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Taking credit

The battlefront in the minimum wage fight shifts to cash wages and tip credits.

When a 50 percent hike in the minimum wage that restaurateurs pay servers kicks in at the end of this year, Brad Rosenstein hopes he won’t have to fire anyone from his family’s 102-year-old restaurant, Jack’s Oyster House in Albany, N.Y. “We’re going to have to cut down and trim,” he says. “I’m hoping to lay off through attrition and not have to confront any individual and say we cannot keep you here. As people move on, we just won’t rehire. It’s a shame.” stack quarters

Starting Dec. 31, 2015, Rosenstein and restaurant operators throughout New York state will pay $2.50 more an hour to every tipped worker. That’s when the so-called minimum “cash wage” for tipped employees will go from $5 to $7.50 an hour. Put another way, the new ruling by the state’s Department of Labor reduces the amount of customers’ tips employers can apply toward the full minimum hourly wage. Currently, New York’s tip credit is $3.75. In December, it will drop to $1.50 at the same time New York’s hourly minimum wage rate will become $9 an hour.

The restaurant industry’s system of cash wages and tip credits has become the new battleground in the fight over minimum wage increases across the country. Many states already have raised the cash wage for tipped employees higher than the federal level ($2.13 an hour), even though, on average, tipped workers earn more as a matter of practice than non-tipped hourlies.

Anything but average

Misconceptions and confusion about the tip credit are fueling arguments to change it. Meanwhile, operators are scrambling to find ways to deal with the sudden or inevitable labor-cost increases.

“There is quite a debate and discussion age a 50 percent increase in labor costs,” says Melissa Fleischut, president and CEO of the New York State Restaurant Association. Solutions include layoffs, raising menu prices, instituting surcharges or doing away with tipping altogether.

“It’s the tipped employees for restaurants who are the highest paid group we have and the largest labor pool,” Fleischut says. At Jack’s Oyster House, servers average between $25 and $35 an hour with tips, Rosenstein says. Nationally, the median earnings of waitstaff range from $16 an hour for entry-level servers to $22 for more experienced servers, according to the National Restaurant Association.

The NYSRA strongly opposed its state’s increase to the cash wage and had restaurant owners and servers argue against it to the state’s three-person wage board, which nevertheless voted 2-1 in favor. Other states and state restaurant associations are fighting a similar battle.

Minnesota eliminated its tip credit more than 15 years ago. It is one of seven states, including Alaska, where employers pay the full minimum wage, whether employees receive tips or not. Minnesota’s minimum wage currently is $8 an hour; in 2016 it will go up to $9.50, and in 2017 it will be indexed to inflation. The Minnesota Restaurant Association supports proposed legislation to cap the minimum wage in the state at $8 an hour for tipped employees, if those workers make at least $12 an hour, including tips. A survey by the MRA found that in the fourth quarter of 2014, servers in the state actually earned $18 an hour on average.

The MRA’s executive vice president Dan McElroy admits the bill’s passage is an uphill battle. The AFL-CIO opposes the legislation, and a similar bill failed last year in the state legislature. One positive sign, however, the new bill, introduced in February by Rep. Pat Garofalo has garnered bipartisan support.

Confusing the issue

The debate isn’t only in the states, of course. Those pushing to raise the current federal minimum wage of $7.25 an hour also have set their sights on the federal cash wage for tipped employees, currently $2.13.

But if, in reality, servers are making substantially more than minimum wage, why is the public going along? Part of the reason likely is a misunderstanding about how the tip credit is applied, say industry observers.

“Proponents of increasing the tipped cash wage are more responsible than anyone else for creating the confusion,” says Angelo Amador, senior vice president and regulatory counsel for the NRA. “No one gets paid $2.13 an hour.”

Adding to the confusion, minimum wage hike supporters use terms such as “subminimum wage” to describe the federal cash wage for tipped employees. Furthermore, last spring President Obama publicly called on Congress to raise the federal cash wage for tipped employees, and the U.S. Department of Labor advocates for raising the cash wage of tipped employees on its website. And, deliberate or not, the phrase “federal tipped minimum wage” rather than “cash wage” appears in blogs and videos on the U.S. Department of Labor website.

“People are not speaking accurately about this issue,” says employment lawyer John Thompson, a partner with Fisher & Phillips in Atlanta. “I can understand a reasonable disagreement over whether there should be a tip credit, but there is a lot of inaccuracy about what the law really is. To say that the current federal minimum wage for tipped workers is $2.13 an hour is wrong.”

That’s because, as Thompson explains, there is one federal minimum wage. Whether a worker gets $7.25 from his employer outright or from a combined cash wage of $2.13 plus $5.12 in tips, the minimum wage is $7.25 either way. If tips from customers fall short of the minimum wage, the employer must then make up the difference. It’s a nuance that is difficult for many voters, many workers and even some operators to grasp.

Restaurants react

Despite calls for change by the Administration, under a Republican-controlled Congress, the NRA does not expect to see any increases in the federal cash wage for tipped workers, says Amador. But that may not matter as the issue moves forward in the states.

Twenty-eight states, including D.C., now have higher minimum wage rates than the federal government and higher cash wages for tipped employees (see map on Page 58). And in some states, such as New York, the tip credit is shrinking.

Oyster House owner Rosenstein estimates the change to a $7.50 minimum cash wage will amount to an average increase of $50,000 a year in labor costs for many of New York’s full-service and fine-dining establishments. “You have to add approximately 20 percent more to each hourly rate based on payroll taxes that go to the state and federal unemployment insurance,” he says. “It’s really more like $9 an hour.”

The industry and restaurateurs need to do more to educate the public on restaurant-
unit economics, say some operators. “People believe if you own a business you must print money as you walk, that while you drive into work you make a million dollars,” says Robert Maynard, co-owner of the Famous Toastery restaurants based in Huntersville, N.C. “People don’t know that margins are tight, food is expensive. You can’t just raise prices to keep up with increases.”

Price increases, however, have become a necessity for some restaurants, particularly on the West Coast where there is no tip credit for employers. Some operators are incorporating service or administrative charges into guest checks to cover mandated health care and still pay higher wages—even though there is a legal line to walk with that approach. Still others are doing away with tipping altogether.

The Tartine Bakery in San Francisco, a high-volume casual bakery, implemented a 3 percent service charge on total orders late last year, says operations manager Vinny Eng. “I think the educated Bay Area consumer understands what the cost of living is here in San Francisco, and they are willing to pay. But there is a ceiling on how much you can charge for food. We want to make it as accessible as possible.”

Umberto Gibin, owner of Perbacco/Barbacco in San Francisco also instituted a service charge last year of 4 percent of each customer’s total bill.
Offsetting the cost of higher wages, the charge goes toward insurance for his 140 employees. The charge is optional, but customers usually pay it—and they continue to tip, he says.

However, with minimum wage rates on the rise, Gibin says he may have to consider price increases on the menu, as well. “We’ve resisted for five years-plus doing anything with prices,” he says. “In the beginning, we took it as a cost of doing business. Now the situation is changing again. A decision will have to be made.”

He draws the line, however, at nixing tipping, though he has seen other operators in the Bay Area implement no-tipping policies in order to pay their staff of hourlies, tipped and not tipped, a more even wage. But Gibin says he’s not sure if American diners are ready for that on a wider scale. “The culture of tipping is so ingrained,” he says. “Guests feel we are taking away their right to vote for the service they’ve received.”

Operators in California may soon get some reprieve. The California Restaurant Association is supporting a bill introduced in the state assembly in March that would cap servers’ wages at $9 an hour if servers make more than $15 an hour in tips. Any sort of reduction on expenses would help smaller operators, says Mat Schuster, chef-owner of Canela Bistro & Wine Bar in San Francisco. He employs fewer than 20 people at his three-year-old restaurant.

“Pretty much every expense we’ve had has gone up steadily—liability insurance, workers-comp insurance and minimum wage,” he says. “When you have a chance to trim something to keep a business viable, it’s a good option.”

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