To ensure fair compensation for tipped employees, the Chicago City Council passed the “One Fair Wage” ordinance on October 6th, 2023. This legislation, which aims to eliminate the subminimum wage for tipped workers in Chicago by July 1st, 2028, will fundamentally reshape the compensation landscape for thousands of individuals employed in service-oriented industries. The ordinance, which commences its phased implementation on July 1st, 2024, is poised to challenge the long-standing practice of tipping and the structure of the city’s restaurant industry. Continue reading to explore the intricacies of this significant policy shift and the various perspectives surrounding it.
Understanding The Subminimum Wage
At this time, employers of tipped workers in Chicago can apply for a credit against the standard minimum wage rate. This credit, commonly known as the “tip credit,” allows employers to pay a lower hourly wage to tipped workers if their tips, combined with their direct pay, bring their earnings up to the city’s minimum wage. For employers with at least 21 employees, the subminimum wage for tipped employees is $9.48 per hour, constituting a 40% credit against the standard minimum wage of $15.80 per hour. Smaller employers with more than three but fewer than 21 employees pay a subminimum wage of $9.00 per hour, a 40% credit against the standard minimum wage of $15.00 per hour.
The Phased Approach
With the passing of the “One Fair Wage” ordinance, the tip credit is set to be reduced in stages:
- 40% of the applicable minimum wage rate until July 1st, 2024
- 32% of the applicable minimum wage rate on and after July 1st, 2024
- 24% of the applicable minimum wage rate on and after July 1st, 2025
- 16% of the applicable minimum wage rate on and after July 1st, 2026
- 8% of the applicable minimum wage rate on and after July 1st, 2027, until and including June 30th, 2028
By July 1st, 2028, employers will no longer be able to take a tip credit of any amount, and the standard minimum wage will apply to all employees in customarily tipped occupations. Tipped employees, however, will still be entitled to earn and retain their tips.
Challenges For Restaurant Employers
The “One Fair Wage” ordinance represents a significant challenge for restaurant employers, especially in Chicago’s vibrant dining scene. Initially introduced with a two-year phaseout period, the substitute measure passed on October 6th provides additional time for the city’s hospitality industry to adapt to the impending changes. The Illinois Restaurant Association has voiced concerns, warning that eliminating the subminimum wage will fundamentally alter the business model of every restaurant in the city.
Proponents of the ordinance cite data from other regions that have already eliminated the tip credit, suggesting that service workers’ take-home pay increases and staff turnover decreases. However, critics point out that the reality may be more nuanced. For instance, the Illinois Restaurant Association notes that a median tipped worker in a full-service restaurant in the state already makes $28.48 per hour. In cities that have abolished the tipped minimum wage, the average tip percentages tend to be lower, which can result in reduced take-home pay for servers. For example, San Francisco, California, saw an increase in restaurant closures after eliminating the tipped minimum wage.
Potential Responses And A Growing Trend
As Chicago restaurants face this transformative change, they may adopt automatic service charges to offset the financial impact, a practice already prevalent in Washington, D.C., after the tip credit was eliminated there. Some may consider eliminating servers altogether, shifting to a self-serve or counter model, or relocating to nearby municipalities outside the city.
This initiative in Chicago is part of a broader trend to eliminate the tip credit, which has been gaining momentum in recent years. Although federal legislation to eliminate the subminimum hourly wage for tipped workers failed in the 2021-22 session, more than a dozen states have legislation pending to abolish the tip credit, and several states already prohibit the subminimum wage. The District of Columbia and Portland, Maine, have also ventured into this territory, with contrasting outcomes.
A Helping Hand In Adapting
The “One Fair Wage” ordinance in Chicago is poised to reshape the compensation landscape for tipped employees, prompting a robust debate about its potential impact on the service industry. While the industry grapples with the changes ahead, another facet to consider is how businesses can navigate these transformations effectively. Professional employer organizations (PEOs) like GMS are a valuable resource for companies in Chicago, helping them adapt to evolving employment laws, including those related to minimum wages and tipping practices. GMS offers comprehensive HR solutions, allowing business owners to focus on their core operations while ensuring compliance with changing labor regulations. With the phased elimination of the tip credit on the horizon, GMS can be a strategic partner for businesses, helping them navigate these changes while maintaining the highest employment standards and fair compensation for their employees. As the “One Fair Wage” initiative unfolds, businesses in Chicago must stay agile and informed, and PEOs can be an ally in this process. Interested in learning more? Contact us today.