Under Initiative 82, Washington, D.C. to Phase Out Tip Credit by 2027

Washington, D.C. voters made it known at the November 2022 ballot box by an overwhelming margin that they want the tip credit to go away. Almost 75 percent of the nearly 180,000 votes cast helped Initiative 82 easily pass, calling for the phase out of the tip credit over the next five years.

The initiative — also known as the District of Columbia Tip Credit Elimination Act — requires a gradual increase in the minimum hourly cash wage paid to tipped wage workers in the nation’s capital and a corresponding decrease in the tip credit until it reaches zero on July 1, 2027. Seven states (Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington) currently prohibit employers from using a tip credit for tipped wage workers.

This law also impacts the Tipped Wage Workers Fairness Amendment Act (TWWFAA) of 2018 but does not eliminate any of the compliance obligations for employers who take the tip credit.

Recently signed legislation by the mayor of Washington, D.C., will delay the first increase to the minimum hourly cash wage until May 1, 2023 (originally set for Jan. 1, 2023), plus the initiative is undergoing Congressional review. There also will be a second minimum hourly cash wage increase in 2023.

What is a tip credit?

A tip credit enables employers to pay tipped-wage employees less than the minimum wage because tip income generally results in a tipped worker’s wages reaching or exceeding the minimum wage. The tip credit is the difference between the minimum wage and the minimum cash wage. Using Washington, D.C., as an example, the local minimum wage currently in effect is $16.10. The minimum cash wage for tipped workers is $5.35 per hour, making the tip credit $10.75.

Employers are responsible for making up the difference if an employee’s hourly tip earnings (averaged weekly) added to the minimum cash wage does not equal the full minimum wage in D.C.

Initiative 82 will follow this schedule for changes in the tip credit.

D.C. Employers Still Have Compliance Obligations 

Employers must comply with several provisions of the TWWFAA to maintain using the tip credit, but they also could avoid the time-consuming aspects of each requirement by paying their employees the current minimum wage in D.C.

Sexual harassment training

Under the TWWFAA, established employers had to create a sexual harassment policy and file it with the D.C. Office of Human Rights (DCOHR). Businesses also have to post the policy and distribute it to all employees. Employers must also report sexual harassment claims annually to the DCOHR, with the recently completed year’s (2022) reporting due by March 31, 2023, via an online form.

Businesses with tipped workers in Washington, D.C. must provide sexual harassment prevention training from a certified provider, which will include prevention measures, response protocol, and intervention, and within 30 days of completing the training are required to submit a certification to the DCOHR.

All employees must participate in the training within 90 days of hire or have been trained within the previous two years (beginning Dec. 12, 2020). Training must occur every two years and can be done online or in-person for non-managers, owners, and operators. Managers must attend in-person training sessions.

Minimum Wage Act training

• All owners, operators, and managers must complete training annually on the requirements of the Minimum Wage Act, with managers required to complete training in person while owners and operators can complete it online.
• Certification of training must be provided to the OHR annually.

Wage statement requirements

Employers must provide a statement with each wage payment that includes:

• Payment date
• Gross wages
• Deductions and additions, with gratuities noted on separate line
• Net wages
• Hours worked during the pay period
• Employee’s tip declaration form for the pay period, separating cash tips from credit card tips

Quarterly wage reporting requirements

Employers must submit a quarterly report certifying each employee was paid at least the minimum wage (tip included). A third-party payroll processor must submit the quarterly report via a web application that has yet to be determined. Hotels are exempt from using a third-party payroll processor.

Reports must contain:

• Employee name
• Number of hours worked during the week by each employee
• Total pay – tips included – for each employee
• Average weekly wage for each employee
• Employer’s tip-out policy – what numbers were used to calculate wages

Notice requirements

Employers also will be required to provide to employees a notice stating:

• Provisions of subsection 4(f) of the Minimum Wage Act
• Each employee may retain all their tips if there is no tip-sharing policy
• Employer’s tip-sharing policy, if tips are shared
• Percentage that tips are reduced for credit card fees

What’s next

Paychex will continue to monitor the developments under Initiative 82. In your research for a third-party payroll provider, consider the more than 50 years of experience an industry leader such as Paychex provides to approximately 740,000 business clients who utilize our payroll and HR solutions.