Date: August 10, 2023Attorney: Gary S. Young

Earlier this year, Washington D.C. began implementing its Tip Credit Elimination Act, which will gradually reduce the tip credit, eliminating it altogether by 2027

In this respect, Washington D.C. is not alone. In recent years, legislatures across the country have moved to eliminate the tip credit granted to businesses with tipped employees to fulfill their minimum wage requirements. Specifically, seven states and one U.S. territory have already banned the tip credit: California, Oregon, Washington, Montana, Nevada, Minnesota, Alaska, and Guam minimum wage.[1] Additionally, Maryland, New York, Connecticut, and Illinois are currently reviewing the merits of tip credit elimination bills.[2] 

The tip credit is a minimum wage credit that allows employers to count a portion of the tips or gratuities tipped employees receive from patrons against the employers’ obligation to pay minimum wage.[3]  For example, the current New Jersey minimum wage is $14.13 per hour.[4]  Under the federal Fair Labor Standards Act, the tip credit permits New Jersey employers to pay tipped employees a minimum base hourly cash wage of $2.13/hour, provided that employee’s tips equal or exceed the balance. New Jersey sets a higher standard, where employers must pay at least $5.26/hour, and tips must equal or exceed the $8.87 that the current New Jersey minimum wage requires.[5] 

Proponents of eliminating the tip credit argue that the current tip credit system results in wage disparities between front- and back-of-house staff and advocate for replacing the tip credit system with a raise in the minimum wage for all workers.[6] But this is a patently false argument: tip credit elimination will potentially reduce the servers’ level of compensation (many make as much as $25 – $30 per hour after counting tips). This, however, does nothing to address or remedy wage disparities for back-of-house staff.[7]

Any doubt about the merits of tip credit elimination is validated by the strong protest of restaurants and their tipped employees across the country who oppose it:  the sentiment among these workers is that the negative effects of eliminating the tip credit system greatly outweigh any benefits.[8]

Restaurants are typically low margin businesses that frequently fail. The allowance of tips that customers provide to waitstaff to count toward minimum wage requirements helps to keep restaurants’ operating costs low and waitstaff’s compensation high.[9]  If tip credit is eliminated, restaurants’ operating costs must increase because labor costs is a large component of the costs of doing business.[10]  This will in turn raise menu prices or will result in restaurants decreasing their workforce (or both).[11]  The workers and customers will ultimately bear the cost of these unintended consequences.[12]

Indeed, Professors of Economics Dr. William Even and Dr. David MacPherson used U.S. Census Bureau Current Population Survey data to study the effect of tip credit elimination and estimate that tip credit elimination would create a total nationwide employment loss of up to 801,224 jobs.[13]  This represents about 10.9% of all restaurant jobs forecasted for 2027.[14]  When they restricted their sample to only tipped workers, tip credit elimination would reduce U.S. employment of tipped workers by 11.7%.[15]

Not only this, but tip credit elimination would result in a large reduction in many tipped workers’ income.  According to analysis of Current Population Survey data, with tips, servers earn an average of $14.32 per hour, and many servers report regularly earning $20 to $30 per hour.[16]  Under the tip credit system, servers are guaranteed to make at least minimum wage, but many servers earn well beyond that.  On the other hand, once the tip credit is eliminated, Drs. Even and MacPherson estimate that tip credit elimination with a $15 tipped minimum wage would result in income loss for each tipped worker’s family by an average of $1,226 per year.[17]  Their data analysis estimates that, in New Jersey, the earnings loss for an average-income tipped employee’s family would be around $1,485 per year and the earnings loss for the poorest 10% of tipped employees’ families would be around $2,300 per year.[18]

In addition, a study by economists at the University of California Irvine found that each $1 increase in minimum wage for tipped workers could cause a 6.1% decrease in employment and a 5.6% decrease in workers’ earnings.[19]  Studies from Cornell University show that as state tipped wages rise, employees’ tip income decreases, supporting the idea that tip credit elimination decreases the tip percentages workers receive.[20]

The likelihood of decreases in income for servers is compounded by the fact that restaurants already operate on extremely narrow margins, and the measures restaurant owners would need to take following tip credit elimination in order to stay in business would affect customers’ willingness to tip servers. For example, many restaurant owners expressed that, if tip credit were eliminated, they would have to impose mandatory service or gratuity charges.[21]  These charges are not necessarily shared with workers, and at the same time, customers are far less likely to tip workers in addition to the mandatory service charge.[22] Therefore, elimination of tip credit could mean elimination of tips for employees altogether.

Finally, given the reduction in hourly wages following tip credit elimination, workers may find little incentive in becoming or continuing as a server, and restaurant owners may struggle to find staff in an industry that already experiences high rates of turnover and unprecedented labor shortages.[23]

The Takeaway:  Legislatures are jumping on a bandwagon that is fueled by false assumptions coupled with a political calculus that often ignores reality. Tip credit elimination bills are credited with claims of improving improve working conditions. Such claims ignore the unintended consequences of such changes. The reality is that the tip credit benefits workers by enabling them to earn income in excess of the minimum wage and benefits customers by keeping the price of eating out lower.

[1] Ben Coley, Where are Tip Credit and Minimum Wage Heading into 2023?, FSR Mag. (Dec. 8, 2022),,Nevada%2C%20Alaska%2C%20and%20Guam.

[2] The Fight Against Tip Credit Elimination Across the Country, Minimum Wage Facts & Analysis (Mar. 17, 2023 2:19 PM),

[3] What Are Tip Credits and How Can Employers Take Advantage of Them?, Paychex WORX Blog (Dec. 6, 2021),

[4] New Jersey’s Minimum Wage Increases to Over $14/Hour for Most Employees, Official Site of the State of New Jersey (Jan. 3, 2023),

[5] See Paychex WORX Blog, supra note 4.

[6] The Pros and Mostly Cons of Eliminating Tipped Minimum Wage in Restaurants, Perdiem,,end%20up%20hurting%20restaurants%20financially.

[7] See Andrea Strong, Do You Know Where Your Tip Money Is Going?, Eater (June 12, 2018, 2:30 PM),

[8] See, e.g., Minimum Wage Facts & Analysis, supra note 3.

[9] See Perdiem, supra note 7.

[10] See Perdiem, supra note 7.

[11] See Perdiem, supra note 7.

[12] See Perdiem, supra note 7.

[13] Dr. William Even & Dr. David MacPherson, State Impacts of a $15 Tipped Minimum Wage, Emp. Policies Inst. (Nov. 2022),

[14] See Even, supra note 14.

[15] See Even, supra note 14.

[16] Rebekah Paxton, Ending the Tip Credit Brings Pay Cuts, Not Raises, Emp. Policies Inst. (Mar. 2021),

[17] See Even, supra note 14.

[18] See Even, supra note 14.

[19] David Neumark & Maysen Yen, The Employment and Redistributive Effects of Reducing or Eliminating Minimum Wage Tip Credits, CATO Inst. (May 4, 2022),; see also Minimum Wage Facts & Analysis, supra note 3.

[20] See Rebekah Paxton, Lawmakers Should Learn from DC’s Harmful Tipping Experiment, Washington Examiner (July 1, 2023, 6:00 AM),; Michael Lynn, The Effects of Minimum Wages on Tipping: A State-Level Analysis, 52 Sage J. (Mar. 13, 2020),

[21] Tip-Lash: D.C.’s Tipped Minimum Wage Back on the Chopping Block, Fisher Phillips (Nov. 22, 2022),

[22] See Fisher Phillips, supra note 22.

[23] See Fisher Phillips, supra note 22.