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Court kills Michigan's tip credit, sets minimum wage at $12 an hour

The decision will require full-service restaurants to pay servers and bartenders the full minimum wage. It also requires most employers to provide paid sick leave.
Michigan tip credit ruling
Photograph: Shutterstock

Full-service restaurants in Michigan are at risk of losing the tip credit because of a court decision that reinstates a $12-an-hour minimum wage for all workers in the state, including servers and bartenders.

The same ruling also raises the possibility of paid sick leave being required of most employers.

The situation extends back to a proposed ballot initiative aired in 2018. Under Michigan law, residents can petition the state to put a proposal on the ballot of the next election. If the measure makes it to the ballot and a majority of voters indicate their approval, it becomes law.

Labor advocates collected signatures to get a $12 minimum wage, applicable to tipped employees as well as conventionally compensated hourly workers, on the ballot. Another petition called for letting voters decide if employers should be mandated to provide paid sick leave.

But Michigan’s constitution allows the state legislature to pre-empt a ballot vote by passing the proposal beforehand.

Knowing that the two initiatives would almost certainly pass if put before voters, the Republican-controlled statehouse went ahead and passed the wage hike and paid-leave mandates, figuring they could rescind or at least amend the laws afterward.

The legislators indeed hiked the minimum wage to $12 an hour starting in 2022 and effectively agreed to let the tip credit die. The credit allows employers of tipped employees to pay those workers a lower wage if they collect the rest of the minimum mandated pay in gratuities. The tips count as part of their compensation.

Without the credit, restaurateurs in Michigan would have to directly pay servers and bartenders $12 an hour, instead of as little as $3.75.

The legislature then amended the law to make it more palatable to business. They passed a modification that raised the pay floor to $12.05 an hour by 2030 and increased what they were obliged to pay tipped employees to $9.60.

The legislature also passed a law that tempered the paid-leave initiative by exempting businesses with fewer than 50 employees.

The legislative actions were immediately challenged in court by labor groups, who accused the lawmakers of gaming the system to subvert what the citizens of Michigan wanted.

On Tuesday, the state-level Court of Claims ruled that the legislature had violated the so-called adopt and amend provision of Michigan’s constitution. Judge Douglas Shapiro wrote that lawmakers could thwart a ballot initiative in three ways: Pass the proposal as a law; defeat the measure, thereby killing it; or approve a version more to their liking—in essence, an amended version.

But, Shapiro ruled, they could not both pass a law and amend it in one session. In his interpretation of the constitution, at least one election would have to be held between the actions.

He ordered that the amended law be killed and the $12-an-hour, no-tip-credit version be reinstated.

However, state labor regulators have not indicated whether they will start enforcing the standards. There are near-universal expectations that the decision by the Court of Claims will be appealed to higher courts until it reaches the Michigan Supreme Court.

“We respectfully disagree with the interpretation of Judge Shapiro and strongly encourage the ruling to be stayed during the inevitable appeals process,” Justin Winslow, CEO of the Michigan Restaurant & Lodging Association, said in a statement. “The inevitable result would be instantaneous menu price increases and significant layoffs during peak travel season.”

Union activists and labor advocates, in contrast, cheered the court action.

“Today, the courts in Michigan vindicated the rights of these millions of workers, and millions of voters, to demand that workers in Michigan be paid a full, livable wage with tips on top,” Saru Jayaraman, head of the union-backed Restaurant Opportunity Centers, said in a statement. “Today we made history!” 

If the court ruling sticks, Michigan would become the eighth state in the nation to prohibit a tip credit.

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