Since we just passed Labor Day weekend, I wanted to tackle one of the business issues that I’m most passionate about: the tip credit. The tip credit is what guarantees that tipped workers, such as restaurant servers and bartenders, make at least their hourly wage for the hours they work but also gives them the opportunity to make significantly more than their hourly wage. In recent years, due to what I believe is a misunderstanding of the entire food service industry, well-intentioned politicians have put forward efforts to eliminate the tip credit, thinking this is what restaurant workers wanted. In fact, the restaurant workers overwhelmingly prefer the way they are paid now. Eliminating the tip credit would have industry-shifting negative impacts for the workers.”

Maine’s minimum wage is $14.15 per hour in 2024. Thus owners pay their tipped employees $7.08 per hour, and if they don’t make at least $7.07 in tips per hour for that shift, then the owner pays them the difference. However, if a server makes, let’s say, $70 in tips during a four-hour lunch shift, that $70 is far more than they would have made if they had only been paid four hours, or $28. Using the tip credit, restaurants can pay half of the hourly rate to their tipped employees, saving them money and keeping their menu prices at a point where they don’t need to raise them to cover this payroll expense.

Why there is a tip credit in the first place is pretty simple: Restaurants have some of the slimmest margins of any industry. To look at why that is, let’s look at three key expenses that face every business. Building costs, inventory/infrastructure and payroll are three of the largest expenses any business has. When you think about a restaurant, which is a forward-facing business (meaning it relies on many patrons coming in to make it successful), they typically need a location either in a densely populated area or, at the very least, in proximity to their customer base. This is why you typically see restaurants in communities with denser populations, near malls and in downtowns. Typically, those locations are pricier, too.

Add to that the price of inventory and infrastructure. For industries like retail that doesn’t typically need specialized equipment, their infrastructure costs can be relatively low while their inventory expenses are typically higher because that’s what they sell to the customers. For service industries like vehicle repair and construction, the cost of their specialized equipment can make their infrastructure costs high but their inventory is lower because they sell a service and not necessarily a product. Restaurants have both specialized equipment and high inventory costs. I mean, have you been to the grocery store lately? Food costs are up, and those cost fluctuations — even in non-inflationary times — can be a lot to budget for.

Profit margin in restaurants is approximately 3%-5%. Some higher-end restaurants can profit more, or restaurants that have mitigated some of the costs described above can perhaps do better, but many new restaurants are on that lower end, too (which is why you see so many owners who work in their restaurant, too). Side note: To nip this little talking point in the bud, businesses do need to make profit. Profits are how businesses give raises, reinvest in their businesses and survive the years when they don’t make that profit margin due to fluctuating costs.

This 3%-5% profit margin is with the tip credit in place. Under this system, tipped employees get paid half of their hourly wage with the other half coming from the tips they make. Crucially, if no one happens to come into the restaurant that day or they are light tippers, the tip credit ensures the employer pays the employee to get up to that hourly rate; however, it’s rare that this is needed.

We’ve seen what happens to Maine restaurants when the tip credit is eliminated. In 2016, when along with the minimum wage being increased at the ballot box, the tip credit was also eliminated in that same referendum. Chaos ensued as soon as it was eliminated, as servers and bartenders would attest to at public hearings in April (six months after it passed, and three and half months after it went into effect). Servers got paid full hourly rates, so menu prices went up (because restaurants only have one income stream, it’s not like they could raise sponsorships or get a grant to offset the payroll expense increase), so people came in less. Servers testified that customers also began saying, “Oh, you don’t have to tip now, that’s what we voted on.”

Restaurant workers contacted legislators and came out in one voice demanding to reinstate the tip credit. In April 2016, after one of the longest committee hearings in the history of Maine state politics that lasted over 15 hours and ended sometime around 2 a.m., the legislators reinstituted the tip credit.

However, the reason for the title of this column is that the issue was raised again at the Portland City Hall within the last month as they debated whether to add tip credit elimination to a referendum this November. The servers again came out in full force, and the issue went to a subcommittee instead of the ballot box. This issue is not going away, though, and will come back again because some politicians believe if the owner isn’t paying the server the full hourly wage that the employee is suffering. The next time it comes up by referendum, the public needs to stand up for these workers and say, “The employees who make their careers in this industry don’t want this — we should listen to them and not eliminate the tip credit.”

Cory King is executive director of the Bath-Brunswick Regional Chamber of Commerce.