Battle over Chicago's tip credit escalates

With a vote expected within weeks, the restaurant industry is mustering its resources--and plenty of research--to avoid a situation like the one that unfolded in Washington, D.C.
The Windy City has become the new battleground. | Photo: Shutterstock

After seeing how operators in Washington, D.C., were walloped by that city’s rollback of the tip credit, the restaurant industry is mobilizing to prevent a repeat in Chicago.

Mayor Brandon Johnson has set abolishment of the tip credit as a priority for his young administration, which came to power in May 15.  A measure to kill the employer break has been publicly endorsed by 26 of Chicago’s 50 alderman, signaling that passage is likely. A final vote on phasing out the credit is expected to be held early next month.

The restaurant industry is trying to avert passage by educating public officials and their constituents on how the wage change would affect Chicago consumers, tourists and the city’s celebrated restaurant business.

A full-page ad that ran in Sunday’s Chicago Sun-Times is headlined, “Like high menu prices and restaurant service fees? That that will be the result of an ordinance pending in the Chicago City Council.” The ad was jointly placed by the National Restaurant Association (NRA) and the Illinois Restaurant Association (IRA).

The placement cites a forecast by the Sun-Times that 80% of local restaurants would raise their prices if the tip credit is phased out.

In addition, the ad states, 44% of local diners would shift their visits to restaurants outside the city’s limits because of the price increases and widespread adoption of automatic service surcharges, the method that was broadly embraced in Washington to protect margins. More than 70% of the District’s restaurants have or intend to offset the spike in their labor costs by automatically tacking the surcharges onto guest tabs, according to the restaurant-friendly Employment Policies Institute.

Restaurants and officials mindful of tax revenues are advised in the ad that the resulting price increases and routine adoption of service fees would drive a majority of consumers to dine out less often.

As City Council members were returning from their summer recess to take up measures like phasing out the tip credit, IRA CEO Sam Toia floated an alternative way of making sure servers get the full minimum wage mandated by Chicago law. He suggested that lawmakers raise the penalties a restaurant would face if it fails to make up the difference between what tipped employees collect in gratuities and the minimum wage they’re due by law.

Labor advocates and other proponents of killing the tip credit have yet to respond publicly to the compromise Toia spelled out.

But Chicago restaurateurs and their advocates have been roused by Mayor Johnson’s effort, in no small part because of what happened in Washington, according to Sean Kennedy, EVP of public affairs for the NRA.

Last November, D.C. residents voted via referendum to phase out the District’s tip credit. The rollback began just five months later with a 12% hike in what employers were obliged to pay tipped workers directly—money that previously came from customers, not the operations’ profits.  

The cash wage for tipped workers then rose again on July 1 to $8 an hour—a 50% increase in what the employees were directly paid before the tip credit phase-out began.

Operators in the nation’s capital say the rapid-fire and steep increases in their labor costs have generated chaos for operators and their customers. Because few guidelines were provided by the municipal government, restaurants were unsure how much of a service charge they could levy, how the money could be used and what they needed to tell customers about the extra charge.

Customers, meanwhile, would encounter a 3% fee in one establishment and a 15% automatic charge at another. Nor, according to local accounts, were they sure if the service fee was in lieu of a tip or if they should still leave a gratuity for their servers.

Chicago’s minimum wage is currently $15.80 an hour.  Full-service restaurants are required to pay servers, bartenders and other tipped employees only $9.48 an hour if the workers collect enough in tips to bring them up to $15.80 in hourly income.

Labor advocates like One Fair Wage, a group supported by the powerful Service Employees International Union, have been sounding a message that servers, bartenders and other tipped restaurant workers are paid only 60% of what their non-tipped co-workers get from employers. They’ve cast the credit as a legalized way for restaurant operators to cheat their waitstaffs.

The group maintains that what it calls the sub-minimum wage is a holdover from the age of slavery, a way of getting people to work for less than the pay they’re due. It cites research that shows 78% of Illinois restaurant workers would only stay in the business if they got the full minimum wage directly from their employer and still were tipped.

The group’s argument that the tipping model is anachronistic and decidedly broken has even won support from some Windy City restaurateurs. Advocates of killing the credit have released a list of 52 local dining establishments that are said to favor the switch to a single direct wage for all restaurant employees, servers and bartenders included. Their reasoning was not revealed.

“I don’t view it as a source of friction or an act of war,” Kennedy says of Johnson’s efforts. “There’s not an appreciation of just how big of a change this would be for the restaurants. Most cannot afford to take on those higher labor costs.”

Given what happened in Washington, and the interest shown by other jurisdictions in killing the credit, the national restaurant group has stepped in to help its state affiliate.

“It always begins with a fundamental misunderstanding of how compensation works in the restaurant industry,” Kennedy says of government officials like Johnson. “What people don’t understand is the tip credit allows a low-profit business like restaurants to work and stay in business.

“It allows the customer to put more money into the system, and it works incredibly well,” he continued.

The association has research indicating that Chicagoans prefer tipping to paying a service fee by a margin of 5 to 1, or 64% versus 13%.

Servers themselves have led drives to re-instate the tip credit in Maine after it was eliminated there in 2016, and more recently spearheaded a drive to defeat abolishment of the employer break by referendum in Portland, Me., last November.

Kennedy says of Johnson, “he’s trying to address a problem that doesn’t exist. Chicago tipped employees are doing very well.” It’s an article of faith in the restaurant business that many servers earn more than their managers because of gratuities.

Chicago is the current flashpoint, but Kennedy advises operators everywhere to pay attention to what could build quickly into a trend.

“You absolutely should care because policy ideas and policy misconceptions like this can spread quickly,” he says. “It’s definitely something that’s starting in progressive communities but has the potential to spread to other localities.”

Two lawmakers in Montgomery County, Md., have already voiced their support for killing the tip credit in that jurisdiction.

One Fair Wage has announced that it has earmarked $25 million to spread the credit-abolition movement to other locales.

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