April 1st ticked off another anniversary for the $2.13 federal subminimum wage – 34 years and counting. What a boon for employers – as the price of everything else has increased substantially, the wages of the tipped workforce have not budged since 1991.

Does this seem reasonable to you?

Or how about the situation in Delaware, where the minimum wage is $15.00 per hour. That’s good – but looks can be deceiving. Customer tips pay $12.77 of that statutory minimum – in other words,  tips cover 85.1% of wages for every hour a tipped worker works, while employers pay just $2.23, or 14.9%. Does this seem fair to you?

As I explain in more detail in this paper, the mechanics of the subminimum wage (also referred to as the tipped wage) hinges on the ‘tip credit’ allowance, which is the difference between the regular minimum wage and the subminimum wage. Even better, and a lot more entertaining, John Oliver does a great job explaining it on his show Last Week Tonight.

At the Federal level today, the tip credit is $5.12 (i.e., $7.25 – $2.13). Thus, employers can claim $5.12 of a worker’s tips as credit towards a tipped worker’s regular minimum wage, while paying an actual cash wage of just $2.13 per hour. In other words, the tip credit is a wage subsidy provided to the employer via customer tips. Yup, tips are not always gratuity!

Both wage floors (nominal) shown in Figure 1 are woefully outdated and far too low – and both are currently in their longest stretch of inaction on record. The original split between the subminimum wage and the tip credit was 50%-50%, but that was severed when a 1996 amendment to the Fair Labor Standards Acts froze the subminimum wage at $2.13 into perpetuity. Thus, as the regular minimum wage increases, the tip credit allowance increases by the same dollar amount – effectively increasing the tip credit percentage over time.

While twenty states follow the $7.25 federal minimum wage policy, fourteen of those also have a $2.13 tipped wage. The good news is that many states have more generous wage floors, although there is a varied mix.

Figure 1

Importantly, there are seven states that do not allow tipped workers to be paid a subminimum wage – thus employers cannot use tips towards the payment of wages. These seven states also have minimum wages far above the $7.25 federal rate: Alaska ($11.91), California ($16.50), Minnesota ($11.13), Montana ($10.55), Nevada ($12.00), Oregon ($14.70), and Washington state ($16.66).

Conversely, some states have increased their regular minimum wages significantly, but have kept their tipped wages very low – thus providing for extremely large tip credit amounts. The coupling of increasing minimum wages with stagnating subminimum wages benefits employers over tipped workers. In this scenario, an increase in the regular minimum wage without an increase in the subminimum wage increases the tip credit allowance for employers while changing little for tipped workers. In other words, the employer does not pay more for tipped labor when the minimum wage increases – they simply command a greater share of customer tips as contributing to the higher minimum wage.

Tip credit allowances vary greatly across the US, as reported in Figure 2. The states with tip credit allowances are in various shades of purple with the darkest representing the highest tip credit dollar amounts — the relevant data (i.e., MW-SubMW=TC) is accessible by hovering a cursor over each state. The seven no tip credit states are colored gray.

Figure 2

The largest tip credit is in Delaware, where the minimum wage is $15.00. But the subminimum is a low $2.23, which leaves a $12.77 tip credit. Keep in mind this tip credit is afforded to employers for each and every hour a tipped worker works — a huge saving on the employer wage bill. Other high dollar tip credit states include Nebraska ($13.50-$2.13=$11.37), Maryland ($15.00-$3.63=$11.37), Rhode Island ($15.00-$3.89=$11.11), and Virginia ($12.41- $2.13= $10.28).

The map in Figure 3 gives the tip credit as a percent of the minimum wage for each state. It represents the percentage of the minimum wage that employers are able to pass on to the public via customer tips. Again, the seven states without a tip credit are in gray as they pay the full minimum wage to tipped workers. As mentioned, the federal tip credit is $5.12 which represents 70.6 percent of the federal $7.25 minimum wage; thus the tipped wage actually paid by employers represents 29.4 percent (in states like Alabama, Texas, and Utah for example).

Figure 3

Just as tip credit dollar amounts have risen to levels never experienced before in the US, so too have tip credit percentages as a share of minimum wages. For example, Delaware employers enjoy an enormous wage subsidy for tipped workers. Tips account for 85.1 percent of wages, while employers are only responsible for paying a cash wage that represents just 14.9 percent of the state’s $15.00 minimum wage. Tips account for at least half of wages for the tipped workforce in 35 states.

Our two-tiered wage floor system does not exist in other countries — and it need not exist in the US. The vast array of policies across the US makes it clear we can and should do better– especially at the federal level. $2.13 has been around for far too long.