On July 31, 2024, the Michigan Supreme Court announced a ruling that now makes the state’s Improved Workforce Opportunity Wage Act (the Wage Act) into a legal reality. The change is expected to have a profound impact on small business owners, and most especially, on employers in the hospitality industry.
In short, the ruling will raise the state’s minimum wage to $15 per hour by 2028 and gradually phase out the so-called “tip credit” by 2029. The tip credit is the exception that allows restaurants to pay a reduced hourly wage to employees who make the majority of their income through tips.
In the wake of the court ruling, many Michigan restaurateurs are scrambling to figure out how the Wage Act will impact their businesses. And while this ruling immediately touches the Michigan restaurant industry, it also sets the stage for a domino effect in restaurants across the country.
Michigan’s Improved Workforce Opportunity Act
Before examining the wider repercussions of the ruling, let’s take a look at how this new law will impact Michigan area restaurants.
The case of Mothering Justice v Attorney General was initiated when Michigan lawmakers simultaneously adopted and then amended rules to raise the minimum wage and provide paid sick leave for all Michigan workers in 2018. Challenges in the lower court and Court of Appeals yielded varying results, but ultimately, the state Supreme Court validated the Wage Act and Sick Paid Leave Acts.
So what does this mean exactly?
Starting on February 21, 2025, the minimum wage in Michigan will increase to $12.40 per hour and will continue to rise with inflation. Restaurants have historically enjoyed a “tip credit”, which means that they pay employees who garner most of their income through tips an adjusted minimum wage–38% of the state’s actual minimum wage. This means tipped restaurant workers currently earn $3.93 per hour.
The new rule raises that number to 48% of the minimum wage starting next year. This would make the tipped minimum wage roughly $6 per hour in 2025. And by 2029, the tipped credit will be eliminated altogether. By that point, restaurants will be required to pay all tipped employees the statewide minimum wage.
According to Michigan Live, the new wage requirements would result in higher and more stable earnings for the roughly 125,000 tipped workers in the state’s hospitality industry. However, the rules also dramatically change the calculus for restaurant operators.
The changing rules will significantly increase the cost of operation for restaurants that must contend with high labor turnover and customers who are already wary of rising prices.
Other Cities That Have Passed (Or Are Trying to Pass) Similar Bills
Michigan restaurant workers aren’t the only tip earners who will see a bump in their take-home pay. Similar legislation has already gone into effect in Chicago, where the tipped minimum wage recently jumped from $9.48 per hour to $11.02.
As with Michigan, this is just the start. Over five years, incremental increases will also eliminate the tip credit, bringing this number in line with Chicago’s new minimum wage of $16.20.
Seattle, Baltimore, and Denver are just a few of numerous cities in varying stages of exploring or implementing elimination of the tip credit. More broadly, tip credits have already been eliminated statewide in California, Minnesota, Nevada, Washington, Oregon, Montana and Alaska. And while there has been little progress toward its passage, there has also been a federal proposal on the Senate books since last July.
What This Means For Your Restaurant
So what can you do as a restaurant operator, whether your restaurant is based in Michigan, Chicago or in any of the countless other markets that are considering, or may soon consider, similar measures?
Some restaurant operators worry that higher wages will force staff layoffs, higher menu prices, and more restaurant closures, and for good reason. Washington, DC implemented a similar measure in 2023, and has since seen a drop in restaurant employment and a rise in menu prices. In stark terms, this change means that your restaurant would be forced to change the way it conducts business. As Michigan’s law stands today, restaurants must be prepared to sustain a substantial rise in labor costs.
This means that restaurants must find ways of offsetting higher labor costs by improving operational efficiencies. As the cost of labor increases, it will be incumbent on your restaurant to take steps that can improve productivity, reduce waste, and keep your customers happy.
How Technology Can Help You Manage Labor Costs
There is some good news for restaurant operators. Even as the hospitality industry at large may face an imminent and precipitous rise in operational costs, emergent technology does offer some extremely valuable solutions. Visit our Vendor Marketplace to browse a variety of our expert-approved technology platforms or book a free discovery call with a Back of House expert to get advice tailored specifically to your business challenges.
