Federal 'TIP Improvement Act' Seeks to Eliminate Subminimum Wage and Permanently Alter Restaurant Labor Model

For anyone who has ever sat down at a restaurant, scanned a menu, and mentally calculated a 20 percent gratuity at the end of a meal, the American tipping system feels like an immutable law of dining out. But the financial engine running beneath that transaction is currently facing its most significant challenge in decades. A new legislative push in Congress is attempting to fundamentally rewire how hospitality workers are paid, threatening to eliminate the subminimum wage that has defined the restaurant labor model for generations.

At the center of this debate is the federal "tip credit," a legal provision that allows employers to pay tipped workers a base cash wage of just $2.13 an hour. As long as customer tips make up the difference to reach the standard $7.25 federal minimum wage, the employer is compliant with the law. For decades, this system has allowed restaurants to keep their direct labor costs remarkably low, relying on the generosity of diners to subsidize the bulk of their employees' take-home pay.

In early 2026, Representative Steven Horsford (D-NV) introduced the TIP Improvement Act, a piece of legislation designed to overhaul this decades-old framework. Crafted with direct input from hospitality workers in Las Vegas, the bill proposes two massive structural changes: permanently eliminating federal income taxes on tips and entirely abolishing the federal subminimum wage.[1][2]

The legislation emerged in response to what local labor leaders have dubbed the "Trump Slump"—a period of reduced tourism and smaller paychecks that has acutely impacted service workers in hospitality hubs. Proponents of the bill argue that the current tipped wage system forces workers to survive on unpredictable income, leaving them highly vulnerable to economic downturns, slow shifts, or even just a rainy Tuesday afternoon.[1]

The TIP Improvement Act also seeks to close several tax loopholes that have historically penalized service workers. Most notably, it would raise the deduction cap for joint filers from $25,000 to $50,000, effectively fixing the "marriage penalty" for couples where both spouses earn tipped income. It also requires a verified Taxpayer Identification Number (TIN) to claim the deduction, ensuring that the relief targets actual workers rather than business owners looking for a tax break.[1][2]

Labor advocates have long argued that the two-tiered wage system is fundamentally flawed. According to the Center for Economic and Policy Research, the $2.13 subminimum wage has been frozen in place since 1991, meaning its purchasing power has severely eroded over the last 35 years. In states that adhere to the federal minimum, customer tips can account for over 85 percent of a worker's total earnings, shifting the burden of payroll almost entirely onto the consumer.[3]

Beyond the financial instability, critics of the subminimum wage point out that relying on customer gratuities can exacerbate workplace inequities. When a worker's livelihood depends on pleasing the customer, they are often forced to tolerate inappropriate behavior or harassment to secure a tip. Eliminating the subminimum wage, advocates argue, would provide a stable financial floor that empowers workers to reject abusive conditions without sacrificing their rent money.[3]

However, the push to abolish the tip credit faces steep opposition from industry groups and conservative lawmakers, who argue that the current system benefits both independent restaurants and high-earning servers. The Competitive Enterprise Institute contends that eliminating the subminimum wage would drastically increase labor costs for restaurant owners, many of whom already operate on razor-thin profit margins.[5]

Opponents warn that forcing restaurants to pay a full minimum wage before tips would inevitably lead to higher menu prices or the implementation of mandatory service charges. In this scenario, restaurants might discourage or eliminate traditional tipping altogether, which could actually reduce the overall take-home pay for top-tier servers who currently thrive under the gratuity model.[5]

In direct response to efforts like the TIP Improvement Act, House Republicans have rallied behind competing legislation known as the Tipped Employee Protection Act (H.R. 2312). Rather than dismantling the tipped wage system, H.R. 2312 seeks to preserve it while expanding the definition of who qualifies as a tipped worker.[4]

Under H.R. 2312, employers would be allowed to classify almost any worker as a "tipped employee" if they receive even small or occasional tips over an employer-selected time period. This would enable businesses to apply the tip credit to a much broader range of staff, including back-of-house employees, delivery drivers, and baristas who do not regularly earn substantial gratuities.[4]

Labor organizations, including the AFL-CIO, have strongly condemned H.R. 2312, arguing that it would destabilize pay for millions of low-wage workers. They warn that the bill would allow employers to average a worker's tips across different shifts—using the gratuities earned during a busy Friday night dinner service to justify paying the $2.13 rate during a slow Monday morning prep shift.[4]

As the legislative battle unfolds in Washington, the broader national landscape is already shifting. Seven states—including California, Nevada, and Washington—have already eliminated the subminimum wage, requiring employers to pay the full state minimum wage before tips are factored in. In these markets, the restaurant industry has adapted, though the transition has often been accompanied by a rise in operational surcharges and higher baseline menu prices.[3]

For the everyday diner, the outcome of this congressional clash will likely dictate the future of the restaurant experience. Whether the industry moves toward a European-style model with higher menu prices and no expected gratuity, or doubles down on the traditional tipping system, the financial reality for over 13 million American service workers hangs in the balance.[6]