Governor Paul LePage recently claimed that Portland’s tip credit is illegal under federal law and stated that the city would have to pay employers back. His administration’s argument seems to be that because Federal law allows for a tip credit of $5.12 and Portland allows for $6.35, it is pre-empted. It should come as no surprise that in this area, as with the recent veto kerfuffle, his dalliance into legal scholarship is misguided.
The Fair Labor Standards Act (FLSA) is the federal law that sets a minimum wage for some, but not all workers. Currently that wage is $7.25 per hour. The FLSA allows employers of tipped workers to count part of a worker’s tips towards that wage. So a restaurant worker that works a five-hour shift can be paid as little as $2.13 in cash and the employer can count tips as wages as long as the worker makes enough to take the total to $7.25. If the worker does not earn at least $5.12 per hour in tips over the week, the employer has to make up the difference in cash wages.
It is this $5.12 that is commonly called the “tip credit”, but it is nothing more than an accounting term to explain the difference between the legally required $2.13 (a number that hasn’t changed since 1996) and the total minimum wage, which is now $7.25.
But the Fair Labor Standards Act does not cover employees in small businesses that have less than $500,000 in revenues per year unless the employee acts directly in interstate commerce. In a state like Maine with many mom and pop diners, most servers are only covered if they regularly use the credit card machine because this counts as interstate commerce. When Frances Perkins, President Roosevelt’s Secretary of Labor and a self-professed Mainer, pushed through the FLSA during the New Deal, it expressly stated that it did not interfere with State laws, but instead provided an additional layer of protection.
Fortunately in Maine we have a robust state minimum wage regime that pre-dates the FLSA and covers the vast majority of workers. Under Maine law the minimum wage is $7.50 per hour, and tipped workers must be paid at least $3.75 in cash if the tips more than make up the rest.
Portland’s protections are even more robust. A tipped-worker must be paid $10.68 total, of which $3.75 must be paid in cash as long as tips make up the rest. This provides more protection than the FLSA. And even if it provided less protection, that would just mean that the employers that were covered by both laws simply had to comply with the stricter one.
The Federal government only cares that tipped-workers workers receive a total of $7.25 per hour with at least $2.13 being cash from the employer as long as tips more than make up the rest. If a Portland restaurant covered by the FLSA pays tipped employees $3.75 then as long as they make another $3.50 in tips per hour, their wage complies with Federal law. In other words, as long as an employer complies with Portland’s ordinance it will always be in compliance with the FLSA.
We’ve now watched state officials and the Portland City council, including several lawyers, get completely flummoxed by the tip credit. I can only imagine how confusing this is to the average small-business person. There are serious penalties for violations, and an employer has to pay the employee’s sometimes crippling attorneys’ fees if a lawsuit is successful. This is great for me, an attorney for workers, but I would rather use my time and energy to help victims of intentional wage theft and not confusion.
The best solution is to abolish the tip credit completely. Several states, including generally conservative Nevada and Montana, follow this approach with few detrimental effects. In fact, states with no sub-minimum wage for tipped workers have stronger employment rates generally and in the restaurant industry and also have higher average rates of tipping.
Slowly phasing out this sub-minimum wage is part of the minimum wage referendum that Mainers for Fair Wages recently collected enough signatures to place on November’s ballot. It’s the best way to make sure workers make a fair wage, boost the economy and eliminate this unfortunate confusion.