In the news recently, you may have seen Washington’s rising minimum wage blamed as the reason some Seattle Area restaurants are struggling and even closing. While the minimum wage certainly presents one challenge, there are numerous factors contributing to the economic shortfalls faced by restaurants. Regardless, I believe restaurateurs can survive – and even thrive – while also living up to our responsibility to provide a fair and living wage for all employees.
The business environment in Washington State is changing. The marked increase in new taxes and rising minimum wage, coupled with high labor costs as a result of one of the tightest job markets in the country, are negatively impacting notoriously narrow restaurant profit margins. Simply raising menu prices is no longer sufficient, and all Seattle Area restaurants are evaluating compensation structure changes in order to remain competitive. On the Eastside, this is already happening: more than 40 percent of my fine dining peers have implemented a (20 percent) service charge, a (2-5 percent) surcharge or both.
Taking care of our employees has always been a top priority for me. The reason we have successful restaurants is because we have the best professionals in the business working for us, and they deserve to be well compensated. All John Howie Restaurants employees receive compensation far above the Washington State minimum wage; even back-of-the-house employees (chefs, cooks, dishwashers), who do not share in service gratuities, make between 30 percent ($15 an hour) to 110 percent ($24 an hour) above minimum wage. We have always and will continue to offer discounted medical and dental insurance, an employee assistance program, paid time off, and meal benefits for employees and their families.
Given the current environment, restaurant compensation will continue to be elevated, and I have no issue with that. The concern, however, is in being able to respond in a way that does not sacrifice the financial health of my company.
Why are restaurants struggling to be successful?
- Competition: I read that more than 112 new restaurants opened in the Seattle Area since May. The article inferred this number indicates the restaurant business is healthy, but the truth is more than half of those restaurants will close within two years, and less than 10 percent will be open in five years. Finding ways to continually innovate and stand out from the competition is essential to enduring success. I am fortunate to have operated two fine dining restaurants in Bellevue for 17 and 10 years, respectively, but I am here to tell you that innovation is not inexpensive, and requires ongoing (and significant) investment.
- A very competitive labor market: To put it simply, there are not enough restaurant employees to fill all the restaurant jobs available. When you can’t fill an open position, there are two choices: (1) lower the capacity of the restaurant, which drives down revenue, or (2) have available employees work more hours, which is not cost effective, impacts the guest experience and is a guarantee to burn out good people.
- Rising minimum wage: By the end of 2019, the Washington State minimum wage will rise from $11.50 to $13.00 an hour. While the new minimum wage will still be lower than what we currently pay our non-tipped employees, the challenge is tipped employees, who are paid minimum wage, will account for a significant labor cost increase. In most restaurants, servers, assistant servers and bussers make up more than 50 percent of the hours worked, so the compensation inequity between tipped and non-tipped employees concerns me the most.
What is the solution?
There is no one-size-fits-all formula to address the rising cost of doing business, but every restaurant will need to consider adopting one or several of the options below if pay equity is a priority, which it is for us.
- Raise menu prices: Incremental price increases are the most common way restaurants have chosen to offset gradually rising business expenses. The challenge is, dining out–especially in fine dining establishments – becomes less affordable, and the frequency of guest visits drop dramatically. The biggest problem is this option does not fix the problem of wage inequity. Another option is to raise menu prices dramatically (20 to 25 percent) and eliminate gratuities. Complacency is the concern here. Yes, restaurants can manage the service team and hold them accountable, but they will not have the same incentive to perform as they do within the traditional tipping model.
- Surcharge: A surcharge is an extra fee (usually between 2-5 percent) added to each guest check. This is something we tried at John Howie Steak, but I eliminated it after deciding it was not the right solution for us.
- Service charge: A service charge is a set percentage added to every guest check, usually around 20 percent. In this model, tipping is eliminated (or additional gratuity becomes optional), and the money goes to the company for equitable distribution. Many restaurants have chosen this solution, but the service charge has two unfortunate downsides. First, as mentioned above, complacency is a factor. Second, the guest cost is higher because restaurants are required to charge tax on the service charge (no tax is charged on gratuity). The upside, however, is this option allows restaurants to create a fair, predictable compensation model for employees.
- Tip credit: A tip credit allows employers to pay tipped employees a lower hourly base rate, as long as total income (base plus tips) reaches at least the standard hourly minimum wage. If tips and the base tipped wage do not add up to the full minimum wage, employers are required to make up the rest. The intent is, with tips, tipped employee compensation will exceed minimum wage, but there is a guarantee that tipped workers make at least the minimum wage. Tip credits are allowed in 43 states, but Washington State has not allowed them since 1992. When I began in the restaurant business 44 years ago, this was the model and I felt fairly compensated. Now, as a restaurant owner, I can see how tip credits might be a viable solution (should legislation allow it in the future) to help restaurants support equal pay for all employees.
In order to endure, every restaurant will need to determine how to address the rising costs of doing business in our state. Our restaurant group is no different and we are thoughtfully weighing every option including – and, if I’m being honest, leaning toward – the adoption of a service charge model. No matter what we ultimately decide, our priorities remain simple: taking care of our valued employees, ensuring our company is well positioned for the future and continuing to deliver an outstanding experience to our guests.
In the meantime, if you value a vibrant restaurant community, please continue to support your favorite establishments – and the hard-working people who work there – by eating out!