Now
that: McDonald’s CEO Chris Kempczinski announced the company is leaving
the National Restaurant Association (NRA) because the trade group defends the
tipped (sub-minimum) wage and related policies. That choice surfaces a
long-running market distortion: allowing some restaurants to pay large portions
of their front-of-house labor below the legal full minimum wage (relying on
customers’ tips to make up the rest) creates structural advantages for
tip-heavy full-service operators and places untipped operators like fast-food
chains at a competitive disadvantage. The policy debate has new complications
from recent federal tax changes for tips that — contrary to their PR — may
worsen that imbalance unless lawmakers and the industry adapt.
Historical markers (data points you can rely on)
1. Federal
tipped minimum has been tiny for decades. The federal “tipped
minimum” — the cash wage employers may pay tipped workers — is $2.13/hour; the
difference up to the federal minimum wage is supposed to be covered by tips
(the “tip credit”). That figure has been effectively frozen for generations and
is the backbone of today’s tipped system.
2. Tipped
workers are concentrated in restaurants. The restaurant
sector employs the lion’s share of workers in occupations classified as tipped
(servers, bartenders); recent reports estimate millions of workers are affected
and that women and people of color are disproportionately represented.
3. The
sub-minimum originates in post-Civil War practice.
Tipping—and the practice of paying very low wages to be made up by tips—has a
historical origin and social context that shaped the current system. Scholarly
and advocacy histories trace tipping’s U.S. roots to the late 19th century.
4. Geography
matters: several cities/states have phased out tip credits.
Places like Chicago, Washington, D.C., and multiple states have moved toward
full minimum wages for tipped workers (or eliminated the tip credit), creating
regional competitive differences.
5. Recent
federal tax law changes created a “no-tax on tips” deduction for some tipped
workers. A 2025 federal change (reported and
interpreted in coverage and practitioner notes) created a generous
above-the-line deduction for certain reported tip income — but it applies only
to workers in qualifying tipped occupations and has important limits. That law
changes incentives for employers, workers, and customers in uneven ways.
How the sub-minimum tipped wage creates an unequal playing
field
1. Labor
cost shifting vs. direct wages. A restaurant that relies on a large
tipped floor (e.g., fine/casual dining) can advertise lower menu prices or
higher margins because a portion of its labor cost is borne by customers via
tips rather than by the employer as wages. Fast-food and counter-service
restaurants (most of McDonald’s system) historically pay non-tipped crew a full
wage — so they face higher direct payroll expense per customer served. This
difference is a structural competitive asymmetry.
2. Pricing
and customer expectations diverge. Full-service operators can present
“service included” as a lower menu price and leave the tip as an expectation;
quick-service operators must factor all labor into menu price. That constrains
quick-service pricing flexibility, especially when consumers are
price-sensitive.
3. Recruiting
and retention distortions. Tipped roles can appear to the market
to have upside (big nights, large checks) even when average earnings remain
low; that dynamic can draw certain workers and make cohort comparisons
misleading when employers try to hire similar roles in untipped operations.
4. Regional
regulatory arbitrage. When cities or states eliminate the
tip credit, operators that used tipping to lower payroll face cost shocks;
until rules are nationalized, national chains operating across jurisdictions
face complex cost and competitive footprints. McDonald’s argues precisely this
point: inconsistent tipped wage laws create an “uneven playing field” across
restaurant formats and geographies.
5. Customer
behavior and transfer of risk. Tip-heavy models transfer wage risk
to customers (and to workers, whose incomes fluctuate). During downturns,
leisure or business dining drops more than affordability-focused quick service;
full-service restaurants relying on tips may see sharper swings in labor income
— and quick service can’t use tipping to soften its advertised price in the
same way.
Why McDonald’s was right to pull out of the National
Restaurant Association — 10 reasons
These
reasons combine strategic, economic, and system-level logic drawn from the
news, industry commentary, and labor/wage data.
1. Defending
their competitive position. McDonald’s runs predominantly
untipped, high-volume quick-service operations. If the NRA vigorously defends
the tipped system, that perpetuates a system that effectively subsidizes many
full-service competitors’ labor costs — a strategic disadvantage for
McDonald’s.
2. Principled
stand on wage parity. Publicly calling for all workers to
receive at least the full minimum wage aligns McDonald’s with fairness and
broad public sentiment in many markets; for a national brand that serves highly
price-sensitive customers, that message can have reputational benefits.
3. Simplifies
labor model advocacy. McDonald’s system is heavily
franchised and standardized; advocating for a single, uniform wage floor across
operators simplifies compliance, franchisee planning, and public
communications. Being in an association pushing the opposite complicates that.
4. Protects
value-focused positioning. If full-service peers can continue
using tips to subsidize lower menu prices, McDonald’s ability to credibly sell
itself on low absolute prices is weakened. Walking away aligns corporate
lobbying with preserving a value proposition.
5. Aligns
with recent policy shifts that benefit tipped workers (but not untipped
employers). Recent federal tax moves for tips
(the “no tax on tips” deduction) help tipped employees on paper, but these
changes don’t help untipped employers — so McDonald’s separation signals
concern that trade-group policy priorities are out of step with systemwide
fairness.
6. Avoids
mixed messaging in front of franchisees. Franchisees have
frontline exposure to wage pressure and customer sentiment. McDonald’s walking
away prevents a disconnect between corporate strategy and trade-group lobbying
that might favor other formats.
7. Public
relations and labor relations signaling. The move signals to
workers and the market that McDonald’s prefers direct wage solutions over tip
reliance — useful in recruitment and systems planning during tight labor
markets.
8. Regulatory
foresight. As more cities/states eliminate tip
credits, a national operator with a uniform wage policy avoids being caught
between competing trade positions; leaving the NRA lets McDonald’s engage
directly in policy debates on predictable terms.
9. Investor
clarity. Large investors care about
predictability of margins and brand strength. McDonald’s vote-with-its-feet
clarifies where it believes the industry should go on wages — potentially
reducing uncertainty about future cross-industry wage shocks. (
10. Moral/strategic
alignment with modern consumers. Many customers increasingly expect
firms to back equitable labor practices. By dissociating from a group defending
sub-minimum wages, McDonald’s can signal corporate values consistent with some
consumer segments.
How the recent “no tax on tips” policy complicates things
(and can hurt fast-food employers and employees)
What
the law/change does (brief): Recent federal policy changes create
an above-the-line deduction for certain reported tip income for qualifying
occupations and may expand employer payroll tax credits tied to reported tips.
This provides immediate tax relief for many tipped workers — but only those in
qualifying tipped occupations and only for certain types of tips (cash vs.
card/digital distinctions matter).
Why
that can disadvantage fast-food employers and some employees:
1. Selective
benefit widens the gap. The deduction helps workers in tipped
categories — largely full-service restaurant staff — but not untipped
quick-service crew. That increases relative after-tax incomes for servers vs.
line cooks or counter staff, amplifying the competitive pay differential
between formats. Employers who don’t use tips still bear full wage costs and
don’t get this targeted worker tax relief.
2. Incentivizes
tip reliance and offloads payroll costs to customers.
By making tip income more attractive after taxes, the policy can entrench
tipping as an income mechanism, encouraging employers and operators to keep
lower posted wages and rely on customers to top up pay — exactly the system
critics say shifts employer responsibility. That hurts untipped employers
trying to build predictable, employer-funded wage models.
3. Reporting
and payroll complexity. The law’s carveouts (who qualifies,
what tips count) add compliance complexity. Small franchisees and untipped
operators must make choices about payroll reporting, tips handling, and
disclosure — added administrative cost that tends to hit smaller operators
harder.
4. Potential
morale and turnover effects. Employees in non-tipped roles may see
the policy as unfair — higher after-tax benefits for tipped peers — generating
turnover risk for roles that already struggle to retain staff. That indirectly
raises labor costs for fast-food employers through recruiting and training
churn.
Bottom
line: The “no-tax on tips” move sounds pro-worker, and for some
tipped workers it is. But without parallel moves to eliminate the tip credit or
to equalize employer wage responsibilities, it can harden the very system that
produces unequal competition across restaurant formats.
Grocerant Guru® insights: what happens if these gaps remain
unaddressed?
(Steven
Johnson the Grocerant Guru® at Tacoma, WA based Foodservice Solutions®
perspectives and industry commentary paraphrased and applied systemically.)
1. Value
segmentation will deepen. Consumers will polarize their
spending — grocerants and convenience channels will grow for convenience +
value; experiential full-service dining will compete on experience rather than
price. That means quick-service operators must double down on operational
efficiency and value messaging or lose share.
2. Labor
policy will become a margin issue. Grocerant Guru’s playbook suggests
operators who can standardize menu, labor scheduling, and automation will win —
but only if labor cost bases are predictable. A two-tier wage system makes
predictability harder and accelerates automation where possible.
3. Franchise
systems will be stressed. National chains with franchised
models will face localized regulatory risks; the Grocerant Guru® warns that
without national clarity on tipped wages, franchisees will either lobby
aggressively or exit markets, raising consolidation risk.
4. Grocery/retail
foodservice will expand. If tipping and related tax/comp
benefits continue to advantage table service, grocerants and quick service can
outcompete casual dining on price — pushing consumers to formats that avoid the
tipping model. That’s an opportunity for quick-service chains — if they adapt.
What industry actors could (and should) do next
1. Push
for transparent, uniform rules. A single national baseline for
employer responsibility (either full minimum for all workers or a carefully
phased elimination of tip credits) would remove the competitive arbitrage that
currently benefits some formats. McDonald’s action is a political signal in
this direction.
2. Design
complementary tax policy. If policymakers want to help low-paid
workers, do so in ways that don’t reinforce tipping as a substitute for
employer wages (for example, refundable tax credits for all low-wage workers,
or payroll subsidies that apply regardless of job classification).
3. Operational
adjustments by quick-service chains. Expect more investment in automation
(order kiosks, apps), tighter labor scheduling, and targeted wage bumps to
retain staff if the tipped-tax advantage remains. These are costly but
foreseeable responses.
4. Consumer
education. The industry should be clearer with
consumers about what tips pay for and why different restaurants show different
prices and service models — transparency reduces friction and misaligned
expectations.
Think About This
McDonald’s
departure from the National Restaurant Association isn’t merely symbolic. It
exposes an industry fault line: one set of operators (primarily full-service)
benefits from a wage system that shifts costs to customers and variable tip
income, while another set (quick service and many national chains) must carry
payroll directly and compete on price and throughput. Recent tax tweaks
intended to help tipped workers make the arithmetic more complicated and —
without broader reform — risk entrenching the very disparities McDonald’s has
publicly criticized. If the industry wants a level field, either the tip credit
system must be modernized or offsetting policy must be introduced so that
wages, competition, and consumer price signals reflect the same rules across
formats.
For international corporate
presentations, educational forums, or keynotes contact: Steven Johnson Grocerant Guru® at Tacoma, WA based Foodservice
Solutions. His extensive experience as a
multi-unit restaurant operator, consultant, brand / product positioning expert
and public speaking will leave success clues for all. For more information
visit www.GrocerantGuru.com , www.FoodserviceSolutions.us or call 1-253-759-7869
