Tip-Lash: DC’s tipped minimum wage back on the chopping block

It’s déjà vu for district restaurant owners and other employers of tip workers, as DC voters have again approved an initiative that will gradually increase the minimum wage for tip workers over the next five years. The Tipping Elimination Act of 2021, passed just this Election Day as Initiative 82, will eventually remove the ability for employers to rely on tips to meet their DC minimum wage obligation (currently $16.10) to workers . In 2018, the district passed a similar law that would have stripped employers of the ability to rely on the so-called “tip credit” until 2026, but the DC Council repealed the law before it went into effect. This time, however, the Council does not appear ready to take such action. Here are some tips for employers affected by the legislation.

DC voters overwhelmingly approve pay rise for tip workers

Currently, employers in DC and many other jurisdictions across the country are permitted to rely partially on tipping to meet their minimum wage obligation to employees who customarily and regularly receive tips. Most of the time, this salary structure works to the advantage of both the employer and the employee. The employer pays a lower direct cash wage, and the employee receives tips and gratuities from customers, often well in excess of the state minimum wage. If the tips are still not enough, the employer must, according to the applicable law, pay the difference between the wage earned with tips and the minimum wage.

DC Initiative 82, almost identical to the 2018 rejected measure, was ostensibly intended to increase the wages of tipped employees to ensure a more stable income and eventually meet the district’s statutory hourly wage minimum. District voters overwhelmingly agreed with that line of thinking this Election Day, with nearly 74% of voters voting yes for the measure.

So what changes are on the menu?

Current law allows employers in DC to pay a tipped worker direct cash wages of $5.35 per hour as long as the tips received provide a minimum wage rate of at least $16.10 per hour.

If passed into law, Initiative 82 will raise the minimum wage for tipping credit for tipped employees well above the current $5.35 per hour. Instead, the tipped minimum wage under Initiative 82 will be slowly but significantly accelerated each year (and twice in 2023) until it equals the city’s full minimum wage in 2027. The pay rise schedule is as follows:

January 1, 2023:

Increase to $6.00 per hour

July 1, 2023:

Increase to $8.00 per hour

July 1, 2024:

Increase to $10.00 per hour

July 1, 2025:

Increase to $12.00 per hour

July 1, 2026:

increase to $14.00 per hour

July 1, 2027:

the wage rate for tipped workers would rise to DC’s minimum wage rate, whatever it may be at the time.

But controversy remains

This cost-raising measure comes at a particularly difficult time for the hospitality industry, which historically has operated on razor-thin margins and as employers are still adjusting to a post-pandemic world marked by elevated operating costs and unprecedented labor shortages. It’s no surprise, then, that the measure met with significant opposition from some of the district’s most prominent restaurant managers, who are among the largest employers of tipped workers.

Perhaps more surprisingly, Initiative 82 also met with widespread opposition from the workers themselves. Many claim they are already earning well above the $16.10 minimum wage under the current wage structure, and fear that higher prices due to the employer-paid wage increase will force businesses to close, stifle tips and lower earnings overall and employment opportunities will result.

In fact, many hospitality business owners have already indicated that they plan to offset the increased costs by passing them on to consumers. This would take the form of mandatory service or tips which, unlike earned tips, are not necessarily shared with workers. Mandatory service and tipping fees also tend to make money-conscious customers less likely to tip workers on top of the tips already added. This would likely result in tipped employees receiving less net compensation on average.

Given DC’s proximity to both Maryland and Virginia — states that currently still allow the use of tipping credit — some predict many tipping-dependent businesses will simply pick up and move their store across the river will do business where it is cheaper.

What should employers do?

Employers in Washington, DC should prepare for a pay increase that will affect their tipped employees effective January 1, 2023. Unlike last time, the measure is unlikely to be voted down by DC City Council. Although the structure or schedule could be revised slightly, it will most likely be implemented as planned.

You should speak to your managers at all DC locations about the change coming into effect soon. You should also prepare to adjust all payroll systems and compensation practices as needed.

Fisher Phillips’ Metro Washington, DC office will monitor developments and provide updates as necessary. We therefore recommend subscribing to Fisher Phillips Insights to ensure you don’t miss a thing. If you have any questions, contact your Fisher Phillips attorney, the author of this insight, or an attorney at our Washington, DC, Metro office.

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