The National Restaurant Association has issued a statement in response to the recent decision by the Chicago City Council to eliminate the tip wage credit for restaurant servers. This change, which seeks to ensure that all restaurant workers earn the prevailing minimum wage for every hour worked, poses significant challenges for restaurant owners in the city.
In a press release, National Restaurant Association Executive Vice President for Public Affairs Sean Kennedy expressed his concerns about the implications of this decision: “Restaurant operators, tipped servers, and local dining scenes will suffer any time the tip credit is eliminated. We are already seeing this play out in Washington, D.C., and Chicago restaurant owners and diners should prepare for similar challenges. Tipping works for owners, servers, and customers, and the National Restaurant Association remains committed to preserving the tip credit system in every community.”
Background on the elimination of the tip credit:
Under the current system, every restaurant worker must receive at least the prevailing minimum wage for every hour they work. For tipped restaurant workers, this means that restaurant operators pay a portion of their hourly wage as a “cash wage,” with tips expected to make up the remainder. If tips do not bring the worker’s earnings up to the minimum wage, the operator is obligated to cover the difference.
Should the tip wage be eliminated, restaurant operators would become responsible for covering the difference between the current cash wage and the prevailing hourly minimum wage. Using the Raise the Wage Act of 2023 as an example, this means that operators using the tip credit would see their wage expenses increase significantly, going from paying $2.13/hour to $17.00/hour – an increase of $14.87/hour per employee.
According to analysis by the National Restaurant Association, if the tip credit were eliminated and the federal minimum wage raised to $17/hour, labor costs for the average table-service restaurant with annual sales of $900,000 would jump 65%, potentially leading to a pre-tax income plunge of 331%.
Background on the implementation of tip credit elimination in Washington, D.C.:
Since May 2023, restaurant operators in Washington, D.C., have been required to increase the cash wage paid to tipped servers by $2.35/hour, raising it from $5.35 to $8.00. To manage this sudden wage increase, operators have resorted to increasing menu prices or adding service charges. A recent survey conducted by the National Restaurant Association revealed that frequent D.C. diners have been forced to adjust their dining habits as a result:
- 2 in 5 frequent D.C. diners have been eating out less.
- More than half (52%) have been eating at home more due to increased menu prices and automatic service charges.
- One-third (32%) have been seeking dining options outside the city in Maryland and Virginia to avoid restaurants with higher costs.
Background on the unique operating perspective of restaurants:
Restaurants operate on slim profit margins, typically around 3-5% pre-tax. With food and labor costs comprising a significant portion of expenses, labor costs have seen a notable increase in recent years. The average earnings of restaurant workers have risen from $15.06 in May 2019 to $19.67 in May 2023, reflecting a 31% growth, compared to 20% in the overall private sector.
In 2019, pre-tax income accounted for approximately 5% of sales for a typical restaurant. However, if a restaurant today is generating $900,000 in sales, they are experiencing a pre-tax loss of -12.3%.
The National Restaurant Association’s statement underscores the challenges faced by restaurant owners, workers, and diners in the wake of tip credit elimination efforts. The impact on the restaurant industry, both in Chicago and beyond, remains a topic of concern and debate as operators grapple with rising labor costs and the potential consequences for their businesses.
Read the full press release at: Press Releases | National Restaurant Association