July 31, 2006 | EPI Policy Memorandum #114

House-passed minimum wage bill cuts wages for tipped employees in seven states by as much as $5.50 per hour

by EPI Vice President & Policy Director Ross Eisenbrey 

The Estate Tax and Extension of Tax Relief Act of 2006, H.R. 5970, which passed the House on July 29, raises the minimum wage for most employees. But for many employees in seven states, H.R. 5970 means a wage cut. Section 402 of the bill strikes down state laws that require employers to pay a full minimum wage without relying on tips from customers to reach the minimum level.¹ States that have those laws will see the minimum wage for tipped employees fall as much as $5.50 per hour.

Seven states—Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington—exclude, in the words of H.R. 5970, “ all of a tipped employee's tips from being considered as wages in determining if such tipped employee has been paid the applicable minimum wage rate.” According to Section 402, therefore, the “minimum wage rate provisions” of those state laws may not be enforced “with respect to tipped employees.” Tipped employees (defined as any employee who earns more than $30 per month in tips) would be left without any minimum wage protection under state law in those seven states.  

In most cases, the tipped employees would be subject to the federal minimum wage law, which allows employers to pay as little as $2.13 an hour and to rely on customers’ tips to make up the rest of the $5.15 minimum wage. This is known as a “tip credit.” Thus, in Washington, tipped employees would see their minimum wage cut from its current $7.63 an hour (plus tips) to $5.15 an hour (including tips). Employers would see their minimum wage obligation to tipped employees fall by $5.50 an hour—from $7.63 an hour to $2.13 an hour (assuming $3.02 in customer tips). For example, an employee who is currently paid the state minimum wage of $7.63 an hour and receives $3.02 in tips earns a total of $10.65 per hour. Under the House-passed bill, the employer would be permitted to pay only $2.13 an hour and count the customers’ tips to make up the rest of the $5.15 federal minimum wage. The employee would lose $5.50 per hour in pay.

Nationwide, more than 5 million employees work in occupations where tips are common, including taxi drivers, food and beverage servers, hotel porters and housekeepers, manicurists, and hair stylists, to name a few.  

H.R. 5970 is the first time in history that the federal government has acted to put a ceiling on minimum wage levels, rather than establishing a national floor from which the states can make improvements.

Endnote
1. SEC. 402. TIPPED WAGE FAIRNESS.

Section 3(m) of the Fair Labor Standards Act of 1938 (29 U.S.C. 203(m)) is amended—

(1) by redesignating paragraphs (1) and (2) as subparagraphs (A) and (B), respectively;

(2) by striking `Wage' paid to any employee' and inserting `(1) `Wage' paid to any employee';

(3) in subparagraph (B) (as so redesignated), by inserting before the period the following:

Provided, That the tips shall not be included as part of the wage paid to an employee to the extent that they are excluded therefrom under the terms of a bona fide collective bargaining agreement applicable to the particular employee'; and

(4) by adding at the end of the following:

(2) Notwithstanding any other provision of this Act, any State or political subdivision of a State which on or after the date of enactment of the Estate Tax and Extension of Tax Relief Act of 2006 excludes all of a tipped employee's tips from being considered as wages in determining if such tipped employee has been paid the applicable minimum wage rate, may not establish or enforce the minimum wage rate provisions of such law, ordinance, regulation, or order in such State or political subdivision thereof with respect to tipped employees unless such law, ordinance, regulation, or order is revised or amended to permit such employee to be paid a wage by the employee's employer in an amount not less than an amount equal to—

(A) the cash wage paid such employee which is required under such law, ordinance, regulation, or order on the date of enactment of the Estate Tax and Extension of Tax Relief Act of 2006; and

(B) an additional amount on account of tips received by such employee which amount is equal to the difference between the cash wage described in subparagraph (A) and the minimum wage rate in effect under such law, ordinance, regulation, or order, or the minimum wage rate in effect under section 6(a), whichever is higher.'