Local wages have experienced a serious boom with recent legislation awarding a higher minimum wage. Oakland and San Francisco are up to $12.25/hour and the federal minimum wage is going up to $10.00/hour at the beginning of this coming year. This is great for employees that are currently working for minimum wage, but it’s a serious problem for owners of small businesses.
Why is this change potentially problematic?
For single location full-service restaurants, the vast majority of which are local, 34.4% of revenue is spent on wages and only 4.3% of revenue trickles through to profit according to IBIS World. As that portion of expense increases, profit for local restaurants will continue to be squeezed in an industry already notorious for razor-thin profit margins.
Moreover, this compounds the already present issue of differentials between the different types of jobs in the restaurant industry. Front-of-house employees, waiters, and hostesses in some states can be paid less than the minimum wage as long as the differential between minimum wage and what they’re paid is less than accrued tips. However, in California this is not the case—wait staff must be paid minimum wage with tips on top.
Kitchen staff are being paid barely above minimum wage ($15-20/hour), so the minimum wage doesn’t have much of an effect on them. Wait staff, however, experience a wage increase that further increases the discrepancy between themselves and other employees.
Many restaurants have simply increased their prices to deal with the increased wage expenses, choosing not to deal with the wage discrepancy problem. When I looked around for creative ways to deal with this problem, however, there are many ways that restaurants can try to avoid significant price increases and the growing gap between servers and cooks.
What is there to do?
The first and most intuitive way to do this is to eliminate tips and pay servers a higher base salary. We recommend considering this alongside our other tips for salary negotiation. Restaurants can choose to build the tip price into the menu (+10-20%) and not accept tips, much like restaurants in Asian countries like South Korea. A no-tip policy dampens the effect of the higher minimum wage on the total price of meals and also evens out the difference between the salaries of front-of-house and back-of-house employees.
There’s also less variability in the wages of the wait staff, which could actually be advantageous for them. When you know exactly how much you will be paid at the end of the month, it’s easier to budget and it makes personal financial planning much easier. Why doesn’t every restaurant do this then? It makes sense that servers should be rewarded for good service, and getting rid of a tip system seems to disincentive that. There are ways around this though, like employee reviews or even customer feedback.
The biggest issue is a cultural one. Americans are used to having the power to determine how much a server is being paid for a given meal. Taking that power away from them could result in a less valuable restaurant experience—which obviously is not good for the owner.
Another method to consider is tip-pooling, where all the tips that the customer pays are placed in a large pool and then distributed to all employees. The biggest problem with this, however, is legislative. California state law states that in order for employees to get a cut of the total amount they have to offer direct table service.
Some businesses have tried to get around this by having chefs be the ones that bring out and present the food. If this practice makes sense in a restaurant’s business model, then tip pooling could be a viable option. If the tip pooling isn't being spread among the back-of-house employees, it does nothing to help close the gap in pay.
While minimum wage laws can help some people get the bare minimum in order to support themselves, it does have a straining effect on small businesses, especially restaurants that often are the engines of growth in an economy. When these legislative hurdles come up, it’s often up to the owners of said businesses to get creative with effective ways to keep employees happy and productive in order to make ends meet in an already cutthroat and difficult industry.