THE BLOG
02/18/2014 01:39 pm ET Updated Apr 20, 2014

Saviors for the Service Sector, Increasing the Tipped Minimum Wage

For the first time in years, restaurant workers are receiving long-overdue recognition by members of Congress. The year 2007 marked the most recent increase in the federal minimum wage from $6.55 to $7.25, but over the last 23 years, the federal tipped minimum wage has remained unchanged; it is worth substantially less today than it was in 1991.

Thanks to congressional leaders like U.S. Senator Sherrod Brown (D-OH), restaurant employees finally have a voice on Capitol Hill. Earlier this week, the Senator claimed that the Democrat-controlled upper-chamber would refuse to omit provisions from proposed minimum wage legislation that would ignore helping tipped employees.

Additionally, Senator Tom Harkin (D-IA), who chairs the Senate Health, Education, Labor and Pensions Committee is sponsoring new legislation that would automatically increase the federal minimum wage all the way up to $10.10 by year 2016. The bill would concurrently increase the tipped out minimum wage by 95 cents each year until it reaches $7.25, at which point, further annual increases would be mandated to compensate workers for inflation.

Speaking on behalf of restaurant owners, Melissa Fleischut, President and CEO of the New York State Restaurant Association, voiced her opposition to the proposed increases, stating that "increasing the tip wage does little to help workers and punishes small business." Even Rob Green, the Executive Director of the National Council of Chain Restaurants responded in similar fashion, stating that "they want to increase wages by over three times for restaurant employees who are typically compensated well above minimum wage, when gratuities are included."

It should be universally incredulous that the restaurant industry's national spokespersons think raising the minimum wage will have a negligible effect on workers. Further, the new IRS "anti-gratuity" rule has plagued the income for restaurant workers over the last month-and-a-half, yet Mr. Green failed to allude to declining incomes resulting from the new rule.

In 2012, the IRS issued a gratuity rule that took effect in January 2014, declaring mandatory service charges as taxable employee income.

Common restaurant protocol mandates an automatic tip of 18% be placed on parties of 8 or more (with some variations). This mandatory service charge was effectually a security blanket for waiters and waitresses to ensure they made an equitable monetary return on a table.

In busy restaurants, a server has a section of maybe 3-5 tables, or sometimes even more. This section is essentially his or her "own mini-restaurant." Serving a larger party not only requires more work, effort, and speed, but it also diminishes the amount of attention and efficiency of service the server can give to other tables in the section. Therefore, having a security blanket of an automatic gratuity alleviates some pressures servers face when wondering if they'll at least break even with their hourly wages.

For instance, if a server is providing excellent, tip-worthy service to a large party, which unintentionally results in sub-par service for a two-person table, the server would have understandable cause to worry whether or not the smaller table will tip well, if at all. The uncertainty of that tip amount can induce unnecessary stress, leading a server to perhaps mistakenly think she or he needs to work harder for a table that may seem more demanding and could potentially choose not to tip well, which simultaneously detracts from the service that could be provided to other tables. At least the automatic gratuity for big parties has traditionally provided a sense of psychological and financial security.

In 2012, the IRS ignored the fact that unlike other employment sectors, the restaurant industry expects customers to pay employees' wages. Because the tipped minimum wage is a staggeringly low $2.13, employers are required by law to make up the difference if the combination of the two does not equate to the normal federal minimum wage. More often than not, however, an employer will respond to a worker requesting compensation by threatening deductions in scheduled shifts or even termination. Workers often keep their requests for proper payment o themselves, anticipating a equitable balance in the long-term. Some decide to work for "sub-minimum wage pay" for a few shifts, in order to avoid potential firing.

The rule change is a revenue-increasing procedure for the IRS, which receives more taxes as a result from the practice. The new rule does not, however, mandate that restaurants remove auto-gratuities, which is a saving grace for the IRS' public perception, because it is merely making it more costly for the restaurant owner to maintain the practice.

Not only does the restaurant have to report the service charge as taxable income, but the employee who earned it must wait the regular two-week cycle before the tip is reflected in the pay-check. In America's service-sector unfriendly economy, restaurant servers typically rely on receiving their tips immediately following each shift because waiting two weeks for a motley $2.13 per hour wage offers little financial comfort. Due to the new rule, the lack of a security blanket could lead to a possible, albeit worst-case scenario, whereby a server makes no immediate income from tips in a night.

The impending possibility of a tipped minimum wage increase would significantly benefit employees who work in a sector recently slammed by the IRS. To the joy of restaurant workers, Senator Brown's and Harkin's efforts could at least counter the hardship caused by the anti-gratuity law and provide security and financial stability to millions of service employees in the years ahead.