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Question 4: Eliminating the Tip Credit Is Bad for Business

July 22, 2016 Posted by Liam Sigaud - No Comments

In the last few months, The Maine Wire has drawn attention to the dangers of Question 4, a proposal on the ballot this November to raise the minimum wage over the next three years (and beyond). You can read those articles here, here, here and here.

Up to now, critics have mostly focused on the proposal’s dramatic increase of the minimum wage to $12 an hour and ignored another alarming provision: the elimination of the tip credit for service employees. In Maine, where the restaurant and hospitality industries are an important part of our economy, this change could have devastating consequences.

Currently, Maine law allows employers to consider tips as part of the wages of a service employee, except that the credit may not exceed 50% of the minimum wage. In other words, service employees may be paid $3.75 in wages, as long as their earnings from tips are sufficient to reach the minimum wage, $7.50 an hour. If approved, Question 4 would gradually phase out the tip credit until it reached parity with the regular minimum wage at $12 an hour in 2024.

In 2015, LD 403—which would have eliminated the tip credit while retaining the current minimum wage, thereby requiring employers to pay service staff $7.50 in wages—was defeated. During the hearing on the bill, dozens of restaurant owners and concerned citizens described what the law would do to small businesses and employment.

Here are two important reasons to maintain the tip credit:

Most tipped employees in Maine earn far more than the minimum wage

Testifying on LD 403, the Samoset Resort in Rockport stated: “Our tipped food service staff ranges from $10-$40 per hour in tips received directly from customers in addition to their $3.75 hourly wage.” In other words, the lowest-paid tipped employees at the Samoset already earn almost twice the minimum wage.

Ben Lord, co-owner of The Black Birch in Kittery, offered his thoughts: “As we were developing our business, thinking about the types of incentives we could use to attract and keep good servers– a slightly higher base pay never occurred to us. As seasoned industry workers we were aware that a good server, even in a tight economy, earns well beyond minimum wage…l can attest that my servers earn on average $25 an hour. Pre-tax, a server averaging $25 an hour and working 50 weeks a year, is earning 37,500.”

Jonas Werner, owner of Azure Café in Freeport, testified: “The reality is that not one server at Azure makes minimum wage. Instead, every one of them, even the newest or least experienced among them, makes considerably more. Nationally, the average hourly wage for a server, including tips, is between $16 and $22, depending on their level of experience. The average hourly wage for a server at Azure is an enviable $24.14/hr.”

Eliminating the tip credit would substantially increase the burden on small businesses

Passing LD 403 would have caused Moody’s Diner, an iconic restaurant located in Waldoboro, to see an increase of approximately $80,000 annually in payroll costs (a conservative estimate, since it doesn’t include payroll taxes). “Our net profit, in a good year, is about 3% of our annual sales. Passing LD 403 would eliminate that profit,” said Dan Beck, Moody’s co-owner.

Kate Rowe, co-owner of The Black Burner Restaurant and Tavern in Brownfield, put it simply: “I do not know if the larger restaurants can absorb this increase; I do know the smaller mom & pops cannot. If this legislation passes; [sic] The Back Burner Restaurant & Tavern, which has been serving Maine since 2005, will be forced to close and displace 10 local people who rely on us to give them a job.”