Costly Compromises: MD’s New Minimum Wage Law Creates ‘Training Wage’ Loophole, Leaves Tipped Workers Behind

Some of the very people who could use a raise the most – workers who rely on tips and young workers just getting a start in life – will be left shortchanged when Maryland’s minimum wage begins to rise next year.

While the General Assembly’s recent passage of legislation to raise the minimum wage to $10.10 an hour by 2018 is an important victory for working Marylanders, lawmakers made some unwise and unnecessary compromises that will significantly weaken its ability to help some workers and the state’s economy. We have previously discussed  why lawmakers should have kept a provision to allow the wage to automatically rise with inflation. Today we look at the new law’s other costly compromises, including a base-pay freeze for tipped workers and a ‘‘training wage” that will allow employers to pay workers under 20 years of age only 85 percent of the minimum wage for their first six months on the job.

Freezing the minimum base wage for tipped occupations at $3.63 an hour significantly reduces the economic benefit of the minimum wage increase for these workers. At least 63,000 workers in Maryland work for tips, according to the Bureau of Labor Statistics, in occupations  including massage therapy, bartending, waiting tables, gaming services, and hairdressing).

By excluding tipped workers, lawmakers are relegating them to the unpredictable nature of tipped work. And while employers are required to make up the difference if an employee’s tips and base hourly wage combined do not meet the minimum wage, this is difficult to enforce.

Total wages for tipped workers are 40 percent less than that of other hourly workers, and they are twice as likely to experience poverty. Restaurant servers, in particular, are three times as likely to experience poverty, according to the White House Council of Economic advisors. Furthermore,  the freeze  will disproportionately impact women, who make up 72 percent of the workforce in predominantly tipped occupations.

Currently, 18 states have a higher tipped minimum wage than Maryland. Some, such as Washington, Oregon, and Nevada, have significantly higher minimum wages for tipped workers, and a 2013 analysis found that higher hourly wages for tipped workers have not hurt job growth in these states.

Meanwhile, the training wage compromise is one of many exemptions in the minimum wage legislation that allows certain businesses to avoid having to pay the full minimum wage, including seasonal amusement parks, cafes and restaurants that have gross revenues of less than $400,000 a year, and Maryland’s only drive-in movie theater. It is an unnecessary loophole that encourages business models based on high employee turnover, making it less likely that younger workers will be able to find steady employment. The exemption is simply another handout to business. It will do little to improve the job prospects of Maryland’s younger workers,  since economic studies show that that the minimum wage has a negligible impact on teen employment. 

Further, the industries that stand to benefit the most from this loophole are the fast food and chain retail industries, which already have a high rate of staff turnover. The National Restaurant Association estimates that three quarters of fast food workers are new from year to year. The retail industry reports a median annual turnover of 67 percent, a figure that has risen significantly in recent years.

Studies show that increasing the minimum wage benefits businesses by reducing turnover and increasing productivity among their employees, which is why  prominent retailers such as the Gap and Trader Joe’s have decided to increase their minimum wage. Maryland’s training wage will likely have the opposite effect, since employers will have an incentive to replace their young employees rather than investing in them.

These kinds of exemptions undermine the minimum wage’s ability to help Maryland workers  make ends meet in the face of rising costs of living. Workers’ advocates should continue the fight to raise the minimum wage for tipped workers and to close loopholes such as the training wage so that all workers can share in the important victory achieved during the 2014 legislative session.