Operators say a ‘living wage’ won’t kill them—if some key ‘if’s’ are met

The impact of more than doubling the federal minimum wage would be tempered by phasing in the increase, many restaurateurs contend. But they still have doubts about one size fitting all.
P. Terry’s drive-thru burger
Photo courtesy of P. Terry’s

Paying workers $15 an hour was as unimaginable for most of Todd Coerver’s 25 years in restaurants as seeing the industry be crippled by a bat virus. Yet in January, all 300 full-time employees of his current charge, the 20-unit P. Terry’s drive-thru burger chain, were raised to that wage level at the instigation of management, which Coerver leads as CEO. And nary a crack has shown in the organization or the industry.

Indeed, other operators have reached out to the Austin, Texas, chain for insights on how they can operate profitably under that pay model.

When organized labor coined the term “living wage” to put a halo on a $15 hourly minimum, the industry shook its head in disbelief. Requiring entry-level pay to start at that nosebleed level was regarded as a sure sign the End Times were upon us, or at least upon the industry.

Far more moderate minimums were similarly resisted, with operators warning that even cost-of-living adjustments would kill jobs, jack up prices, and hasten the industry’s death by a thousand cuts.  The industry also cited its conviction that the market should set the prevailing wage, not lawmakers.

Todd Coerver

Photo courtesy of P. Terry's

But the prospect of raising the federal wage—to $15 no less—is being met with a different reaction from the industry this time. Many operators say market conditions have already pushed wages well past that threshold.  About 78% of industry employers pay more than the federal minimum wage of $7.25 an hour, of whom almost half pay more than $12, according to a survey of 500 operators by Restaurant Business. About 4% pay more than $20 an hour.

Operators and hike proponents also note that the minimum wages of eight states and about 40 municipal or county jurisdictions are already on a climb to at least $15 an hour.

Those early adopters include California, where the minimum for businesses with at least 26 employees rose this year to $14 an hour. Smaller enterprises are required to pay at least $13 an hour.

The bulk of Denny’s branches are located in the West Coast state. Yet the restaurants there have enjoyed “six consecutive years of positive guest traffic—not just positive sales, but positive guest traffic—as the minimum wage was going up,” Robert Verostek, Denny’s CFO, remarked to financial analysts. That market is out-performing the system.

Indeed, he says, sales there were likely helped by consumers having more money to spend as a result of their wages having increased. “We have seen it within our system in a way that can be beneficial,” said Verostek.

He contrasted that situation to what Denny’s encountered in Arizona, where the minimum wage rose overnight by $1, to $12 an hour. Denny’s tried to temper the impact by raising prices in one flash by 5% to 7%, a steep hike that “does have a traffic consequence,” Verostek acknowledged.

Allaying the chances of sticker shock through gradual adoption, rather than the size of the overall increase, has emerged as a paramount concern. Operators say they’d like time to ease into a pay increase of that caliber but aren’t daunted by the prospect of literally doubling what’s now the lowest legal wage on a federal basis.

“As long as it’s done in a staged way and in a way that is equitable for everybody, McDonald’s will do just fine with that,” Chris Kempczinski, CEO of the chain, assured investors in January.

Prices likely to rise

The near-universal response to any increase in the federal minimum wage would be a hike in menu prices. Nearly four out of five respondents (79%) in RB’s operator survey said they’d try to temper the impact by asking customers to pay more for their meals.

Fifty-eight percent of respondents said they’d cut workers’ hours, and 56% reported they’d strive to eliminate jobs.

P. Terry’s was able to cover about half its increased labor expenses by taking a price increase of 2% to 2.5%, depending on location, Coerver said.

“That equated to a dime on every burger and a nickel on our fries and drinks,” the CEO said. As for guests’ reaction, he said, “We didn’t see anything, we didn’t hear anything. So, we figured the guest was accepting of it.”

The Terry’s, the husband-and-wife team that owns the Austin-based chain, decided to cover the remaining 2% to 2.5% in increased costs by absorbing the hit to margins.

No jobs were eliminated. Some employees wept at the news, Coerver recalled, even with a dip in hours here and there. “They got what amounts to a $5,000 raise on an annual basis,” he recounted. “It had real, tangible value to them. We’ve got people going back to school. People making down payments on a car, or a down payment on a home.”

He’s quick to add, “Obviously there’s a business advantage to this as well. We’re seeing very talented, skilled folks leaving some of the best-in-class employers in our industry to come work with us.”

Jobs likely to be eliminated
P.Terry’s may be an exception in leaving its payroll uncut as wages rise. More than half (56%) the operators participating in RB’s survey indicated they intend to eliminate positions.

The Congressional Budget Office (CBO), Capitol Hill’s on-site accounting shop, calculated that the $15 minimum wage introduced in Congress as part of the American Rescue Plan would likely eliminate about 1.3 million jobs—roughly 0.8% of all payrolls nationwide—by the time that pay threshold is reached in 2025.  The CBO found that the number of positions lost could run as high as 3.7 million, depending on how certain variables break.

But the agency found that the payback would be the elevation of 1.3 million families out of poverty by the 2025 full-enactment date.

The industry still voices fears of doomsday scenarios if a $15 federal wage should be hammered into law. About 22% of the respondents in the RB survey said they would consider closing if that so-called living wage becomes national law. A full 25% said they believe a wage of that scale would kill the industry, and 8% concluded that their restaurant would be among the casualties.

Yet even that research shows moderation from the industry’s usually shrill and steadfast opposition to an increase. Seventeen percent of respondents said they don’t oppose an increased minimum wage, but regard $15 an hour as too high for right now.

Three percent said a shift to a living wage would be a “non-event” because they already pay more than that amount, and 6% said they favor an increase because of the beneficial impact it could have on spending.

Feasibility concerns

Texas is one of the states that uses the federal standard rather than a state-set figure as its mandated minimum wage, meaning the pay floor would be raised to $15 if the federal proposal yanked at the last minute from the American Rescue Plan should be passed as a standalone piece of legislation. That measure, known as the Raise the Wage Act, calls for raising the minimum in stages until it reaches $15 an hour in 2025. The tip credit would be disallowed as part of the act.

Already offering $15 an hour doesn’t mean P. Terry’s is apathetic about setting that amount as the national pay floor. The 20-unit chain spent six months studying the situation and its options, looking to balance the benefits and detriments to all parties. It was a highly customized exercise that might’ve ended in a different outcome for a different operation, Coever says.

“The answer is complicated,” he said when asked if the chain would like to see a nationwide $15 pay threshold. “I’m not sure if a federal model is even the right way to go.” Even within Texas, he said, there’s a world of difference in the cost of living from one area of the state to another.

Yet, he noted, the federal minimum hasn’t been raised since 2009, when the legal limit was increased by 65 cents an hour.

“Hopefully, it is tiered across several years,” Coever said of any federal increase. But $15 doesn’t sound outlandish, he said. “If we do go this way, and I know we will, it’s the logical and the humane thing to do.”

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