Striking the Wage Balance

Inside the Michigan Supreme Court’s ruling on minimum wage, tip credit, and paid sick leave

By Art Bukowski | Aug. 31, 2024

A bombshell Michigan Supreme Court ruling stands to change compensation for Michigan workers, including an elimination of the "tip credit" that allows restaurants to pay tipped workers a very low hourly rate.

The Supreme Court in late July issued a ruling that will raise the minimum wage to roughly $15 an hour over the next three years (it’s currently $10.33 an hour) and completely eliminate the state’s tip credit (which currently allows tipped workers to be paid $3.93 an hour) by 2029. Once it’s gone, employers would have to directly pay those workers at least the minimum wage.

The ruling also allows workers to accumulate more paid sick leave than currently prescribed under state law and removes the paid sick leave exemption for employers with less than 50 employees.

While some hail this ruling as a major victory for Michigan workers, others are concerned about the impact on businesses, particularly smaller businesses that are just getting back on their feet after the pandemic.

How Did We Get Here?

The July ruling all began with a pair of ballot initiatives—Michigan Paid Sick Leave Initiative and the Michigan Minimum Wage Increase Initiative—introduced in 2018 that outlined sweeping changes to Michigan employment laws and compensation.

(You can find the full ballot language at ballotpedia.org/Michigan_2018_ballot_measures.)

Rather than have voters weigh in on the matter, the Republican-led legislature adopted into law both proposed ballot measures. But a few months later, the legislature substantially amended and “watered down” these measures, leading to a legal challenge.

After winding its way up to the Supreme Court, justices ruled that the state legislature’s “adopt-and-amend” modification of what was described in the ballot initiatives was unconstitutional, thereby reverting the laws back to the ballot initiative versions.

The rules now are set to take effect in February of 2025 unless the state legislature intervenes.

Bracing for Impact

Various industry groups have blasted the ruling. The Small Business Association of Michigan says it will “reduce future small business growth and put Michigan’s entrepreneurial climate at risk.”

“There is zero doubt among the small business owners we represent at SBAM that these new mandates will have an absolutely devastating effect: reducing planned growth, forcing layoffs and possibly even causing many to close their doors for good,” the association said in a statement.

Sam Barnwell is chief development officer at Hotel Investment Services, which counts the Stafford operations (Perry Hotel, Weathervane, Bay View Inn, and more) among the properties it manages. He and everyone else interviewed for this story told Northern Express that price hikes are likely if they have to pay servers more.

“The margins in the restaurant business are not significant enough that the money doesn’t have to come from somewhere,” Barnwell says. “It either comes from cutting staff or it comes from raising prices. That’s just the macroeconomics of it.”

Gary Jonas owns and runs the popular Little Fleet in Traverse City along with Farm Club in Leelanau County. He points out that state law already requires employers to make their servers whole in the rare instances that their tip wages don’t get them to the minimum wage amount.

“So why not just raise the minimum wage in general? For restaurants that are not busy or the servers are not making a lot of money, then they’re covered,” he says. “For us, the servers are doing a great job and being compensated very well, so why put the burden on all restaurants?”

Could More Mean Less?

Jeff Libman is the general manager of Amical, a fine dining staple on Front Street in Traverse City. He is concerned less about having to boost server pay than about what the changes could mean for the pool of available servers if customers are less incentivized to tip.

“The average tipped employee in the state of Michigan makes $29 an hour, and those at nicer restaurants like ours can make much more than that,” he says. “Who wants to make less money?”

Plus, Libman says, bringing everyone to a level playing field means that the best servers—the kind that Amical has pegged its reputation on—will be harder to come by. If working harder and providing better service no longer means better tips, those workers might take their skills to a different industry altogether.

“Amical is special at least in part because we’ve always had excellent service,” he says. “After this, your special occasion restaurants might become not so special anymore.”

Hard data about tipping behavior in the handful of states that do not have a tip credit (Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington) is difficult to come by, but some reports indicate it’s lower in those states.

Like Libman, Barnwell is concerned about what his nearly 200 tipped employees will do, particularly the best ones, if their income takes a hit.

“Our whole service industry is based on [the concept that] if you are very good at what you do and provide great service, you make more income,” he says. “It’s going to be a really rough transition to getting paid an hourly rate for just showing up and putting your hours in, regardless of your performance.”

This is particularly concerning in northern Michigan, Barnwell says, where a combination of factors means good workers are already difficult to come by.

“Housing is a significant issue that’s been well reported,” he says. “But when you then take housing and combine it with the uncertainty in the stability of your income…we’re going to lose a lot of staff.”

Lawmakers Prepare for Next Steps

State Rep. John Roth (R-Traverse City) recently attended a gathering of servers, restaurant owners, and managers in Traverse City, and he says the general consensus from that group was to not fix something that isn’t broken.

“They really did not want this to occur, and they’re happy the way the situation is now,” he says.

Roth is particularly concerned about the impact on business that already endured the tumultuous run of the COVID pandemic.

“So many businesses—doesn’t matter if it’s a restaurant or just small business in general—are just now starting to get to where they feel like they’re more comfortable, and now we’ve thrown more things on their plate,” he says. “This is a really large change in a short period of time.”

Roth believes the legislature will likely try to reach some sort of compromise before February.
“I think we’re going to do something,” he says. “My worry is it’s not going to happen until after the [November] election. But people are concerned…I hope there’s an appetite to look at all of it.”

State Rep Betsy Coffia (D-Traverse City) was also at the gathering of restaurant folk. She says a solution going forward can’t be an either/or: She wants something that will support workers while not endangering small businesses.

“I’ve been in very intentional conversations with my caucus about what actions we might be able to take to support both our small businesses and our business community while also supporting our workers,” she says. “We have many, many restaurants in my district along with a lot of workers, so I have been pretty vocal about it.”

Coffia says she’s talking to as many workers and employers as possible in order to gather information and encourages anyone with input to contact her or her office directly.

“I know that we need to find ways to ensure our small businesses are sustainable and have a viable business model. They took a lot of hits over the past couple of years, and they’re dealing with a lot of pressure,” she says. “But our region is increasingly unaffordable…and workers need to make enough to live on, and they need to be able to take days off when they’re sick.”

State Sen. John Damoose (R-Harbor Springs) is the co-chair of the senate’s hospitality and tourism caucus. He called the ruling a “flat-out disaster” for the restaurant industry that could close as many as 20 percent of Michigan restaurants if the legislature doesn’t act.

“I’ve heard a number of different proposed solutions, nothing really specific, but I think people are very concerned and realize something has to happen or this is going to be devastating for our business,” he says. “My guess is that there’s a real high likelihood that we’re going to have some sort of compromise by the end of the year, because the stakes are just too high.”