Michigan Saved the Tip Credit and Put the Minimum Wage on an Automatic Escalator.

What happens to a neighborhood restaurant when the state requires the owner to pay every server the full minimum wage before a single tip reaches the table?

That was the deadline Michigan restaurants were facing.

In 2024, the Michigan Supreme Court ruled that lawmakers had acted unconstitutionally when they adopted two voter initiatives in 2018 and then weakened them during the same legislative session. The Court restored the original minimum-wage schedule. Under the Court's September 2024 clarification order, the tipped wage would have risen until the tip credit disappeared in 2030.

Senate Bill 8 changed that result before it arrived.

The tip credit allows an employer to count part of a worker's tips toward the required minimum wage. The employer must still make up any shortfall if wages and tips together do not reach the regular minimum.

Public Act 1 keeps that system. The tipped minimum starts at 38 percent of the regular minimum wage in 2025 and rises gradually to 50 percent in 2031. Tips remain the employee's property. Managers and supervisors cannot take part in the tip pool.

For a server, this preserves a compensation model built around tips. For a restaurant owner, it avoids a sudden requirement to pay the full minimum wage before tips while still guaranteeing the worker reaches the regular wage floor.

That was the win.

The two laws govern different parts of the same paycheck.

Michigan decides how much the restaurant must pay and how much of the regular minimum wage may be satisfied through tips. President Trump's 2025 tax law gives eligible workers a federal income-tax deduction for up to $25,000 in qualified tips.

So a Michigan server can work under the tip-credit system and deduct qualifying tip income on the federal return. The tips still count when determining whether the worker received the required minimum wage. The employer still has to make up any shortfall.

"No tax on tips" is narrower than the name suggests. The deduction applies to voluntary cash and charged tips, including qualifying tip-pool distributions. Mandatory service charges do not qualify. Social Security and Medicare taxes still apply, and the tips must still be reported. The deduction also phases out for higher-income taxpayers.

Michigan adopted a matching state deduction beginning in 2026. Michigan workers receive no state deduction for tax year 2025. Under current law, both the federal and Michigan deductions end after 2028.

That creates a deadline of its own. Public Act 1 preserves Michigan's tip-credit system beyond 2028. The special tax treatment does not. A server could still earn much of a paycheck through tips in 2029 after the federal and state deductions have expired.

The other half of the law raises Michigan's regular minimum wage to $12.48 in 2025, $13.73 in 2026, and $15 in 2027.

After that, the rate increases automatically with inflation. Lawmakers do not have to vote again. The law has no sunset.

Picture a small restaurant planning next year's menu and payroll. Food prices rise. Insurance rises. Rent rises. The state minimum wage then rises from the same inflation pressure. The owner has four choices: raise prices, reduce hours, leave a position open, or absorb the cost.

The law includes one brake. If Michigan's unemployment rate reaches 8.5 percent or higher, the automatic increase is skipped for that year. That protects employers during a severe downturn. It does not require lawmakers to reconsider the annual increases during ordinary years.

Enforcement adds another layer of exposure. A wage claim can bring the unpaid amount, an equal amount in damages, attorney fees, and costs. State officials may expand one complaint to similarly situated workers at the same workplace.

Public Act 1 prevented the complete elimination of Michigan's tip credit. Restaurants and tipped workers gained a more workable outcome than the court-restored schedule would have produced.

The price of that compromise is a $15 minimum wage followed by automatic increases with no expiration. Michigan saved the tip credit and put the rest of the payroll on autopilot.

This is our read of the law. We encourage you to read it yourself and reach your own conclusions.