Will a $15 Minimum Wage Work for Restaurants?

President Joe Biden's $1.9 trillion relief package passed the Senate over the weekend, stacked with bills aimed at battling COVID and bolstering the economy. On Tuesday, it goes to the House, where it will likely pass as well. Initially amended to the package of relief was the Raise the Wage Act, which would have slowly ramped up the minimum wage of the country's most poorly paid workers to $15 (by about halfway through 2025) and eliminate the so-called "tipped wage" — the sub-minimum wage rate that most states allow restaurant operators to pay waiters, bartenders, and bussers—by 2027. A Friday night vote of 42-58 rejected the proposal, however, with seven Democrats and one independent joining all 50 Republican senators in voting against it. Even though it didn't pass this time, the prospect of raising the federal minimum wage still looms.

According to a report by the House Education and Labor Committee, the bill would have given nearly 32 million Americans a raise and lift workers out of poverty by increasing pay for roughly 6 in 10 working families whose total family income is below the poverty line. It would have also addressed racial pay inequality: Nearly one-third of all Black workers and one-quarter of Latinos would see a raise. In addition, women comprise nearly 60 percent of workers who would see their pay increase under the bill.

"This is 20 years of organizing finally coming to fruition," said Saru Jayaraman, President of One Fair Wageand the Director of the Food Labor Research Center at UC Berkeley, before the bill was rejected. "It is an historic moment for tens of millions of workers and women and women of color who have struggled since emancipation with this sub-minimum wage. It is essential for these essential workers."

The higher wage coupled with the elimination of the tip credit is controversial, particularly for those in the hospitality industry. Traditional restaurant business models are built on the tipped wage, which allows the employer to pay tipped workers below the minimum wage as long as their tips make up the difference.

The bill was opposed by the National Restaurant Association, and a recent statement from the industry group questioned the bill's appropriateness at a time when the industry has laid off 2.5 million workers as a result of the pandemic, and 1 in 6 restaurants have shuttered. "During a pandemic is not the time to impose a triple-digit increase in labor costs," said the Association in a statement. "Far too many restaurants will respond by laying off even more workers or closing their doors for good... [a] nationwide increase in the minimum wage will create insurmountable costs for many operators in states where restaurant jobs are most needed for recovery." The Association has called for time to recover and an opportunity to "have a conversation about a balanced way to address wage levels in the foodservice industry."

It's a sentiment that's echoed by many. "Eliminating the tip credit just does not make sense," said Rebecca Mitchel, owner of STUF'D, a food truck and catering business in Ditmas Park, Brooklyn. "People will short staff their restaurants, which isn't good for customer service. With the cost of goods going up since the pandemic, consumers are going to have to pay a lot more. With people getting used to cooking at home, it will be a huge hit on the industry which is already suffering."

Simone Barron, who has worked as a tipped worker for the past 20 years and is a Visiting Fellow with the Independent Women's Forum, and the co-founder of the Full Service Workers Alliance, opposes the bill because she says it will actually mean lower wages for many restaurant workers. "Most full-service restaurant workers make far more than minimum wage with their tips," she said. "Working short 4- to 6-hour shifts, a server likely makes $25 to $50 an hour."

Barron does not oppose raising the minimum wage but says the tip credit is the sticking point for her. "I don't think people are arguing that $2.13 is okay, but just labelling the tip credit as a starving wage and not recognizing the importance of tipped wages is a travesty," she said. "I made far more money as a server than my friends [who worked] at the Gap. It allowed me to go to school, get out of my small town, and grow as a human being."

She also said the tip credit has a positive impact on non-tipped back of the house workers because it frees up revenue to distribute wages more fairly. "Why are we giving a raise to people already making above minimum wage and not just giving it to people who need it in the back of the house. Looking at the bigger picture, we should not be eliminating the tip credit without more conversation."

A new report entitled "New York City's $15 Minimum Wage and Restaurants and Employment and Earnings" mounts a strong argument in favor of the bill. The report analyzed the impact of New York State's minimum wage increase on the restaurant industry and found that contrary to fears of massive job losses, $20 Big Macs, and shuttered restaurants, the industry thrived and expanded.

"Our findings bolster the argument that it's not minimum wage but other factors that determine employment levels," said co-author James A. Parrott, PhD, Director, Economic and Fiscal Policy, Center for New York City Affairs at The New School. His report also found "no evidence that the absence of a lower tipped-credit wage harms the industry or lessens tips for affected workers. Moreover, compelling research shows that New York State should end the subminimum wage for tipped workers, who are more vulnerable to sexual harassment and wage theft and suffer higher rates of poverty and hardship than those in states where the subminimum wage has been eliminated."

Jelena Pasic, the owner of Harlem Shake in New York City, said this is the time for change, even though it may mean challenges at first. When the minimum wage was raised several years in a row in New York City, her business suffered. "The first few years were very very tough and we were forced to reduce the amount of labor hours just to stay afloat," she said.

Despite the difficulties, she said she supported the bill. "I believe in a higher minimum wage for everyone because it provides for a happy and healthy workforce and besides, everyone deserves a living wage. But as a business owner, I think when the government is going the route of hiking wages, careful consideration needs to be given to all other factors that impact the profit line in the food industry. Some of which are indeed borderline unfair or abusive to the small businesses in the industry."

Pasic said she hopes that the government will support the industry by taxing vacant storefronts, evaluating local and state fines for violations, and that rampant delivery fees imposed by third-party delivery services will become federally regulated and capped. "If you are going to regulate the wage you have to also consider and regulate other burdens that the fragile restaurant industry experiences," she said.

Jon Shook and Vinny Dotolo are the chef-owners of Animal, Son of a Gun, and a slate of other popular restaurants in Southern California where the minimum wage is already $15 and the tip credit has been eliminated. They're on board with the bill, but emphasize that the public also has to understand that price increases will follow. "I am a big believer in livable wages and I think even $15 is still not enough," said Shook. "But raising the minimum wage will also mean an increase in the cost of goods and in menu prices. Lots of people say folks should get paid $25 an hour, but that same person will say, 'I can't pay this for a burger.' But if we undercharge for a dish on a menu, we will go out of business."

The inability to pass on the labor cost increases to the consumer will be an issue, especially for small mom and pop restaurants in middle-income cities, said Nick Mautone, a Seattle-based restaurant consultant and a former managing partner at Gramercy Tavern in New York City.

"In no uncertain terms, I am in favor of the minimum wage going up," he said. "But it must be realized that raising the minimum wage will have a bigger effect on small businesses and micro-entrepreneurs, as opposed to big companies like Amazon or Costco which already start frontline workers above $15."

He says the jump from $7.25 to $15 is a cost that many small businesses will have difficulty absorbing. "Realistically, you cannot have labor go up almost 100 percent. Where does that money come from? The owner/operator has to pay their bills and rent, and you can't simply raise prices 100 percent. The guest will not tolerate that. Undoubtedly, at a minimum, that will mean less hours for workers."

Like Pasic, Mautone said there needs to be a holistic conversation on work rules for employers to be able to both innovate and manage their payroll costs effectively. He'd like to see changes to the 80/20 rule (which requires waiters to spend 80 percent of their time doing consumer-facing work), and overtime re-evaluated to 45 hours.

Some operators, like chef/owner Jorge Guzmán and co-owner Travis Serbus of Petite León in Minneapolis, think the solution is to add a flat 20-percent service fee line to checks, which the restaurant can use to pay an equal living wage to both the front and back of the house. "Without the tip credit, to do it otherwise it makes no sense for the business model we are in," said Serbus. "Losing the tip credit adds to the division between front and back of the house because front of house workers will be getting full $15 plus tips, making the disparity even larger. This is the direction that we as an industry have to go in in order to properly pay the talent in the kitchen."

Finance experts following the industry agree a new model is the answer. "At the end of the day, all operators want employees to make more and establish careers within their organization, but they do have to figure out how to maintain their profitability and best serve the business," said Stephanie O'Rourk, CPA, a partner at the accounting firm CohnReznick and the leader of the firm's National Hospitality Emerging Concepts division.

Stephen Mancini, an industry leader for CohnReznick's Advisory practice and a member of the firm's Strategy and Innovation Group, said this kind of disruption is crucial. "I understand the concern and apprehension because for some operators it's a significant lift, but I've always believed that disruption and necessity are often the catalyst for innovation. I anticipate a movement away from the legacy model to a more agile model that allows for both business health and a living wage."