association argues that eliminating the tipped subminimum wage would lead to reduced employment and prohibitive costs for restaurants, which sometimes operate on razor-thin margins. It has successfully lobbied against minimum wage raises in many cities and states, but lost a major battle in New York when Gov. Andrew Cuomo used a wage board to raise pay for fast food workers to $15 an hour (by 2018 in the city, and 2020 in the state).

Yet thanks to the two-tiered wage law, tipped workers were not included in the New York raise, and the NRA wants to keep it that way. In January, 100 anonymous restaurant owners penned a letter to Governor Cuomo asking him to freeze the current wage for tipped workers and exclude them from the coming increase. So far, Cuomo has not said he would extend the raise, hard-won by protesting fast-food staff, to tipped workers in full-service restaurants.

“The industry needs time to adjust to this dramatic increase; this is why we are asking that any increase to the minimum wage exclude tipped employees,” Melissa Fleischut, president and CEO of the New York State Restaurant Association, said in a statement. “This increase has already forced restaurants to close, business owners to cut hours and lay people off, and made owners look to incorporate more tablets at tables; any further increase will just exacerbate these problems.”

The evidence for these arguments is so far mostly anecdotal. Of the seven states that have already eliminated the subminimum tipped wage, most have both higher per capita sales and higher job growth than businesses in the states that kept the lower minimums, the ROC has found. And multiple independent studies measuring employment in neighboring states that implement higher minimums haven’t clocked the dramatic negative effects the NRA warns of.

President Obama shakes hands with waitress Toni as he arrives at Ann's Place in Akron, Ohio, during a 2012 visit.

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For the RAISE coalition, victories are far more likely to come from piecemeal local reforms than a change in federal law. At a White House summit dedicated to “worker voice” in October, President Obama said outright that he couldn’t see Congress “raising standards for restaurant workers” during the rest of his time in the White House.

But cities and states that are already raising their local minimums — 15 in 2015, including New York — could eliminate the tipped subminimum when they do. (This is precisely the action Cuomo is mulling now, and which the state restaurant association opposes.)

In fact, legislators in Portland, Maine, did just this by accident last year. When the city raised its general minimum to $10.10, they inadvertently raised the tipped minimum along with it, then quickly backpedaled when the local restaurant association caught wind of it.

“For somebody that doesn’t even know that a tipped person makes less of a wage than a regular employee, they’re confused right out of the gate, because that doesn’t make any sense to them,” Greg Dugal, CEO of the Maine Restaurant Association, told Bloomberg at the time.

Alice Waters in New York in October.

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Alice Waters, who pioneered the organic food movement decades ago at her California restaurant Chez Panisse, compared changing attitudes about tipping with the industry's slow — but now widespread — embrace of local and organic ingredients.

“I heard the same thing with organic food — that it would cost too much,” she said at a Ford Foundation event in January. “That’s the message we hear from a fast food culture."

Gratuity Free NYC / Via gratuityfree.nyc

And just as organic tomatoes and locally grown kale have gradually made their way from fine dining to the mass market, some restaurant owners think a change in the mainstream approach to tipping is inevitable. Meyer and others have called “gratuity-free” the new “smoke-free” or “gluten-free.” Brooklyn restaurateur Andrew Tarlow even commissioned a logo.

Uber, Seamless, and other on-demand apps now regularly include pre-calculated tips, cutting down on mental math for customers and tough-to-tax cash exchanges with workers. Many high-end restaurants have embraced reservation apps that settle bills automatically behind the scenes, tips included.

Were tipping to disappear entirely, whether via an industry sea change or law, it could simply be one less point of friction for consumers in a world of increasingly streamlined transactions.

“There is going to come a time where people will have to get on board,” said Johnny Livesay, a RAISE member who owns the gastropub Black Star in Austin. “The diners will drive the change once they start to better understand that they have been paying these supplemental wages for all these years. …Regardless of people’s hang-ups now, this is where the industry is heading.”