Chicago has joined several states and Washington, D.C. in eliminating the lower minimum wage for tipped workers, sometimes referred to as the "subminimum" wage. The One Fair Wage ordinance, passed by the Chicago City Council on October 6, gradually increases the minimum wage for tipped workers, starting in July 2024. By July 2028, restaurants and other businesses will be required to pay tipped workers the same minimum wage as non-tipped workers — currently, $15.80 per hour ($15.00 per hour for businesses with 20 or fewer employees).
As originally proposed, the ordinance would have implemented the increase over two years, but its sponsors agreed to a five-year phase-in to gain the endorsement of the Illinois Restaurant Association.
HOW IT WORKS NOW
Currently, restaurants and other employers of tipped workers are entitled to a tip allowance of up to 40% of the applicable minimum wage. In other words, they may pay tipped employees as little as $9.48 per hour [$15.80 – (40% x $15.80)], so long as tips cover the difference between the reduced wage and the regular minimum wage. If an employee's compensation falls short, the restaurant must make up the difference. For employers with 20 or fewer employees, the subminimum wage can be as little as $9.00 per hour [$15.00 – (40% x $15.00)].
HOW IT WILL CHANGE
Under the new ordinance, starting July 1, 2024, the tip allowance will be reduced by 8% per year until it is eliminated on July 1, 2028. This means that the minimum wage for tipped employees will increase by a little over $1.26 per year ($1.20 for smaller restaurants) until it reaches the minimum wage for non-tipped employees in 2028. Ultimately, the ordinance will increase the minimum wage restaurant's must pay their servers and bartenders by nearly 67%.
Note: The ordinance establishes a $500,000 pool from private funds to help smaller restaurants make the transition to the higher wage. It also contains an exemption for unionized restaurants, allowing them to continue paying lower wages pursuant to a collective bargaining agreement.
IMPACT ON RESTAURANTS AND THEIR EMPLOYEES
Restaurants will need to weigh their options for dealing with the minimum wage increase. In jurisdictions that have adopted similar laws, some restaurants have already responded by raising menu prices, adding new service charges, or both, to cover their higher costs. The change may also lead some restaurants to explore strategies for reducing staff, such as a shift to counter service or using digital kiosks to take orders.
Restaurants that impose additional service charges should implement them carefully to ensure that customers know the charges are coming and understand what they are for. Some jurisdictions have issued strict guidelines on how service charges may be used and how and when restaurants must disclose the amount of these charges and the reasons for them.
The impact of the new ordinance on restaurant employees is not entirely clear. Although it will likely increase wages for employees whose tips do not currently bring them up to the minimum wage, its impact on higher-earning employees is less certain. Some people fear that the new law may lead customers to stop tipping or to tip less, but studies on the impact of eliminating the subminimum wage on tipping behavior have reached inconsistent conclusions.
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