The Subminimum Wage: 35 Years and Still Waiting for Change

As another April 1st rolls by, it marks 35 years of the $2.13 federal subminimum wage. Yes, I realize this seems like an April Fool’s joke, but it is no joke for millions of tipped workers.

How did this happen? The 1996 amendment to the Fair Labor Standards Act froze the subminimum wage “in perpetuity” at the behest of the National Restaurant Association. It has been stuck at $2.13 since 1991.

As I explain in more detail in this paper, the mechanics and the legality of the subminimum wage (also referred to as the tipped wage) hinge on the “tip credit” allowance, which is the difference between the regular minimum wage and the subminimum wage. Federally, that $7.25 minimum wage minus the $2.13 subminimum wage leaves a federal tip-credit of $5.12 — meaning for each and every hour a tip worker works, customer tips pay the lion’s share of the wage bill.

Make no mistake, and many customers do, the tip intended as a gratuity is in part a wage-subsidy provided to employers in lieu of them paying workers the full minimum wage (which is also woefully low and outdated). While the tip credit is $5.12 at the federal level, at the state level where higher minimum wages are coupled with low tipped wages, customers are burdened with paying larger shares of higher hourly wages to tipped workers: 86 percent (or $12.87) in Nebraska, 83 percent (or $10.64) in Virginia, and 76 percent (or $12.11) in Rhode Island. How is this “fair”?

April also marks tax time. This is the first year workers can claim the highly touted “no tax on tips” break. It’s very telling that this rather gimmicky policy is temporary and ends in 2028. However, the problem of low wages for tipped workers does not end in three years. More importantly, it is important to recognize that from the very start this policy was not a serious attempt to help the low-wage tipped workforce. The lowest tipped earners do not pay federal taxes, so this policy does exactly nothing for them. Much has been written about the shortfalls of this tax policy, including the fact that it is so poorly targeted, as it disproportionately helps higher tipped earners. This policy is generally nonsensical, providing little impact for those in need.

In the end, if you want to help tipped workers, let’s do the obvious — eliminate the subminimum wage and increase the minimum wage. After all, the US subminimum wage policy for tipped workers is a lone outlier across the globe.