As some activist groups continue to attempt to undermine the system that allows service workers to earn tips, voters this election will decide on Proposition 138, which protects the opportunity to earn tips and ensures workers can continue to earn well above the mandatory minimum wage.
The current law
Current Arizona law allows employers to pay tipped employees up to $3.00 per hour less than the minimum wage, provided that the employee’s total earnings, including tips or gratuities, equal at least the minimum wage for all hours worked. Employers can verify this either through their own records or the employee’s declaration under the Federal Insurance Contributions Act (FICA).
This ability for employers to pay tipped workers less than the hourly minimum wage is known as the employer tip credit.
What will Proposition 138 change?
Proposition 138 seeks to amend the Arizona Constitution, allowing employers to pay tipped employees up to 25% less than the minimum wage. However, employers must demonstrate that the employee earns at least the minimum wage plus an additional $2.00 per hour for all hours worked.
This calculation would be based on the average tips or gratuities received and wages paid during the payroll period, or any other period permitted by state law. Employers would be allowed to use records of charged tips or FICA declarations to confirm compliance with the proposed amendment.
Why is this being proposed?
Arizona’s current tipped worker credit helps sustain between 6,200 and 13,500 jobs statewide, reduces restaurant and bar prices by about 1%, and contributes up to $1 billion to the state’s annual GDP.
However, according to the Common Sense Institute, the value of this credit has significantly declined, dropping from over 40% of the hourly minimum wage in 2006 to just 21% today. Proposition 138 aims to stabilize the credit at a fixed 25% of the hourly minimum wage moving forward.
Rising labor costs, strict regulations, and other challenges have made it harder for young people and students to enter the labor market, including in the service sector. In 1990, the teen labor force participation rate exceeded 50%, but today it is nearing 20%.
Some activists oppose tipping
Anti-tipped-pay activists across the country and in Arizona have been calling for the elimination of the employer tip credit and to treat currently tipped employees the same as non-tipped employees.
Eliminating the credit, however, would put upward pressure on menu prices as employers would seek a way to absorb the new higher labor costs.
Evidence in other jurisdictions where the tip credit has been eliminated indicates that higher menu prices lead to servers and other workers earning lower tips, as patrons figure that the higher mandated hourly wage should correspond to higher take home pay for the workers. But that’s not always the case, as servers lose the ability to supplement their income in a way that traditionally allowed them to earn well above the minimum wage.
The business community view
“The Arizona Chamber of Commerce & Industry strongly supports Proposition 138, the Tipped Workers Protection Act. This measure provides a balanced approach to wage management that
protects tipped workers’ income, and ensures fair compensation for employees while supporting the economic health of our local businesses,” said Danny Seiden, president and CEO of the Arizona Chamber of Commerce & Industry.
“The City of Tempe enjoys a vibrant tourism ecosystem encompassing various stakeholders from the tech, manufacturing, education, hospitality, lodging, dining, and entertainment industries. The preservation of the current tipping model is vital to our continued success in Tempe, which is home to a significant dining population between the over 100,000 people who work here, 189,000 who live here, and roughly 63,000 who go to school here,” said Colin Diaz, president and CEO of the Tempe Chamber of Commerce.
“Inflation has wreaked havoc on businesses across Arizona. This is particularly true of the restaurant industry, which has seen substantial layoffs and closures over the past few years. The
Tipped Workers Protection Act helps alleviate this problem by lowering costs for Arizona restaurants, while ensuring that restaurant servers still make more than the state’s minimumwage. This will help make dining more affordable for families and promote job creation in the restaurant industry,” said Victor Riches, president and CEO of the Goldwater Institute.