McDonald’s executives have apparently grown tired of taking shots from full-service brands like Chili’s over prices.
The fast-food giant has dropped its membership in the National Restaurant Association over differences in views on the tip credit, effectively internalizing an ongoing debate over the wages paid to servers and other tipped employees.
That comes after McDonald’s CEO Chris Kempczinski took issue with the tip credit in an interview on CNBC’s “Squawk Box” this week.
Kempczinski was asked about the “no taxes on tips” provision in the recent budget bill passed by Congress. While he said that he supports that idea, he noted that it only benefits restaurants that have tips. And then Kempczinski went off on the tip credit, noting that the $2.13-per-hour minimum for tipped workers hasn’t been changed since 1991. The federal minimum wage was last increased in 2009.
Kempczinski said there is an “uneven playing field” between those restaurants that accept tips and those that do not. With no taxes on tips, full-service restaurants get a double benefit.
“You’re essentially getting the customer [to pay] for your labor, and you’re getting an extra benefit from no taxes on tips,” Kempczinski said. “Everybody should be paying the same minimum wage.”
He added that McDonald’s is “open to conversations” about raising the federal minimum wage. Kempczinski also highlighted the seven states plus Guam that do not have a tip credit, noting that it doesn’t lead to job loss and that such states have lower poverty levels and lower turnover rates.
The National Restaurant Association confirmed that McDonald’s left the group over a “policy difference.”
“McDonald’s has chosen to step away from membership in the association due to a policy difference,” the trade group said in a statement. “The association remains committed to representing the full spectrum of the restaurant industry and continues to advocate for policies that support sustainable growth and workforce development. Our focus remains on serving all members through effective advocacy and engagement.”
This is not the first time that McDonald’s has split with the association over a policy issue.
In 2019, the company told the association that it would no longer support lobbying against an increase in the federal minimum wage. The association itself stopped that lobbying during the pandemic.
Yet the comments bring to the forefront an ongoing debate on the tip credit, which enables full-service restaurants that accept tips to pay a lower-than-minimum wage. That debate has largely pitted restaurant companies and labor activists and, indeed, Kempczinski’s comments drew a response from One Fair Wage.
“McDonald’s CEO’s comments expose what we’ve been saying for years,” Saru Jayaraman, president of One Fair Wage, said in a statement. “The subminimum wage for tipped workers is indefensible.”
To be sure, full-service restaurants’ costs aren’t exactly helped by that subminimum. A typical full-service restaurant spends 36.5% of its revenues on salaries, wages and employee benefits, compared with 31.7% at limited-service restaurants.
On a chainwide basis, Texas Roadhouse last quarter spent about a third of its restaurant sales on labor, compared with 25% at Chipotle.
Yet tension on the issue has been building more recently as more states increase their minimum wages and customers push back at fast-food restaurants—and McDonald’s in particular—over their price hikes.
And then last year, California started requiring fast-food chains in particular to pay an even higher wage, $20 an hour. Kempczinski said that there has been pressure on operators in that state as a result. “There are definitely pockets of the market, like in California, where there is much more pressure on” profitability, he said.
At the same time, chains like Chili’s have tapped into consumer frustration over rising fast-food prices to highlight budget offers such as the 3-for-Me at $10.99 deal. That $10.99 price is equivalent to the average price for a Big Mac combo meal in California.
McDonald’s is now cutting the prices on its combo meals, while bringing back the Extra Value Meals moniker. The company is also covering the cost for those operators whose price cuts lead to financial losses.
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