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Labor Committee Approves Bill Regarding Tipped Employees

April 6, 2006 — Employees who receive tips as part of their compensation may have to trade in their extra dollars for a flat minimum wage if a bill going through the Senate is approved.
The bill, which was narrowly passed on to the Rules Committee during a Labor and Agriculture meeting Thursday, seeks to amend the current law which states that businesses with gross receipts less than $150,000 annually are exempt from the requirement to pay minimum wage.
The amendment, sponsored by Sen. Celestino A. White Sr., would remove tipped employees from this exemption, thus requiring employers to pay them minimum wage.
During the meeting, White said some tipped employees are working for rates as low as $3.35 per hour instead of earning the current $5.65 hourly minimum wage, and use their tips to make up the difference. He further said that some employers pool tips and use the money to help pay the salaries of both tipped and nontipped workers.
"Anyone working in the tip industry right now can have their employer take their tip and use it to pay their salary," White said. "If the minimum wage right now is $5.65, for example, an employer can pay their employees whatever they want, then use their tip to pay the rest. That's not right."
While applauding the intent of the bill, testifiers from the Labor Department and the St. Thomas-St. John Chamber of Commerce said the amendment would not help employees, as White intended, but would disenfranchise employers who cannot afford to pay workers minimum wage and allow them, at the same time, to keep their tips.
"St. Croix, for example, would be disproportionately affected because there are more small businesses in the community," said attorney Adriane Dudley, speaking on behalf of the St. Thomas-St. John Chamber and the Virgin Islands Hotel Association. "There's no way a small business, with two or three employees, could afford to do both. They would have to makeup the difference somehow."
Dudley explained that if employers were forced to pay tipped workers minimum wage, then businesses might have to cut back hours and shifts or tell customers not to tip the employees. "Employers might opt instead to enforce a service charge, where they can keep the income themselves and simply pay the employees minimum wage," she said. "In that case, the real loss would not be so much to the employers, but rather, the tipped employees would lose a lot in terms of dollars – especially those employees who need those dollars to eat and to live."
Dudley further said the amendment might infringe upon provisions laid out in the federal Fair Labor Standards Act, which states that both employers and employees must agree on implementing the tip credit system and that all employees are entitled to keep all the tips they earn.
She added that under the system, employees must at least earn minimum wage when they combine their base salary with their tips. "If the tips earned do not take that employee up to minimum wage, then the employer is required to pay the difference," Dudley said.
A letter read into the record Thursday from the St. Croix Chamber supported Dudley's opinion by stating that many employees currently make more than minimum wage when tips are added to their base salary. "If the bill were to be approved, then many job descriptions would have to be redefined, and nontipping creations would be created," wrote Diane Butler, president of the St. Croix Chamber.
Glen Smith, director of labor relations at the Department of Labor, added that if tips were eliminated, then the Internal Revenue Bureau would have to more closely monitor the income earned by tipped employees, since many do not currently pay various government taxes on tips paid in cash.
Smith's statements raised concerns for senators, who said that tipped employees could be "cheating the government" out of income owed through taxes.
Dudley put these concerns to rest, however, by noting that hotels and restaurants generally arrange a "pattern" with IRB for collecting receipts, and if that pattern is broken, "then the businesses are audited."
Taking a different angle on the matter, labor leader Tito Morales said he agreed with the intent of the bill but suggested that senators look at the Economic Development Commission benefits being awarded to hotels and restaurants. He said that when such businesses are granted EDC benefits, employers then have the authority to reduce the minimum wage by 40 percent, thus decreasing the base salary for employees from $5.65 an hour to $4.30 an hour.
Because of this, Morales proposed that the tip credit should be reduced from 40 percent to 5 percent, preventing an employer from completely eliminating tips and instituting a service charge.
While some senators said they would rather an economic impact study be conducted on the bill before it is approved, others, like Sens. Norman Jn Baptiste and Terrence "Positive" Nelson, said that employees shouldn't have to rely on tips in order to be compensated – especially if they have to use their tips to pay for insurance coverage and medical bills if an employer chooses not to provide certain benefits.
Despite these comments, Nelson voted against the bill, along with Sens. Craig W. Barshinger and Ronald E. Russell.
Sens. Neville James, Jn Baptiste, Pedro "Pete" Encarnacion, and White voted for it.
All committee members were present during Thursday's meeting, along with noncommittee member Sen. Juan Figueroa-Serville.
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