Several cities in the U.S. have raised the minimum wage paid within their city limits beyond the federal or state minimum wage, and others are considering following suit. With more than half of the country’s minimum wage workforce employed in occupations related to food service and preparation, the restaurant industry could arguably be the industry where the effects of a higher minimum wage will be felt most profoundly.
How will the industry deal with the changes on the horizon?
Actions taken by restaurants in Seattle, Wash., may prove instructive, or cautionary. Seattle’s $15 minimum wage, currently one of the highest in the nation, took effect January 1 for employers with more than 500 workers, which includes many of the city’s restaurant chains. Smaller employers will be phased in over the next few years. In most other areas of the state of Washington, the minimum wage is $11 per hour.
To compensate for those higher personnel costs, the city’s restauranteurs are combining tried-and-true business practices with innovative solutions. Many restaurants have raised their prices; some modestly, some substantially. Most, if not all, are paying closer attention to standard business disciplines such as watching hours worked and keeping overtime to a minimum, while others are trying more radical ways of dealing with the mandate of a higher hourly wage.
To cope with the higher overhead, one Seattle chain adopted a no-tipping approach with an unusual twist. Schwartz Brothers Restaurants replaced optional gratuities with a 20 percent service charge on each guest check at three of its fine-dining restaurants in Seattle. A handout given to patrons as they are seated says that each restaurant “[R]etains the full service charge and 100 percent of these funds are distributed to our team members in the form of wages, commissions and benefits.” When it implemented the service charge, the company eliminated the tip line from the credit card slips at the three establishments, and reclassified their workers as “commissioned employees,” which enabled it to pay them less per hour than the $15 mandate without running afoul of the city’s statutory requirements.
Under the city’s statute, minimum wage is defined as "[A]ll wages, commissions, piece-rate, and bonuses actually received by the employee and reported to the Internal Revenue Service.” According to restaurant employees who asked that their names not be used, front-of-house employees said they are paid $12.50 an hour by the company. Servers and bartenders receive a 13 percent commission on their sales, four percent of the service charge is retained by the house and the remaining three percent is shared among back-of-house employees, host, servers’ assistants and expeditors. The change in procedure has also meant a change in employees’ pockets and purses. While several back-of-house employees said they were making slightly more money under the new system than they made prior to its implementation, front-of-house employees said they are taking home noticeably less. Several requests for comments from the restaurant chain’s management have gone unanswered.
Although the approach may seem like exploiting a loophole in the law, industry experts opine that the practice is lawful if done correctly.
“As long as there’s no tipping involved and it is always just the service charge, then what they’re doing is perfectly legal,” Dr. Michael Cheng, director of Florida International University’s Food and Beverage Program, said.
However, it was important that the restaurants eliminated the line for gratuities when they added the service charge.
“The restaurants that are doing it correctly note that a gratuity has been added, and they don’t have a ‘tip’ line on their bill,” Cheng said. “[Otherwise, guests] get their check, they don’t see the service charge added on and they leave an additional tip on top of it.”
Other Seattle establishments have adopted variations on the service charge theme. Frolik, a bar in the downtown hotel Motif, adds a 20 percent service charge which the bill says is “retained by our hourly Team Members,” though the hotel charge and credit card slips have a line labeled “Addtl tip.” Motif is operated by Destination Hotels. Palomino, a Restaurants Unlimited, Inc. establishment, adds a 3.9 percent “Living wage service charge to offset the cost of Seattle’s minimum wage.” The menu goes on to explain that, “This is not a charge for service provided.” Credit card slips continue to have a line for gratuities.
No Tipping, No Service Charge
Another Seattle chain, Ivar’s restaurants, operates 26 stores in several formats across Washington. It instituted a “no-tipping” approach at two of its full-service restaurants within the Seattle city limits, but instead of adding a service charge or automatic gratuity, the restaurants raised menu prices by approximately 21 percent and began sharing that increase among all hourly employees. The chain’s rationale was that, with tips already averaging 17 percent, the change would mean a net increase of only four percent for its guests. However, most of the guests didn’t understand the plan, didn’t like it, or both.
“A lot of customers looked at the menu and got sticker shock,” according to Margo, a bartender at Ivar’s Salmon House. Once the plan was explained to the guests, many understood it and a few even loved it, she said, but in the main it proved unpopular with the restaurant’s clientele. In March 2017, the chain rolled back the policy and reverted to the traditional method of leaving gratuities to the discretion of the guest. The plan wasn’t particularly popular with the restaurant’s front-of-house people, either, some of whom felt the pinch in their wallets.
“I may have made a bit less under that plan,” Margo said, noting that her take-home pay has improved since the roll-back.
Since going back to the old way of doing things, Ivar’s has increased its focus on business basics to cover the increased labor costs.
“I’d like to say there’s one silver bullet, but there’s not,” Ivar’s spokesperson Kirsten Wlaschin said. “We’re focusing on expanding top-line sales, enhancing menu offerings, looking at product sourcing, facility costs, maintaining our cost structure,” and similar practices. However, she said the chain is not reducing any employee benefits in its effort to cope with the higher costs.
“That is steadfast with our ownership group,” she said.
While certainly the largest, Seattle was not the first city in western Washington to institute a higher minimum wage for workers at certain restaurants. The Seattle suburb of SeaTac, a 10-square mile city of nearly 28,000 residents that surrounds and encompasses Seattle-Tacoma International Airport, raised its minimum wage to $15 per hour as of January 2014 for transportation workers and hospitality workers “who work in a restaurant or retail outlet that is within a hotel, public facility, corporate cafeteria, conference facility or meeting facility,” according to that city’s statute. Generally, that means workers in the area’s many hotels, conference centers and at the airport are under the higher minimum wage, which has since increased to $15.34 per hour. Those who work at stand-alone restaurants are under the state minimum wage.
Some businesspeople in SeaTac fully embrace the new paradigm, which poses challenges but also has some silver linings.
“We’re seeing lower staff turnover than before the higher minimum wage was enacted,” Bob Schrader, general manager of the Marriott Airport Hotel in SeaTac, said.
In addition to providing repeat guests with the consistency that comes with seeing familiar faces, that means reduced costs for acquiring and training new employees. The higher minimum wage also means more applicants for the hotel’s open positions.
“It makes us more attractive to workers who live in nearby areas that don’t have the higher minimum wage,” he said.
Those silver linings will disappear when and if the disparity between the minimum wage in SeaTac and other communities disappears but for the near future, they are tangible benefits to be enjoyed.
While many restaurant operators grudgingly accept the higher minimum wage as a reality of doing business, others embrace and actively support better pay for their workers. MOD Pizza, named the fastest growing quick-serve restaurant by research and consulting firm Technomic, is one of them.
“The move toward a higher minimum wage is quite consistent with what MOD is all about,” Bob Barton, MOD Pizza’s CFO, said. “We have been a leader throughout the U.S. to see that the folks who work for MOD are being paid a living wage, so we have had a tendency to pay beyond the minimum wage in most markets that we’re in.”
Of its 215 restaurants across the U.S. and the United Kingdom, MOD Pizza has four restaurants in Seattle that are covered by the $15 minimum wage. Accordingly, those stores had to make adjustments.
“We’ve had to be thoughtful about pricing relative to what the minimum wage is,” Barton acknowledged. “Our pricing in the downtown Seattle area is a bit higher than some of the other markets to try to help offset some of that cost.”
What will the future hold?
Many question what the mandate of a higher minimum wage will mean in the long run. Tony, a server at one of the Schwartz Brothers restaurants, said he does not believe the higher wage is sustainable.
“The model may have to change,” he said. “Otherwise, either prices will go up so high people will stop going to fine-dining restaurants, or servers’ pay will drop to the point that these restaurants won’t be able to hire good people.” He also wonders whether the changes will embolden more restaurant workers to unionize, which could lead to even higher wages, commensurate increases in prices, and perhaps further reductions in patronage as a result.
Others, including Cheng, say innovative solutions such reclassifying employees as commissioned rather than tipped employees, could face legal challenges, particularly for those restaurants or chains that add a service charge and continue to include a tip line.
“When a restaurant that has an automatic gratuity or a service charge continues to include a tip line on its guest checks, the waters are muddied,” Cheng said. “If they didn’t eliminate the tip line, are they really creating a category of commissioned employees or are they still tipped employees?”
Cheng’s point also raises the question of the historical precedent. Front-of-house employees have historically been considered tipped employees. Whether reclassifying them as commissioned employees is sufficient to overcome years of history may be something a court will ultimately be asked to decide.