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Blog: Repealing "Pete's Tax': A Fair Wage for Tipped Workers


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This week, the Department of Labor announced that Philadelphia sports bar chain Chickie's & Pete's will pay more than $6.8 million in back wages and damages to current and former employees for improperly taking tips from servers and violating federal minimum wage, overtime and record keeping requirements. The agreement resulted from one of the department's largest tip credit investigations and will benefit more than 1,000 workers.

Chickie's & Pete's required servers to contribute a portion of their tips to an improper "tip pool." This amount came to be known as "Pete's Tax," named for company owner Peter Ciarrocchi Jr. It was required to be paid to the manager in cash at the end of each shift, even if the server had received all tips on credit cards. In some cases, employees had to borrow cash from another server or head to a nearby ATM in order to contribute to this pool.

This is a particularly egregious case, but it underscores the daily struggle for survival facing tipped workers, the great majority of whom are women. Since 1991, the federal tipped minimum wage has been frozen at an abysmally low $2.13 per hour (though some states have a higher rate). That's all a restaurant owner is required to pay his servers as long as those servers' tips bring their average hourly earnings to the federal minimum wage of $7.25 per hour.

This system of "tipped credit" too often leaves servers vulnerable either to unscrupulousness or sloppiness on the part of their employers. If a restaurant isn't playing by the rules or isn't properly calculating the tipped credit, servers can walk away at the end of their shift with a paycheck amount of zero. Besides, when workers depend so heavily on cash tips to get by, they are subject to elements beyond their control -- if business is slow, or the weather is bad, or customers are feeling a little less generous, restaurant servers' income can take a significant hit. It's no wonder that half of all full-time restaurant servers are earning less than $18,500 per year.

Legislation currently before Congress would give workers a little more breathing room and peace of mind. It would increase the federal minimum wage from $7.25 to $10.10 per hour, with the tipped minimum wage going up to $7.07 per hour. As part of his vision of opportunity for all, President Obama believes hard work should be rewarded with a fair wage, and that is why he has made this a top priority.

Many forward-looking employers agree. Last Monday in Columbus, Ohio, I met with Eric Allen, part owner of Brothers Drake Meadery & Bar. He pays his tipped employees almost twice the federal requirement. Raised by a single mother who worked two minimum wage jobs, Allen understands that a race to the bottom isn't a good way to run a business.

He's not alone. Whether it's a big retailer like Costco, or the Ace Hardware down the street from my office, or In-N-Out Burger on the west coast, or now The Gap, more and more businesses are embracing higher wages as part of a sound business model -- both the right thing to do and the smart thing to do.

No one who works full-time in the wealthiest nation in the world should live in poverty. The bus driver who gets our kids to school safely, the custodian who cleans our offices, the bank tellers who handle our money and the servers who wait on us in restaurants -- it's time to give them a hard-earned, well-deserved raise.

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