Michigan's last-minute pay law shows the fight over tips and wages is getting more complicated

NBC News

01-03-2025

Michigan lawmakers brokered an eleventh-hour deal last week resolving a seven-year fight over what tip earners get paid. But the compromise wasn't reached until 12 hours after the deadline, and advocates now say workers should get paid for the delay.
The reason for that is complicated, and it caps the latest skirmish in a nationwide battle over minimum wages and tips that experts expect to grind on — in ever more byzantine ways.
'There's conflicting interests, and the difficulty is negotiating and figuring out who has the power,' said Michael Lynn, a professor of consumer behavior and marketing at Cornell University. 'The power is the restaurant industry, and that's why federal law hasn't changed.'
All parties appear dug in on the issue, which the ongoing fight against inflation has magnified. Labor advocates and many Democrats want workers to earn higher wages and rely less on gratuities. Business groups and many Republicans want to keep payroll costs and menu prices down. Consumers want to be nagged less to tip.
But for now, Washington doesn't look eager to mediate.
States decide
President Donald Trump has called the federal minimum wage of $7.25 an hour, last raised by Congress in 2009, 'a very low number' but hasn't committed to raising it. Last month, Treasury Secretary Scott Bessent ruled out a nationwide hike, saying it was 'more of a statewide' issue. That leaves intact a convoluted patchwork of state and municipal pay laws that continues to evolve, even as Trump promises to scrap taxes on tips and overtime.
A White House spokesperson didn't respond to a request for comment.
The Michigan compromise boosts tip earners' base pay to $4.74 an hour from $4.01 previously, rising to 50% of the state's standard minimum wage by 2031. The rate for nontipped employees, which the law bumped to $12.48 from $10.56, will hit $15 by 2027.
The measure, whose details voters never got to weigh in on, is a scaled-back version of a ballot measure they were set to consider in 2018. The proposal would have abolished the state's so-called 'subminimum' wage, a common setup also known as a 'tip credit' that lets employers pay tip earners less but requires them to fill in the gap whenever gratuities fall short of the standard pay floor.
But Republicans pre-emptively passed those changes and then, in a lame-duck session, sharply curtailed them, which lawmakers spent the next six years arguing over. Finally in 2024, the Michigan Supreme Court reinstated the original law, which called for gradually phasing out the subminimum wage.
Last week's bipartisan deal — which instead preserves it — coalesced as the clock ticked down on a midnight deadline. Democratic Gov. Gretchen Whitmer signed it about 12 hours later. One Fair Wage, an advocacy group pushing for higher base pay and an end to subminimum rates nationwide, says that means the earlier law was in force for half a day and employers should pay up.
'Any worker who has worked since midnight is legally owed this higher wage,' the group said in a statement shortly before Whitmer's signature. One Fair Wage said it's offering legal services to anyone affected.
Still following along?
The complex design of Michigan's updated pay system, the horse-trading it took to get there, and the lingering dissatisfaction that followed aren't unique to the state.
'There is no solution that satisfies everybody,' Lynn said.
In November, Arizona voters rejected a proposal backed by restaurants that would have slashed tip earners' base pay once gratuities brought their overall hourly income to at least $2 more than the state minimum wage. Activists including One Fair Wage had criticized the measure as deliberately confusing to voters.
In both states — as in others where policymakers have sought to raise pay for tipped workers, phase out subminimums, or both — employers warned higher labor costs would demolish already thin profit margins.
Paul Andoni, who owns Shield's Pizza in Troy, Michigan, said paying his staff the $5.99 an hour mandated in the original bill would have cost an additional $90,000 a year, forcing him to raise menu prices by 20%-30%.
'I just don't have a slush fund sitting there that I can go raid to pay for this,' Andoni said. 'I have to get it from the customers.'
The National Restaurant Association has long argued that 'servers, customers, and restaurant owners all benefit from the tip credit. It maximizes server earnings, allows operators to hire ample waitstaff, and keeps menu prices affordable.'
Servers' wants and worries
Tip earners themselves are hardly sold on doing away with the two-tiered system. Some say guests would tip less if they knew workers were earning more, or else steer clear altogether in the face of higher prices.
'Customers won't come in and buy a burger for $18,' said Megan Hendrien, a server at Shield's who estimated she regularly makes more than $20 an hour in tips.
There's some basis for these concerns.
Gratuities have been relatively anemic in recent years. The combination of shifting pay laws and competition for workers has led many restaurants to boost base pay, with operators increasingly making up for customers' crummy tips. As service-sector employers grapple with these and other costs, menu price hikes to offset them have spurred consumer rebellions.
Washington, D.C., is in the midst of phasing out its subminimum wage. Voters took two election cycles to agree on that move, passing it in 2022 after rejecting it four years earlier. The city's tipped rate currently stands at $10 an hour and will match the standard one, now set at $17, by 2027. D.C.'s restaurant industry says the hikes have already forced cuts to its workforce, which it said declined by 3% in 2024 from the year before. In a survey by the reservation platform OpenTable, more than half of area establishments reported reducing employment.
On the other hand, Lynn said, tip levels haven't changed much in states that have eliminated tip credits. 'In California, they're still tipping in that 15%-20% range,' he said.
At any rate, One Fair Wage President Saru Jayaraman says the piecemeal status quo is unfair and unsustainable.
'What we need is for everybody, small and big business, to have a level playing field,' she said. 'Then the consumer isn't bearing the burden of paying the worker's wage. They're actually doing what they think their tip is doing, which is giving the worker a bonus on top.'
Status quo with a side of tax cuts
But subminimum pay doesn't appear to be going away anytime soon.
In addition to sticking around in Michigan, it was upheld by Massachusetts voters who rejected an effort in November to replace it with a system for distributing tips evenly among workers. Only seven states — Alaska, California, Minnesota, Montana, Nevada, Oregon and Washington — have replaced tipped wages with universal pay floors, with gratuities as gravy on top.
And while 30 states have raised their minimum wages above the federal pay floor, 20 still haven't. Of those, all but one backed Trump.
So far, the president has kept his emphasis on cutting taxes on various forms of income, rather than mandating higher pay. While restaurant workers told NBC News during the campaign that they'd welcome any tax savings on tips, the idea generally ranked as a low priority.
'Two-thirds of tipped workers don't even earn enough to pay federal income tax,' Jayaraman said.
Lynn foresees eliminating taxes on tips as benefiting high-earning service workers, while 'the really poor person who's working for tips is going to see a much smaller reduction in their tax bill.' Other critics have said the policy would help employers save money on payroll, taxes or both, encouraging them to shift more workers into tipped roles and ramp up requests that customers kick in gratuities.
For now, some servers like Hendrien say they're wary of any changes that could threaten the tips they rely on — posing a challenge to activists like Jayaraman who argue a simpler alternative would leave them better off.