Hawaiʻi should eliminate its tipped sub-minimum wage

Hawaiʻi’s working families deserve a long overdue increase to the $10.10 state minimum wage. HB2510 HD2 SD1—currently working its way through the 2022 legislative process—would do just that, creating a minimum wage of $18 by 2026. This Senate Draft is substantially different from the second House Draft that crossed over to the Senate from the House Committee on Finance, which would have raised the minimum wage to $18 by 2028.

It’s not just the wage increase timeline that’s different. While the House Draft would have increased the state “tip credit” to a maximum of $2.75 in 2028, the proposed Senate Draft would actually phase-out the tip credit entirely by 2026. State legislators should prioritize keeping this phase-out of the tip credit in the bill as it continues to move through the Senate toward an eventual Conference Committee, where representatives and senators will try to work toward a compromise between their preferred versions.

National research shows that employers frequently exploit tip credit provisions to pay their employees beneath the legal minimum wage. As a result, tipped workers tend to earn lower, less-consistent wages than non-tipped workers, and they are more likely to experience poverty. In light of these disadvantages, seven U.S. states have eliminated the tip credit, including California, Oregon and Washington. Hawaiʻi should follow this example and eliminate its tip credit.

A Tip Penalty

The so-called “tip credit” is a provision that sets a sub-minimum wage for many service-related jobs. In reality, it should be called a “tip penalty,” because the policy allows employers to pay their tipped employees less in direct wages than the state minimum wage.

In effect, it makes the livelihood of tipped workers reliant on the generosity of their customers. It also makes their income far less reliable, since tip amounts can vary significantly over a given period of time. This is underlined by the fact that tipped workers are likely to work in lower-wage occupations, thus making them less able to deal with unanticipated disruptions to their income.

Hawaiʻi’s tip credit law allows employers to pay a sub-minimum wage to their employees as long as the total hourly compensation of the employee in question—with tips factored in—amounts to at least $7 over the minimum wage. In Hawaiʻi the maximum tip credit amount that can be applied against the minimum wage is $0.75. So a minimum wage earner in a restaurant could be paid as little as $9.35 in actual wages ($10.10 minimum wage minus $0.75 tip credit) as long as the employee is also earning at least $7.75 in tips for a total hourly compensation of $17.10, or $7 over minimum wage. If the total hourly compensation was only $17 an hour, the employer would have to pay the employee $9.45 in wages instead.

If you think this is overly complicated and fraught with opportunities for exploitation, you’d be correct. There is strong evidence that businesses throughout the U.S. frequently violate wage standards. An investigation conducted by the U.S Department of Labor between 2010 and 2012 discovered that 5 out of every 6 restaurants that were studied had committed a wage violation. These violations cost their employees millions of dollars in stolen wages. 

In spite of these widespread wage violations, the responsibility of enforcing tip credit regulations is mostly placed on the employee. A 2017 study on the 10 most populous states in the U.S. found that 17 percent of workers were paid less than the minimum wage for their state. Based on this data, the Economic Policy Institute estimated that U.S. workers were illegally underpaid by at least $15 billion for that year.

In order for workers to contest unfair compensation, they first have to confront their employer about discrepancies—and risk facing retaliation in the process. Although the data for Hawaiʻi is lacking, these national findings suggest that the tip credit may not be properly enforced at a local level. 

The tip credit also exacerbates racial and gender-based inequities in the labor force, as women and people of color make up a disproportionate share of tipped workers in the U.S., as shown in Figure 1. In 2020, women occupied 68 percent of the jobs in key tipped industries, even though they only accounted for 47 percent of the labor force. Likewise, people of color occupied 48 percent of jobs in key tipped industries, while they made up 37 percent of the labor force. Even in states where the tipped minimum wage is equal to the state minimum wage, tipped workers are still almost twice as likely to be living in poverty as non-tipped workers.

Some have argued that removing the tip credit leads to job losses and shift reductions. However, between 2011 and 2016, businesses operating in tipped industries within states that do not have a tip credit experienced greater employment growth than their counterparts in states that do have a tip credit.

To guarantee that tipped workers are entitled the same minimum wage as everyone else, state lawmakers should consider eliminating Hawaiʻi’s tip credit in conjunction with a minimum wage increase. The better policy is to ensure that all employers are paying all their workers a livable wage.