Discussions on the tip credit. | Illustration by Nico Heins/Midjourney
McDonald’s doesn’t typically find itself on the same side as organized labor. The fast-food giant has been doing battle with various labor groups longer than many of its restaurants’ workers have been alive, on issues such as the minimum wage, California’s FAST Act and the definition of “joint employer.”
They’ve protested the chain’s restaurants, held strikes, pushed shareholder initiatives and marched outside the company’s annual meeting.
And yet, in a series of interviews, the only one that didn’t appear surprised by McDonald’s decision to leave the National Restaurant Association over the tip credit was Saru Jayaraman, the cofounder of labor activist group One Fair Wage. “We’ve heard this from McDonald’s over the last decade, actually,” she said in an interview for the A Deeper Dive podcast.
Politics can often make strange bedfellows. And McDonald’s stand on the tip credit, revealed in a recent interview on the CNBC program “Squawk Box,” certainly qualifies. The view is sincere. Some of the chain’s franchisees have long been frustrated by the credit, which enables full-service restaurants that accept tips to pay workers a lower-than-minimum wage, so long as the tips add up to the full minimum.
In the process, it effectively internalized—or “brought into the family”—a tip credit debate that historically pitted restaurant industry interests against labor advocates. And it revealed a long-simmering tension between McDonald’s, which must pay all its workers the minimum wage, and full-service brands that get a break because they accept tips.
But the timing just felt strange. Kempczinski’s comments distracted from the chain’s Extra Value Meals marketing push. It created a days-long crisis with backers of President Trump, forcing the company to do damage control. And then McDonald’s said nothing more about the tip credit—effectively dropping a bomb in the middle of the restaurant industry, then running away.
In the process, McDonald’s may well have revealed something else: The company may be feeling the pressure of two years of almost unrelenting pressure on traffic and criticism over its prices, some of which has been fueled by full-service brands like Chili’s.
There is “pressure on the model, there’s pressure on the brand, and I believe a big chunk of this has to do with demonstrating to the franchisees that they are willing to go to the mat,” said Joe Kefauver, managing partner with Align Public Strategies and cohost of the Working Lunch podcast.
The tip credit
The tip credit is complicated. For years, restaurants did not have to pay a minimum wage for tipped workers at all, until 1966, when the Fair Labor Standards Act established a tip credit.
The tipped wage was set at $2.13 an hour in 1991 and hasn’t been increased since. The federal minimum wage was last increased in 2009, when it was raised to $7.25 an hour. Yet seven states, plus Guam, do not allow a tip credit. More than half of states set their own tip credits. And 15 states rely on the federal minimum. Rules defining what constitutes a tipped employee can vary, though in most cases they must earn a certain amount in tips.
“Right now, there’s an uneven playing field between if you are a restaurant that allows tips or has tips as part of your equation,” Kempczinski said on “Squawk Box.” “You’re essentially getting the customer to pay for your labor, and you’re getting an extra benefit from no taxes on tips.
“Part of what I think we need to do in this minimum wage conversation is, let’s start with everybody should be paying the same minimum wage, whether they are tipped or not tipped.”
Kempczinski then argued that states with no tip credit are better off.
“We know that in those states, poverty levels decrease,” he said. “We know that turnover levels go down. We know that actually doesn’t lead to any job loss. So, there’s already been a model that shows that … tipped wages can be at the same level as the federal minimum wage. We need to do that across all 50 states.”
The average unemployment rate in the states without a tip credit was 4.3% last year, compared with 4% for the nation as a whole. But they do, on average, have a lower rate of poverty than the nation as a whole—10.2%, compared with 10.6% nationwide.
Jayaraman argues that tipped workers are on Medicaid or food stamps at double the rate of the U.S. workforce, noting that most of them work in lower-paying concepts like IHOP or Denny’s.
“We’re subsidizing these restaurants every time we eat out through our tips and we are paying for their workers’ survival on top of that because workers cannot survive on the subminimum wage plus tips,” she said. “So, they end up having to use public assistance.”
The full-service problem
Casual-dining restaurants certainly don’t feel they have an advantage when it comes to labor.
According to the National Restaurant Association, full-service restaurants are less profitable than limited-service restaurants, with income before taxes at 2.8% of sales on average, compared with 4% at counter-service concepts.
The tip credit hardly saves them on labor. Full-service restaurants spend 36.5% of their revenues on labor, compared with 31.7% for limited-service restaurants. On a chainwide basis, the difference is even starker: Texas Roadhouse spends 33% of its revenue on labor, compared with 24% for Chipotle Mexican Grill.
It’s also worth noting that full-service restaurants have been dealing with weakening demand for years. Technomic, in fact, expects full-service sales to grow at least less than half the rate as limited-service sales.
Martin Murch is the owner of Good Eats Group in Chicago, which spends 30% to 32% of its revenue on labor. About two-thirds of that is spent on tipped workers. “The tip credit really helps the operators to be able to perform and make the model work,” he said.
Murch added that it allows workers themselves to make a better income. “It enables the team to be able to generate earnings that they would not be able to get otherwise,” he said.
Eliminating the tip credit and paying higher wages ultimately drives up prices, which can drive customers away, particularly given that they are paying a tip on top of that full minimum wage. A 2022 study from the National Bureau of Economic Research found that raising the tipped minimum wage leads to job reductions that ultimately blunts any impact from a higher wage.
Concern about job loss was enough for Washington, D.C. to reinstate its tip credit in July, which voters passed in 2022. Leaders there were stung by the closure of 74 restaurants in the city last year and job cuts among full-service restaurants. “We think our restaurants are facing a perfect storm with increased operating and supply costs, higher rents and unique labor challenges,” D.C. Mayor Muriel Bowser said in May.
No tax on tips
None of this really explains why McDonald’s would take this issue on, and why now. Some of this might simply be due to frustration over no taxes on tips, which provides a benefit to operators that accept them. Kempczinski suggested that the provision, which was in the budget bill, doubled down on an advantage full-service restaurants already enjoyed.
“You’re essentially getting the customer to pay for your labor,” Kempczinski said, “and you’re getting an extra benefit from no taxes on tips.”
Said Jayaraman: “It really was the no-tax-on-tips policy that finally kind-of drew it out of McDonald’s CEO saying, ‘this is not fair.’”
But even that was fraught with landmines. While Kempczinski began his comments by declaring, “I support no tax on tips,” McDonald’s nevertheless came across as opposing the plan, a major policy initiative from President Trump.
Trump is a big fan of McDonald’s. His signature campaign stop featured him working an afternoon shift in one of the chain’s restaurants. “It didn’t look good from that particular front,” Kefauver said. Perhaps unsurprisingly, McDonald’s came under heavy criticism from Trump supporters on social media.
The CEO of one of the world’s largest restaurant brands is undercutting Trump’s “No Tax on Tips” push — a policy with 83% support from hourly workers.
The irony? McDonald’s benefits enormously from Trump’s Big, Beautiful Bill—corporate and franchise tax relief, overtime pay… https://t.co/u7sKEOja6H
— Wall Street Mav (@WallStreetMav) September 4, 2025
The result overshadowed the entire discussion on the tip credit, which was Kempczinski’s real target, and forced McDonald’s into crisis mode. Jon Banner, global chief impact officer for the chain, subsequently went on the social media site X to say that the company “supports the President’s No Tax on Tips policy.”
For the record, McDonald’s supports the tax policies in the Big Beautiful Bill that enable small businesses to win and supports the President’s No Tax on Tips policy. We support all measures that benefit restaurant workers and our 2,000+ franchisees. Contrary info is fake news.
— Jon Banner (@jon_banner1) September 5, 2025
Why now?
There certainly are other issues, however, that may have intensified McDonald’s frustration and ultimately led the company to split off from the National Restaurant Association. “Long time coming,” one source said when we asked about it.
Tension has long been building between the Association and the world’s largest restaurant chain over various issues, including the minimum wage and the tip credit. In 2019, for instance, McDonald’s stopped funding lobbying over the minimum wage.
One source of tension could be seen in California, which may have played a role in the company’s ultimate push against the credit.
California began requiring fast-food chain restaurants in the state to pay at least $20 an hour last year. Full-service restaurants and other businesses must still pay $16.50 an hour, and California is not a tip-credit state.
That may get to the heart of the issue. McDonald’s has been under heavy criticism over prices the past couple of years. And the company is clearly bristling at the issue, which is a major factor in the chain’s weak traffic.
Social media highlighted an $18 Big Mac meal at a single rest stop location in Connecticut in 2023 as symbolic of the chain’s prices. Some alleged studies falsely insisted the chain’s prices have doubled since the pandemic, forcing the company last year to publish its real average prices for the first time. That hardly quieted the criticism.
And then the full-service chain Chili’s started highlighting its 3-for-Me menu, which has a starting price of $10.99. In ads and on social media, Chili’s compared the value of that meal to one at McDonald’s. That helped the chain’s sales take off. In California, Technomic pricing data found that McDonald’s Big Mac combo meal in the state was the same price as the lowest-price 3-for-Me offer.
Much of Wall Street has been pushing a narrative that Chili’s is taking business from McDonald’s, citing the latter chain’s flat results from 2024 compared with the surging full-service brand. At one point, even Brinker International CEO Kevin Hochman had to debate a Wall Street analyst, arguing that the two companies aren’t really direct competitors.
McDonald’s is likely hearing the same thing. And we’ve spoken with many sources who believe that McDonald’s is effectively using the tip credit to respond to Chili’s, as Kefauver suggested, to show that they’re doing something.
And yet Wall Street is dead wrong on this front. The two just aren’t competitors. McDonald’s is about convenience. It’s a place you stop on the way home from work or on a road trip or because you have a hankering for a Big Mac. You have to think about a visit to Chili’s. That’s a big difference.
Also, McDonald’s is huge. It is more than 10 times Chili’s size. On a per-dollar basis, McDonald’s generated more absolute sales from its 2.5% same-store sales increase last quarter than Chili’s did with its 24%.
Or let’s put it this way: McDonald’s generated more than $53 billion in system sales last year. That was two-thirds of the total sales generated by the entire casual-dining segment. The idea that Chili’s is damaging McDonald’s business, or that the tip credit has much of an effect on the fast-food giant, is laughable.
McDonald’s may be frustrated by the time the association is spending on the tip-credit topic, but the tip credit itself doesn’t really impact the fast-food giant.
The fallout
All that said, it’s not that unusual for big companies to take a stand and leave a trade group, as McDonald’s is doing with the National Restaurant Association.
The pharma giant AbbVie left pharmaceutical industry groups in 2022. Shell left the American Fuel and Petrochemical Manufacturers Association in 2020 over a disagreement on climate change policy. Several food companies have left the Grocery Manufacturers Association over the years.
In leaving the Association, McDonald’s is making a public statement, distancing itself from some of the group’s views. That in theory could be a public relations win for the company. But that also means it will need to be out front on specific issues.
One key benefit of having an association is to at least give a company the appearance of distance from politics, which these days isn’t a bad thing. But now McDonald’s, with all the baggage that comes with being the world’s largest fast-food chain, must be the one doing the actual lobbying.
McDonald’s does have issues that need attention, such as tariffs, immigration and joint employer. Indeed, shortly after McDonald’s decision to leave the group, a new bill was introduced, with backing from the restaurant association and the International Franchise Association, that would codify the meaning of joint employer.
Whether the company’s attention to the tip credit changes the narrative on that topic, however, remains to be seen. The restaurant association has been remarkably successful of late in lobbying on its key issues. And efforts to kill the tip credit have also been largely unsuccessful, as the Washington, D.C. exampled demonstrated.
McDonald’s will now need to lend its voice to the debate in state legislatures around the country. It could, in theory, rally its fellow fast-food chains behind that point. But we don’t get the sense that there’s a groundswell of support from them to do so.
Jayaraman, however, believes McDonald’s views could prove significant. “McDonald’s is a respected voice,” she said. “And they are saying it is unfair business practice to allow some restaurants to pay $2 and we have to pay the minimum wage.”
Of course, the moment One Fair Wage echoed McDonald’s comments on social media, it also took time to remind the fast-food giant to raise its own wages. So, they are only bedfellows for so long.
“McDonald’s thinks sit-down restaurants need to give their servers a raise.”
Looks like @McDonalds has entered the chat, but what about your workers? They deserve a livable wage as well. 👀https://t.co/2Avg9sRCk5
— One Fair Wage (@onefairwage) September 5, 2025
