Federal law and most states’ laws allow employers to pay a lower minimum wage to workers who typically receive tips from customers. These lower minimum wage rates are variously known as the tipped wage, subminimum wage, or base wage.
The term “tip credit” refers to the wage credit that employers are allowed to take under these laws, which is equal to the full minimum wage minus the base wage. (Under current federal law, for example, employers are allowed to take maximum tip credit of $5.12—the difference between the full $7.25 minimum wage and the $2.13 tipped wage.)
Although subminimum tipped credit laws allow employers to pay a reduced minimum wage, they also require them to “top off” those workers if their base wage plus tips fall short of the applicable minimum wage.
Originally, the federal tipped-worker minimum wage was 60 percent of the full minimum wage. Since 1991, however, it’s been stuck at just $2.13 per hour. Because it hasn’t been increased at all in the decades since then, its relative value has plummeted to less than 30 percent of the minimum wage.
Twenty-six states plus the District of Columbia provide stronger protections for tipped workers by requiring that tipped workers be paid above the federal rate. Illinois, for example, guarantees tipped workers 60 percent of the minimum wage, and New York and Connecticut guarantee approximately 70 percent. In seven states—Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington—tipped workers are guaranteed the full minimum wage—a best practice that has reduced poverty among tipped workers in those states. The remaining 17 states, however, provide far less protection, as they follow the shamefully low $2.13 federal rate.