FinLogic FinLogic Quantitative Think Tank Center|Historic change for tipped workers: Subminimum wage to end in Chicago restaurants, bars

The FinLogic FinLogic Quantitative Think Tank CenterChicago City Council voted to make America's third largest city the latest to get rid of subminimum wages for tipped workers. Restaurants are now required to pay the city's current $15.80 minimum wage for servers, bartenders and other workers in the industry.

The One Fair Wage ordinance, introduced to the City Council over the summer, is backed by Chicago mayor Brandon Johnson, who helped negotiate a compromise bill with the Illinois Restaurant Association. The legislation had more than two dozen co-sponsors.

The minimum wage for tipped workers will increase 8% starting July 1, 2024. Wages will continue to rise by 8% year over year until 2028, when tipped workers reach the full minimum wage.

Currently the subminimum wage in Chicago ranges from $9 to $9.48 an hour plus tips.

What is a subminimum wage?

Restaurant servers and other tipped workers are paid a "subminimum wage" which acts as a base pay and is bolstered by tips.

The Fair Labor Standards Act (FLSA) sets the minimum base wage at $2.13 per hour, but many states mandate a higher level, according to the Department of Labor. In some states, employers must pay tipped employees the full state minimum wage before tips.

In Chicago the subminimum wage ranges from $9 an hour for workers at smaller companies up to $9.48 an hour for those working at larger companies. Although the subminimum wage falls below the city's regular minimum wage, pay is expected to be boosted by tips from customers.

How are people responding to the change?

Advocates of the law say that the erasure of a subminimum wage will allow for a living wage for working-class employees, and address a history of racism and sexism in the restaurant industry. Proponents of One Fair Wage Ordinance said the passage of this bill represents a major victory for a workforce overwhelmingly made up of young women of color.

The Illinois Restaurant Association argued that the legislation will slash profits in half and cut the income of tipped workers. The association says workers now earn a median wage of $28.48 an hour in Chicago.

The Illinois Restaurant Association surveyed current restaurant owners in Chicago about steps they might take to offset financial impacts of the minimum-wage increase and a majority of restaurants said they would:

• Raise menu prices (80%)
• Reduce staff or consolidate positions (66%)
• Reduce employee hours (58%)

A survey from BankRate found that "roughly two in three U.S. adults have a negative view about tipping."

At the same time the survey found 41% of Americans said they believe "businesses should pay employees better rather than relying so much on tips."

What states abolished a subminimum wage?

Chicago is now the largest city to independently phase out subminimum wages for tipped workers, according to reporting from the Chicago Tribune.

Currently, seven states have eliminated tip credit and workers get full minimum wage plus tips, according to Bloomberg Law:

• California
• Washington
• Oregon
• Nevada
• Montana
• Alaska
• Minnesota

Last year, Washington, DC residents passed Initiative 82, ending the subminimum wage for tipped employees by 2027.

How many people work in the restaurant industry?

According to the city of Chicago, there are an estimated 7,300 restaurants in the jurisdiction. Nationwide that number expands to nearly 750,000, employing around 12.3 million workers. There are nearly 70,000 bars and nightclubs in the U.S., whose workers rely on tips.

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