Tips on Top in Montgomery County: Guaranteeing Full Wage Protection Would Ultimately Put $150 Million in Workers’ Pockets

Most Marylanders agree that working hard should leave you and your family with enough to afford the basics. Policymakers in Montgomery County have taken important steps to make this vision a reality, raising the local minimum wage for most employers to $15 by 2021 ($16.70 today) and securing its future purchasing power through inflation indexing. It’s time to build on that progress by guaranteeing tipped workers the full minimum wage, with tips on top.

Today, employers in Montgomery County are permitted to pay tipped workers as little as $4 per hour due to a carve-out in minimum wage law that traces back to racist southern Democrats’ efforts to cement a two-tiered economy as the price of their support for New Deal worker protections.

This subminimum wage makes it harder for nearly 15,000 tipped workers in Montgomery County to pay their bills, with the greatest harms falling on women as well as Latinx, Asian, and multiracial workers. Even a single adult working full time and not caring for children would need to take home $25.52 per hour to afford a basic living standard in Montgomery County.[i]

Gradually phasing out the subminimum wage – and putting tips on top of a fair base wage – would make Montgomery County’s economy more inclusive, and would increase tipped workers’ earnings by about $50 million in the first 12 months. By 2028, the annual income boost will exceed $150 million.[ii]

By the Numbers

Montgomery County workers in tipped occupations[iii] are primarily women and overwhelmingly workers of color:

• 65% of workers in tipped occupations in Montgomery County are women, compared to only 50% of workers in other occupations.[iv]
• 76% of workers in tipped occupations are people of color, with Asian/Pacific Islander workers constituting the largest group (22%). Only 57% of other Montgomery County workers are people of color.
• 49% of workers in tipped occupations are women of color. Together, women and workers of color account for 92% of the county’s workforce that works in occupations that generally rely on tips.

Workers in tipped occupations in Montgomery County come from all walks of life and all stages of life:

• 86% are at least 20 years old. More than half are at least 30 years old.
• 19% have a college degree and another 30% have at least some college education.
• 24% are caring for children under 18.
• 44% were born outside the United States, including 21% who are naturalized U.S. citizens.
• 84% of tipped-occupation workers in Montgomery County also live there, and 96% live in Maryland.

The subminimum wage – $4 per hour, with tips filling the hole – is not nearly enough to get by in Montgomery County:

• Tipped-occupations workers in Montgomery County are three times as likely as those in other occupations to have family income below the federal poverty line ($30,000 for a family of four in 2023) and twice as likely to have income less than double the poverty line.
• 26% of tipped-occupations workers devote more than 30% of their income to housing (the maximum amount considered affordable by the U.S. Department of Housing and Urban Development), compared to only 17% of workers in other occupations. One in eight tipped-occupations workers put more than half their income toward housing.

It’s Time to Put Tips on Top

The Montgomery County Council will soon consider a bill to gradually phase out the tipped subminimum wage, beginning in July 2024 and guaranteeing full minimum wage protection to tipped workers by July 2028. This gradual approach delivers meaningful benefits within a year and prevents sharp cost increases for restaurants and other employers that currently take advantage of the carve-out.

This is a long-overdue step to repair a deep-seated local and national legacy of codified racism.[v] When Congress established the federal minimum wage in 1938, lawmakers specifically denied protections to workers in restaurants, hotels, and certain other service industries – one of many compromises to blunt corporate opposition and secure the support of racist southern Democrats. Congress extended partial wage protections to these workers in 1966, but still allowed employers to pay tipped workers less than the full minimum wage. The subminimum wage for tipped workers was unjust in 1966, and federal as well as state lawmakers have chosen to expand both its reach and its harm in the decades since:

• Congress originally imposed the subminimum wage on workers who regularly earn at least $20 per month in tips, equivalent to more than $180 today. Lawmakers raised this threshold to $30 in 1978, equivalent to $133 today. Lawmakers’ failure to adjust this threshold in the last 45 years has effectively extended the tipped subminimum wage to a larger pool of workers who take home only nominal tips.
• Lawmakers originally set the tipped subminimum wage equal to half the standard wage floor. This brought the tipped wage to $2.13 per hour in 1991, equivalent to $4.71 today. However, Congress froze the federal tipped wage at this level in 1996 and has not updated it since. While Montgomery County lawmakers included a small increase for tipped workers in the local $15 minimum wage law, this protection is still weaker than what tipped workers had three decades ago.

The tipped subminimum wage also contributes to gender inequity in our economy. Not only does this two-tiered system hold down earnings for thousands of women, it exposes workers in tipped industries to a greater risk of sexual harassment. Because tipped workers cannot rely on a stable, decent wage, they are often at the mercy of customers for adequate pay – meaning that reporting or pushing back against mistreatment could take a bite out of a worker’s paycheck. This unjust power dynamic contributes to high rates of sexual harassment in the tip-heavy accommodation and food services industry.[vi]

Long-Lasting Benefits

Ending the tipped subminimum wage would benefit Montgomery County families and children for decades to come. A large body of research shows that when families earn enough to afford the basics, the benefits ripple out to nearly every part of their lives. A 2013 systematic review of academic literature linked higher family incomes to:[vii]

• Fewer families struggling to put food on the table
• Fewer underweight births and lower infant mortality
• Increased spending on children’s clothing, reading materials, and toys
• Fewer behavioral problems, less physical aggression, and less anxiety among children
• Improved academic and cognitive test results, and more years of schooling completed

Guaranteeing a consistent wage floor is the right choice for the local economy. Increased pay for low-wage workers who live paycheck to paycheck translates almost immediately into higher spending, which means stronger sales at local businesses. Evidence also shows that higher wages reduce employee turnover, which means more experienced workers and lower hiring costs.  Family-supporting wages make Montgomery County a more attractive place to live and work, which means a deeper talent pool for employers to draw from.

Despite dire predictions from minimum wage opponents, a robust body of credible research shows no significant link between the minimum wage and the number of jobs available.  For example, a 2019 study described as “the most important work on the minimum wage in 25 years” examined 138 state minimum wage changes between 1979 and 2014.[viii] The study found no evidence of any reduction in the total number of jobs for low-wage workers and no evidence of reductions affecting subsets of the workforce such as workers without a college degree, workers of color, and young workers. Similarly, a 2016 meta-analysis of 37 studies on the minimum wage published since 2000 found “no support for the proposition that the minimum wage has had an important effect on U.S. employment.”[ix] The verdict is in: Strong, consistent wage protections work.

“Backfilling” Requirement Provides Inadequate Protection

Proponents of the tipped subminimum wage are quick to point to the requirement that employers make up for any deficit between a tipped worker’s total pay after tips and the minimum wage, claiming that this nullifies the harm caused by the subminimum wage. This argument does not hold water:

• Enforcement of this “backfilling” provision requires workers to add their wages and tips, divide by hours worked, and proactively request reimbursement from the employer if there is a deficit. This process is complicated and cumbersome, especially for the large number of tipped workers whose hours are far from stable.
• Moreover, workers must contend with pressure from their boss – actual or suspected – to let underpayment slide. It is easy for a boss to reduce hours, deny advancement opportunities, or retaliate in other ways against a worker who insists on appropriate payment. As managers in tipped workplaces already exercise significant discretion in scheduling and other decisions, such retaliation is difficult to prove.
• The subminimum wage twists the intended purpose of tipping, often without customers’ knowledge. While customers typically leave a tip to compensate a worker for their labor or to reward a job well done, a portion of tips effectively subsidizes the employer’s choice to pay less than the standard minimum wage. For a full-time worker, the first $1,016 in tips for each pay period simply reduce the employer’s pay responsibilities. Customers wind up unknowingly tipping the boss.

Endnotes

[i] Economic Policy Institute 2018 Family Budget Calculator,  http://www.epi.org/resources/budget/

[ii] Economic Policy Institute Minimum Wage Simulation Model; 2015-2019 5-year ACS data pinned to 2022 CPS wage distribution. Employment scaled to match 2022 CPS labor force size. For more details see Technical Methodology by Dave Cooper, Zane Mokhiber, and Ben Zipperer, 2019, https://www.epi.org/publication/minimum-wage-simulation-model-technical-methodology/

The 2028-forward estimate of $150 million in increased wages is based on the current full minimum wage of $16.70. Because the local minimum wage will continue to update for future inflation, the true impact will almost certainly be greater.

[iii] Estimates in this section are based on MDCEP analysis of 2017–2021 IPUMS American Community Survey microdata. “Tipped occupations” are identified using a modified version of the definition presented in Cooper, Mokhiber, and Zipperer (2019). Because the occupation code 4060 (counter attendants, cafeteria, food concession, and coffee shop) is not available in 2017–2021 data, code 4055 was used instead. This code includes fast food workers, who typically are not paid the tipped subminimum wage. For this reason, demographic estimates in this section do not precisely match the population covered by the EPI impact estimates.

[iv] American Community Survey data code all respondents as male or female, preventing analysis of more detailed gender groups.

[v] “Ending a Legacy of Slavery: How Biden’s COVID Relief Plan Cures the Racist Subminimum Wage,” One Fair Wage, 2021, https://onefairwage.site/wp-content/uploads/2021/02/OFW_EndingLegacyOfSlavery-2.pdf

[vi] Jocelyn Frye, “Not Just the Rich and Famous: The Pervasiveness of Sexual Harassment across Industries Affects All Workers,” Center for American Progress, November 2017, https://www.americanprogress.org/issues/women/news/2017/11/20/443139/not-just-rich-famous/

Catherine MacKinnon and Louise Fitzgerald, “The Tipping Point: How the Subminimum Wage Keeps Incomes Low and Harassment High,” One Fair Wage, 2021, https://onefairwage.site/wp-content/uploads/2021/03/OFW_TheTippingPoint_3-1.pdf

[vii] Kerris Cooper and Kitty Stewart, “Does Money Affect Children’s Outcomes? A Systematic Review,” Joseph Rowntree Foundation, October 2013, https://www.jrf.org.uk/sites/default/files/jrf/migrated/files/money-children-outcomes-full.pdf

The systematic review methodology involves defining in advance how researchers will identify relevant studies, as well as quality control measures to ensure that only studies with credible methodologies are included. This methodology protects against researchers cherry-picking studies that support their viewpoint.

[viii] Doruk Cengiz, Arindrajit Dube, Attila Lindner, and Ben Zipperer, “The Effect of Minimum Wages on Low-Wage Jobs,” The Quarterly Journal of Economics 134(3), 2019, https://academic.oup.com/qje/article/134/3/1405/5484905

[ix] Paul Wolfson and Dale Belman, “15 Years of Research on US Employment and the Minimum Wage,” Labour 33(4), 2019, https://onlinelibrary.wiley.com/doi/abs/10.1111/labr.12162