WHAT IS HAPPENING?

Tips are voluntary payments from customers to servers and other hospitality workers in traditional service occupations. Tips are the property of the employee receiving the tip and cannot be retained or utilized by the business. All tip income is free from sales tax and business income taxes.

A tip credit is an amount that restaurants can save on a tipped-worker’s traditional W2 wages. These savings are used to increase the compensation for non-tipped workers, such as cooks and dishwashers. On the extremely rare occasion that a server does not make enough in tips to earn the minimum wage, the business must make up the difference. The national average income for servers is $27 per hour, so this situation almost never happens.

Service fees and surcharges are mandatory fees charged to customers as a percentage of the total bill. Service fees and surcharges are the property of the business and both sales tax and business income tax must be paid on them.

The tip credit allows owners to keep labor costs down, while keeping it affordable for people to dine out. If the tip credit is removed, restaurants will be forced to raise their prices drastically to help cover costs. Driving menu prices up has a direct correlation with losing business: One study of minimum wage increases in the Bay Area—where there are no tip credits--shows that, for every dollar that the base wage is increased, the chance of a restaurant closing goes up by as much as 14 percent.

The tip credit allows tipped workers to earn substantially more than the minimum wage because of tip revenue. This system often results in higher overall income compared to flat wage models. Without the tip credit, the entire hospitality industry would need to change business models and customers would be forced to pay more. To maintain a comparable out-of-pocket price point for customers, restaurants in cities with no tip credit are using “service included” models or instituting mandatory service charges on the bill. With these models, guests are told that the traditional tip is no longer necessary because the higher wage is included in the price of the food, or included in the charge at the bottom of the bill. Under these models, that money is the property of the owner, not the server, thus decreasing the income of tipped workers dramatically. Restaurateurs like Danny Meyer, who have experimented with this no-tip model, have seen staff leave the company “in droves.” Tipped workers understand this. If a guest is paying a 10-15% mandatory service charge, they will reduce or skip their tip all together. In fact, 90% of tipped workers support the current model, and 87% fear that their earnings would drop if the tip credit was eliminated.

The restaurant industry in America is unique, and survey data proves that both tipped workers and the public prefer it as well. Restaurant workers often look at ourselves as commission-based sales people--the more we sell the more we make. In addition, we are rewarded when we give guests exceptional experiences. Our guests appreciate that they can show their satisfaction through tipping; it is a way to show their respect for us executing our craft. Far from being demeaning, as some activist organizations have claimed, the tipping system is empowering for servers and bartenders. In research conducted by Lloyd Corder, an adjunct professor at Carnegie Mellon University, over 90% of tipped workers support the current tip credit system. “The survey data is crystal clear: Tipped employees overwhelmingly prefer the current tip credit payment system, and they don’t want to change it,” Corder said in a statement. “It’s race to find an issue that commands such widespread support across diverse age, race, gender, and geographic groups.” Prop. 138 protects the tipping system by giving it constitutional protections and preventing outside groups from removing the tip credit.

No! By law, a service charge or other fee that is automatically added to the check is considered income and the property of the restaurant. The restaurant can do whatever they want with that fee and the employee has no right to that money. While many restaurants would elect to give the service charge back to the employees, it still would not make up for the lost tips to the servers. Here is why: When a customer leaves a tip for an employee it is considered the property of the server and not part of the revenue for the restaurant. This means that no sales tax or business income tax is paid on that tip amount. However, if a service charge is paid instead, it is treated as revenue and both sales tax and business income tax must be paid on it. That means that a significant portion of money that went directly to the tipped employee now goes to the government instead. Again, this is how the law works, and it is not a result of any restaurant policy.

This is an incredibly rare occurrence. While a server may have one or two customers that don’t tip well, it is very unlikely that a server would experience this enough to significantly impact their compensation. In the unlikely event this does occur, there are protections for tipped employees. Under current law, tipped employees are still guaranteed to be paid at least the full minimum wage ($14.35 per hour). If the employee does not get enough in tips, the restaurant must make up the difference. Under Prop. 138 that guarantee is increased by $2 per hour. If Prop. 138 was in place today, tipped workers would be guaranteed $16.35 per hour instead of minimum wage.

Servers and bartenders answer this question with a resounding – NO. Here is the reason why: in all the jurisdictions that have eliminated the tip credit, restaurants have been forced to significantly increase menu prices, add mandatory service charges, switch to counter-service models, or close all together. In the restaurants that stay open and keep a full-service model, customers are not tipping on top of service charges because they view service charges as part of the tip. Customers are also dining out much less because of the higher prices. This is why we see average tip percentages in no-tip credit jurisdictions fall – such as California which boasts the lowest tipping percentage in the Nation. That means that tipped workers see less coming in through tips and the additional base wages fails to make up for it – and that is if the tipped workers keep their jobs. Unfortunately, we also see reduced hours and layoffs in jurisdictions without a tip credit.

NO. You may have heard this from uninformed social media posts or even the media, but it’s not true. Prop. 138 replaces the current statutory tip credit with a constitutionally protected one. Current law sets the tip credit at $3 per hour and sets the guaranteed pay for tipped workers at the minimum wage. Under Prop. 138 the $3 tip credit is replaced with one that is set as 25% of the minimum wage, and increases the guaranteed pay for tipped workers to $2 above the minimum wage. Much of the confusion comes from individuals theorizing that if Prop. 138 was in place in 2024, the base wage for servers would not be as high as current law. While this may be true, the key is that Prop. 138 CANNOT be in place in 2024 because it hasn’t been voted on yet. The minimum wage in Arizona increases each year based on the change in the Consumer Price Index. When Prop. 138 is effective, the minimum wage will be higher, and the 25% credit will be calculated off that minimum wage and not the current $14.35. This means that tipped workers will not see a decrease in base pay. This doesn’t even take into account that Prop. 138 also INCREASES the guarantee pay for tipped workers by $2 over current law.

Simple, Arizona’s minimum wage law has an automatic adjustment each year to increase the minimum wage by the increase in inflation as calculated by the Consumer Price Index. The $3 tip credit doesn’t have an adjustment. This means as time goes on and the minimum wage continues to increase, the percentage of the $3 tip credit decreases and will eventually be the same thing as an outright elimination. By switching to a percentage and pegging to the minimum wage that increases each year, we ensure a standard tip credit for the future. The $3 tip credit was put into place in 2006 when Arizona moved away from the federal minimum wage and the federal tip credit. Prior to that, Arizona worked under the federal standard, which had a minimum wage of $5.15 per hour (in 2006) with a tip credit of $3.02, resulting in an effective tip credit of 59%. The new Arizona that law went into effect in 2007 set the minimum wage at $6.75 per hour with a $3 tip credit, resulting in an effective tip credit of 44%. Since then, the effective tip credit in Arizona has continued to drop year after year. Prop. 138 stops the decline of the tip credit by switching to a percentage.