Fast Food giant McDonald's speaks out on the tip credit issue

McDonald's Breaks Away from National Restaurant Association Over Minimum Wage Debate

In a significant move, McDonald's has departed from the National Restaurant Association (NRA) due to a policy difference regarding the minimum wage. The crux of the issue is the tip credit, a policy that affects wages paid to servers and other tipped employees.

In an interview on CNBC's "Squawk Box", McDonald's CEO Chris Kempczinski expressed his concerns about the tip credit, stating that everybody should be paying the same minimum wage. Kempczinski believes there is an "uneven playing field" between restaurants that accept tips and those that do not, due to the fact that tips are not taxed.

The federal minimum wage for tipped workers has not been changed since 1991, while the federal minimum wage was last increased in 2009. This contrasts with the situation in seven states plus Guam, which do not have a tip credit, and these states have lower poverty levels and lower turnover rates, as highlighted by Kempczinski.

Tension on the tip credit issue has been building more recently as more states increase their minimum wages and customers push back at fast-food restaurants, particularly McDonald's, over price hikes. For instance, California started requiring fast-food chains to pay an even higher wage, $20 an hour, last year, putting pressure on operators in that state.

The NRA confirmed McDonald's departure and stated that they remain committed to representing the full spectrum of the restaurant industry. This is not the first time McDonald's has split with the NRA over a policy issue.

Meanwhile, McDonald's is covering the cost for those operators whose price cuts lead to financial losses. As a response to pressure from customers, the company is cutting the prices on its combo meals and bringing back the Extra Value Meals moniker.

The ongoing debate on the tip credit involves full-service restaurants that accept tips being able to pay a lower-than-minimum wage. This practice has been criticised by organisations such as One Fair Wage, with its president, Saru Jayaraman, stating that the subminimum wage for tipped workers is indefensible.

On the other hand, limited-service restaurants typically spend less on salaries, wages, and employee benefits compared to full-service restaurants. A typical full-service restaurant spends 36.5% of its revenues on these costs, compared with 31.7% at limited-service restaurants, such as fast-food chains like McDonald's.

The operators of the Chili's restaurant chain, criticised by McDonald's over price issues, are typically Brinker International, the parent company that owns and runs Chili's. Texas Roadhouse spent about a third of its restaurant sales on labor last quarter, compared with 25% at Chipotle, highlighting the financial impact of the tip credit on full-service restaurants.

McDonald's is open to conversations about raising the federal minimum wage, a stance that contrasts with the position of the NRA until the pandemic. The NRA stopped lobbying against an increase in the federal minimum wage during the pandemic.

These developments underscore the ongoing debate about fair wages in the restaurant industry and the evolving stance of major players like McDonald's.