October 06, 2023

National Restaurant Association Statement on the Chicago City Council Vote to Eliminate the Tip Credit

Washington, D.C. – Today, the Chicago City Council voted to eliminate the tip wage for restaurant servers This change will significantly increase operating costs for Chicago restaurant owners. To manage this increase, operators will have to raise menu prices or reduce payroll costs by cutting jobs.

National Restaurant Association Executive Vice President for Public Affairs Sean Kennedy released the following statement about the on-going threat of elimination of the tip credit nationwide:

“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:

Every restaurant worker must make the prevailing minimum wage for every hour they work. (Some states or cities have higher minimum wages than the federal minimum wage and if that’s the case, the worker must make the higher local minimum wage for every hour worked.) For a tipped restaurant worker that means that the restaurant operator is paying a part of that hourly wage in what is called a “cash wage,” and their tips must make up the rest. If their tips do not bring them up to the hourly minimum wage for every hour worked, the operator must pay the difference to get them to the minimum wage.

When the tipped wage is eliminated, restaurant operators become responsible for 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, should the tip wage be eliminated, operators using the tip credit would go from paying $2.13/hour to $17.00/hour – an increase of $14.87/hour for the operator to bear alone.

According to analysis by the National Restaurant Association, if the tip credit was eliminated and the federal minimum wage raised to $17/hour, labor costs for the average tableservice restaurant with annual sales of $900,000 would jump 65%, assuming that no employees are laid off and the restaurant’s pre-tax income would plunge 331%.

Background on the implementation of tip credit elimination in Washington, D.C.:

Since May 2023, restaurant operators have been forced to increase the cash wage they pay tipped servers by $2.35/hour (from $5.35 to $8.00). To manage the sudden jump in wages, operators have increased menu prices or added service charges. According to a recent survey by the National Restaurant Association, frequent D.C. diners have changed their dining habits to eat out less or eat outside the city more.
  • 2 in 5 frequent DC diners have been eating out less and more than half (52%) have been eating at home more as a result of restaurants in the city increasing menu prices and implementing automatic service charges.
  • One-third (32%) have been seeking dining options outside the city in Maryland and Virginia to avoid restaurants with increased menu prices and automatic service charges.
Background on the unique operating perspective of restaurants:

Restaurants can’t easily absorb or pass on cost increases. The typical small business restaurant run on a 3-5% pre-tax margin. Food and labor costs are the two most significant line items for a restaurant, each accounting for approximately 33 cents of every dollar in sales. Other expenses – typically non-controllable costs like credit card swipe fees and occupancy costs – generally represent about 29% of sales. For the vast majority of restaurant operators, the costs in these three categories have increased significantly in recent years.

For labor costs alone, the market demand for both experienced and entry-level restaurant workers has pushed their average earnings from $15.06 in May 2019 to $19.67 in May 2023 – a 31% percentage point growth, compared to 20% in overall private sector.

According to analysis by the National Restaurant Association, in 2019, pre-tax income represented approximately 5% of sales for a typical restaurant. For the average restaurant with annual sales of $900,000, this translated to pre-tax income of $45,000. If a restaurant today is making total of $900,000, then they are suffering a pre-tax loss of -12.3%.

About the National Restaurant Association

Founded in 1919, the National Restaurant Association is the leading business association for the restaurant industry, which comprises more than 1 million restaurant and foodservice outlets and a workforce of 15.5 million employees. Together with 52 State Associations, we are a network of professional organizations dedicated to serving every restaurant through advocacy, education, and food safety. We sponsor the industry's largest trade show (National Restaurant Association Show); leading food safety training and certification program (ServSafe); unique career-building high school program (the NRAEF's ProStart). For more information, visit Restaurant.org and find @WeRRestaurants on Twitter, Facebook and YouTube.