On June 19, 2018, also known as D.C. Primary Day, D.C. residents voted in favor of Initiative 77, which will require D.C. business owners to gradually increase pay so all workers will earn at least $15 per hour by July 2020. Initiative 77 will also change the way restaurants owners pay their tipped workers, as well as how they operate their restaurants moving forward.
Tipped workers in D.C. are currently paid a base wage of $3.33 per hour because the tips they receive push the earnings to the District’s current minimum wage of $12.50. Initiative 77 would require tipped workers to be paid the same amount as other workers by 2026.
By increasing the pay of the $3.33 per hour, tipped employees to $15 per hour, restaurant owners will now be burdened with extra costs. They will likely have to fund the extra cost by raising menu prices or by having their tipped employees become regular, non-tipped employees. If these employees become regular, non-tipped ones their hourly wages could be funded by automatic gratuities or service charges, which are generally added onto restaurant bills when there is a large party.
Should restaurant owners switch from tipping to service charges to accommodate the requirements of Initiative 77, a major drawback would be the loss of “FICA Tip Credits.” The “FICA Tip Credit,” also known as the “Credit for Employer Social Security and Medicare Taxes,” is a federal tax credit for restaurant owners equal to the employer’s share of the Social Security and Medicare taxes paid on employees’ tips. The “FICA Tip Credit” has proven to be a highly favorable tax credit for restaurant owners. These owners could see higher federal tax liabilities should they decide to do away with tipping, as a result of Initiative 77.
While Initiative 77 has passed, the D.C. Council could still block or modify the measure. DC.. Mayor Muriel E. Bower and members of the D.C. Council have expressed strong opposition to this measure. The Restaurant Association of Metropolitan Washington is also opposed to Initiative 77 and has communicated that they will advocate that this measure gets repealed. While there have been no indications as to whether Initiative 77 will stay in place or be modified, we will continue to monitor and provide updates on Initiative 77.
Our tax specialists are available for consultation on this and other business management topics for restaurants and hotels. Please contact our hospitality tax advisors or Aaron Boker at 301.231.6200 for more information.