Chicago Pauses Its Tip Credit Phaseout

The pause in Chicago’s incremental tip credit phaseout is a victory for employers in the hospitality industry that rely on a “tip credit,” which allows an employer to pay an eligible tipped employee a lower direct cash wage than the standard minimum wage by using tips the employee earns to satisfy the employer’s minimum wage obligations. Chicago’s current minimum wage is $16.60 per hour, and the permissible maximum tip credit is $3.98 per hour (24 percent of the current minimum wage rate), which means that tipped employees working in Chicago must be paid at least $12.62 per hour.

Quick Hits

• Chicago’s tip credit phaseout, which would have eliminated the subminimum tipped wage by 2028, is now paused, with the next phased adjustment postponed until 2028 or later, depending on employer size.
• Enacted in 2023 and applicable to all workers employed within Chicago’s city limits, the One Fair Wage ordinance was calibrated to reduce the tip credit over the course of five years, with its eventual elimination scheduled to have occurred by July 1, 2028.
• The delay in the phaseout may help businesses manage rising labor costs. The tip credit is currently 24 percent of Chicago’s current minimum wage rate.

Chicago’s One Fair Wage Ordinance

In 2023, the Chicago City Council voted to gradually eliminate Chicago’s tip credit under the One Fair Wage ordinance, beginning on July 1, 2024. The ordinance provided a five-year plan to lower the Chicago subminimum “tipped” wage so that all tipped workers eventually earned the full standard minimum wage by 2028. Importantly, the ordinance applied to anyone who worked within Chicago’s city limits, even if the employer’s location was not in Chicago.

The allowable tip credit under the ordinance was scheduled to decrease to 16 percent of the applicable minimum wage on July 1, 2026, eventually phasing out to 0 percent of the applicable minimum wage by July 1, 2028. Opponents of the ordinance pointed out that eliminating the tip credit would drastically increase employers’ payroll costs and that the phaseout disproportionately impacted businesses since tipped employees, on average, earn far more than the minimum wage, inclusive of tips.

Impact of the Pause

The tip credit phaseout is now paused for two years, meaning that the next mandated wage increase will not take effect on July 1, 2026. Under the new measure, businesses with more than twenty-one employees should expect to comply with the ordinance (i.e., eliminate their use of the tip credit) by 2030. Businesses with between three and twenty-one employees would have to comply by 2033.

The pause helps restaurant owners adjust to rising costs and better manage labor costs. Ultimately, though, the still-inevitable rise in payroll costs from the elimination of the tip credit may result in higher menu prices and staffing cuts.

What Employers Can Do Now

Employers that rely on the Chicago tip credit should make sure their payroll systems halt the previously scheduled July 1, 2026, tipped wage increase, and be aware of the new tiered phaseout, depending on the size of the business. Employers should also continue to comply with other applicable tip laws and regulations, including providing tip credit notices to employees and following tip pool restrictions.

Ogletree Deakins’ Chicago office, Hospitality Industry Group, and Wage and Hour Practice Group will continue to monitor developments and will provide updates on the Hospitality, Illinois, and Wage and Hour blogs as additional information becomes available.

In addition, the Ogletree Deakins Client Portal provides subscribers with timely updates on wage and hour laws, including state and major locality minimum wage and tip credit requirements, such as the recent development in Chicago. Premium-level subscribers have access to full law summaries—which include current, upcoming, and future scheduled minimum wage and tip credit rates. Snapshots and Updates are complimentary for all registered client users. For more information on the Client Portal or a Client Portal subscription, please email clientportal@ogletree.com.

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