The Latest on the Minimum Wage

Chef preparing meal in kitchen

Would an increase actually result in business failure?

The push toward a double-digit minimum wage keeps building, and the questions are clear: What would an increase do to businesses that rely heavily on hourly employees? What would happen with tipped employees? What are the drawbacks and benefits to an increase?

As of January 2016, the federal minimum wage was $7.25 an hour. That also was the minimum wage in 24 states. The remaining states’ minimum wages are above the federal standard, and two—California and Massachusetts—require an hourly minimum wage of $10.

In 2015, New York legislators proposed a $15 minimum wage. Some say that prompted restaurateur Danny Meyer to launch Hospitality Included, his initiative that eliminates tipping at the 13 New York full-service restaurants in his Union Square Hospitality Group. As of early 2016, both New Jersey and Florida were considering a $15 minimum wage, as was Oregon, where the hourly minimum wage is $9.25 an hour. Some municipalities, including Seattle, have already raised the minimum wage to $15. Others, including Chicago, are considering it. 

The National Restaurant Association (NRA), which mounted an unsuccessful legal challenge to New York’s plan to hike the minimum wage, opposes an increase. NRA spokeswoman Christin Fernandez outlined the reasons in an email.

“Over 90 percent of America’s restaurants are small businesses, independent or franchisee-owned,” wrote Fernandez. Restaurants, she explains, typically operate on margins of three to six percent, with one-third of costs going to labor. 

“Dramatic calls for increases that would essentially double the federal minimum wage are having, and will continue to have, negative consequences on the way restaurants do business,” Fernandez continues. “As the minimum wage increases, restaurateurs have been forced to find ways to streamline their operations, whether that’s in the form of an increased focus on automation or moving toward a part-time staff. Traditionally we have been one of the few industries to offer real opportunity to the younger workforce—teens and students—but I have heard from many restaurateurs who say they simply cannot afford to hire unskilled employees at $15.” 

Pros and cons

Benefits to a higher hourly wage do exist. Higher wages would make the industry more competitive for top-level workers, maintains Gordon Food Service Customer Effectiveness Manager Ken Wasco. The recession, he notes, has pretty much ended, and the workers who flocked to the foodservice industry after losing their jobs are now returning to higher-paying jobs elsewhere. Some also argue that higher wages—especially if tipping is eliminated—would also simplify bookkeeping for operators.

Among the drawbacks: A bigger payroll and slimmer margins, as Fernandez points out, not to mention a wider gap between wages for tipped and non-tipped workers. Why? An hourly wage increase would also mean an increase in the level of tipped wages. The federal tipped-worker hourly wage is now $2.13, provided tips bring that hourly amount to the non-tipped level. This frightens tipped workers. Their fear: That a higher minimum wage would force restaurant and bar owners to rework the tip/wage system—à la Danny Meyer—and result in lower incomes for traditionally tipped workers. 

The overall effect on operations

The giant question: Would an increase actually result in business failure? 

The Seattle Times initially examined that question in a March 2015 feature it updated in January of this year. Just after the city raised the minimum wage, a half-dozen or so of the city’s restaurants closed. A magazine article blamed the higher wage, and the newspaper decided to take a second look. It found no link between higher wages and the closures, mostly because at the time of the closings, the wage increases hadn’t occurred. Seattle’s minimum wage hike is taking place in stages, with larger employers (501 or more employees) paying $15 an hour by 2017, and smaller employers (500 or fewer workers) reaching $15 an hour by 2021. The in-between wage, launched in April 2015, is $11 an hour.

While the higher wage wasn’t forcing a mass closure of restaurants, it did have operators discussing how to cover the higher wages. Seattle franchisees of a national sandwich chain, according to the article, had discussed either raising menu prices or putting a 4 percent surcharge on the entire menu.

For now, the good-ish news seems to be that the $15 increase, if it is to appear at all, is still far in the future. That gives restaurateurs plenty of time to weigh options—raise prices? reduce staff? eliminate tipping?—plus time to prepare for what appears to be a quickly rising tide.