On July 1, 2024, Chicago will take its first step towards eliminating the tip credit. That day, the tip credit amount an employer can claim decreases from 40% to 32% of the applicable minimum wage. Every year thereafter, on July 1, the tip credit will decrease by 8% until July 1, 2028. At that time, the standard minimum wage rate will apply to all employees, including those in occupations that customarily receive tips. Those employees will still be entitled to earn and retain their tips.

A Brief Background on the Tip Credit

Currently, federal law permits employers to take a tip credit when the employer pays the employee the minimum cash wage of $2.13 per hour and the employee receives an additional amount in tips that covers the difference between the minimum cash wage and the $7.25 minimum wage. Additionally, the employer must have informed the employee of the tip credit provisions, and all tips received by the employee must be retained by the employee.

Forty-three states currently permit employers to take the tip credit, while Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington prohibit taking the tip credit. Of the 43 states where taking the tip credit is permitted, 14 states’ minimum cash wages are the same as that under the FLSA, $2.13. In six states, the minimum cash wage is above $2.13 but below $7.25. In the remaining 23 states, including Illinois, the minimum cash wage is higher than $7.25.

Challenges to the tip credit have yielded varying results. In November 2022, Washington D.C. asked voters to weigh in on the issue, and voters overwhelmingly passed the “District of Columbia Tip Credit Elimination Act.” As a result, the tip credit for D.C. tipped wage workers will be gradually phased out by 2027. In contrast, also in 2022, Portland, Maine residents voted against “Question D,” which sought to abolish the tip credit over a three-year period. Portland continues to permit the tip credit.

More states and municipalities are set to take up this issue. For example, the Illinois House is seeking to eliminate the tip credit statewide by January 1, 2025 via HB 5345. Despite passing the state House Labor and Commerce Committee, the bill faces bipartisan opposition. Additionally, just this month, Massachusetts’ highest court issued a ruling upholding the attorney general’s certification of a ballot question asking voters to increase the state’s minimum wage for tipped workers.

Chicago’s Gradual Tip Credit Elimination

On October 6, 2023, the Chicago City Council voted to eliminate the subminimum wage for tipped employees working in Chicago by 2028, entitled the “One Fair Wage” ordinance (the “Ordinance”). The Ordinance covers employees working within the geographical boundaries of Chicago, regardless of their immigration status or the location of their employer.

On July 1, 2024, the minimum wage in Chicago will increase to $16.20 and the minimum cash wage will increase to $11.02. That minimum cash wage paid to tipped employees will continue to increase year over year as the tip credit is decreased, as illustrated:

Projected Impact on the Restaurant Industry

Proponents hail the Ordinance as a victory for tipped workers because tipped workers’ minimum wage automatically increases. Additionally, Mayor Brandon Johnson’s press release states that the Ordinance will address the restaurant industry’s staffing crisis, increase opportunities for youth employment, address systemic inequities in the restaurant and hospitality industry, and create a better economic future for tipped workers.  

On the other hand, the restaurant industry reports that tipped workers already earn median pay of over $28 per hour when the minimum cash wage and tips are combined. Organizations like the Illinois Restaurant Association believe that, as many restaurants are still trying to recover from COVID-19, increasing the cost of labor will lead to owners’ reducing staff, increasing menu prices, reducing employee hours, opening future locations in surrounding jurisdictions or other states, eliminating tipped employees altogether, or closing the restaurant entirely. Some restaurants may also opt to implement or increase the use of mandatory service charges, a practice adopted by many D.C. restaurants after the tip credit was eliminated.

*Caitlin Cannon is a Summer Associate at Littler Mendelson’s Dallas, Texas office. Ms. Cannon is not licensed to practice law in the state of Texas.