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Restaurant Owners Discussion

Our Restaurant Owners group met on May 24th for a lively discussion, this one surrounding the lawsuits that are pending or recently settled regarding Service Charges and Tip Pooling. The local case that has drawn attention is James Russell Conlon v Surly:

The link above includes the summary judgement in that case.

Our guest speaker was Jessica Roe, of Row Law Group, who spoke about the risks associated with tip pooling. Most interesting to me was her statement about attorneys interested in filing lawsuits based on counsel receiving fees' and expenses on top of settlements, meaning these types of lawsuits are attractive for attorneys and clients alike, which may increase the likelihood of filing.

What Surly experienced is not atypical for many operating restaurants within the Twin Cities - Restaurant Managers and Owners (RM/O) want the "direct service" staff (Servers, Bartenders) to share some of the voluntary tips that they receive from customers with the support staff (Bar Backs, Wait Assistants), who are also paid at the minimum wage, and rely on the shared tips for some of their income. However, wage laws dictate that the direct service employee who receives the tips, owns those tips. And there is no law stating that the direct service employee must share them. In fact, the law states that RM/Os must not dictate to any employee what they can or cannot do with their earnings, including tips.

Restaurant managers and owners (RM/O) are walking in a minefield - they would like to manage their staff, and ensure that all employees are compensated fairly. Many RM/Os inform their employees that their tips must be or should be shared with their support staff. But it is difficult to prove that all tip pooling or tip sharing is completely voluntary by the employees.

However, if the tips are not shared, RM/Os must either increase the wage of the support employees, or risk losing them.

So the RM/Os are now at the mercy of their employees. The effective management of employees includes the tool of Pay Scale, which is used in other industries to reward top-performing employees. In restaurants, the Pay Scale is out of the hands of the RM/Os for about 1/3 to 1/2 of their employees, because the customer is paying some of the earnings for those employees, and those employees are, in turn, (hopefully) paying some of those earnings to other staff.

With the increase in minimum wages, the wages of the direct service staff are increasing at a faster pace than any other employee within the restaurant environment (including management). This creates the next conundrum: how to create a hierarchy where the top hourly-pay performers progress to salaried management positions. If the direct service staff are earning more per hour with an increasing minimum wage on top of tips, what attractiveness does a management position hold? This creates a disruptive hierarchy within each restaurant organization, which leads RM/Os to seek alternative solutions, such as the implementation of Service Charges or raising prices/eliminating tips. RM/Os are beginning to ask themselves how the culture of a non-tipping restaurant might be appealing, and how to educate their consumer on adopting this new culture.

Our discussion also touched on Kitchen staff, who, by law, are not allowed to participate in tip pooling, if it exists within a restaurant's operation, because they generally are not in direct contact with the customer. A few local restaurants found a way around this, by creating a model where the Kitchen staff and direct service employees are the same employees (, the now-defunct Victory44 in North Minneapolis and the now-defunct Piccolo in South Minneapolis).

Kitchen staff are among those most sought-after employees at this time, and there appears to be a shortage of Cooks and Dishwashers within the local labor pool. Paying these employees a higher hourly wage, in order to secure their employment, creates a higher cost for the restaurant, resulting in smaller profits for the owners.

With the wages of both the service and kitchen staff on the rise, not to mention the newer requirement to provide health insurance and Sick/Safe Time, RM/Os will be forced to make financial decisions to keep their restaurants alive. RM/Os are learning that they have to operate more like a traditional business model. Will this make tipping go away? It remains to be seen if the customer can adapt.

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