The rock and the hard place.
Cue hosts monthly discussion meetings for Restaurant Owners - both our clients and other restaurant owners - it is a forum to discuss the operating environment, and check in to see how other owners are handling similar situations. In one of our recent Owner Discussion group meetings, members discussed the impending minimum wage hike in Minneapolis. For your reference, here is a link to the City of Minneapolis minimum wage ordinance, and how it will be implemented:
By July 1, 2022, if a restaurant has more than 100 employees (on average over 12 months), their employees will be paid at least $15.00/hour. For most employees in the Kitchen, this will be an incremental increase, and they will likely make more than that, on average, before 2022. But for Front-of-House staff, including Servers and Bartenders, this represents an increase in pay of 58% phased in over the next 4 years. (By the way, if an establishment has less than 100 employees, the minimum wage will be $13.50/hour by 2022, still an increase in pay of 44% for minimum wage employees). Because the primary recipients in a restaurant of the minimum wage are FOH employees, we'll explore just their wage increase for now.
Currently, FOH wage costs average 8 - 12% of the total Sales for restaurants around the Twin Cities. An increase of 44 - 58% in FOH wages will mean FOH staffing costs will increase to about 12-18% of the current Sales volume for most restaurants. Since most restauranteurs depend on at least 5% of their Sales dropping to the bottom line, adding 4-6% in costs will deplete the entire Net Income for some establishments - and it wouldn't be fair to expect restaurant owners to not make a profit. Why else would they be in business?
Since the tips that customers leave behind do not count towards the minimum wage requirement in Minneapolis, and since those tips legally belong to the Servers/FOH Staff, it's not an option to simply distribute those tips to everyone who works within the restaurant as a way to increase everyone's wages. So restaurants have to react to the additional cost of Labor - either by raising prices, cutting their Labor force, or implementing another source of revenue to pay for the wage increase.
Let's explore those options:
1. Raising prices
- This approach leads to sticker shock for most customers, as the food and beverage menu items will increase incrementally in price. For Servers and Bartenders, though, this is the most favorable option, if we assume that customers are still going to tip, and that they customers are then tipping on a higher check amount at the end of the meal.
2. Implementing a Service Charge
- This approach means customers will pay the same menu price as they do now, but will see a Service Charge (anywhere from 10-20%) added to their check. How a restaurant distributes this additional revenue is totally up to the owners - Service Charges belong to the restaurant, the same as food and beverage sales, and they can choose to share this additional revenue by paying employees a higher wage or some share of the Service Charges, as long as all employees are paid at least the minimum wage per hour.
3. Cutting the Labor Force
- This approach is the least favorable to all involved. Less staff means longer wait times for tables and service, which may lead to a lower-quality experience for the customers. Fewer shifts mean employees will make less money overall, and it's possible that these effects will lead to a downturn in the restaurant's overall Sales.
There's one more option that tests the gray area of the requirement that tips belong only to employees with direct contact with the customers. Restaurants could opt to keep their menu prices the same, and allow customers to continue to tip, and then "pool" those tips and distribute them amongst all of the staff. But like I said earlier, these tips belong to the employees with direct contact with customers - so the workaround would possibly be for ALL staff to start having direct contact with customers. Imagine the number of restaurants that will begin to open up with one giant room, so that all staff can see and be seen by customers!
We've seen this work in sushi restaurants, where sushi chefs greet customers and interact with them. This option would mean the Kitchen and other staff - Line Cooks, Prep Cooks, Dishwashers, Hosts included - would need to stroll the restaurant and provide some level of contact with guests. This isn't a new option - there are restaurants around town who utilize this approach.
No matter the system, it remains to be seen how Minneapolis restaurants will react to the minimum wage increase. The exploration of these options will continue, and we're certain to see some leaders emerge with ideas on how best to handle the wage increases.