Yes, we are still talking about minimum wage increases here in California. The consensus is clearly in the favor of increased minimum wage being rolled out within the next year.

At the Federal Level

At the federal level, the tipped minimum wage is $2.13 – regular minimum wage is $7.25 per hour. That’s the advantage an operator that operates in a state that follows federal guidelines gets in the restaurant business. President Obama has called for Congress to raise the minimum wage to $10.10 per hour – but with the current Congressional block, it is unlikely that this will occur anytime soon. The advantage these states have is the tip credit applied against the hourly minimum wage.

At the State level

States range in tip credit amounts; Arkansas and Missouri are the highest at 50% of minimum wage and the District of Columbia is at 55% of minimum wage. California is one of only seven states that do not have any provision for the tip credit. The other states with no tip credit include Alaska, Minnesota, Montana, Nevada, Oregon and Washington State.

At our state level, we are currently operating under California House Bill AB10. That legislation calls for an increase on January 1st, 2016 to the $10.00 an hour mark – an 11.1% increase over the current minimum wage. At the same time, there is another bill introduced in February 2014 by State Senator Mark Leno, D –San Francisco, to pass SB 935 that would override the current bill and increase the minimum wage to $11.00 in 2015, $12.00 in 2016 and $13.00 by 2017. This bill then calls for automatic (no legislative action) increase starting in 2018 based on inflation rates. There are more initiatives out there including one from U.S. Representative Barbara Lee, D – CA. that has the minimum wage increasing to $26.00 an hour.

It is important to note that we lost our tip credit during Governor Brown’s first trip through the Governor’s office.

California does not pay the highest minimum wage as the State of Washington currently has a $9.47 an hour minimum. The city of Seattle pays the nation’s highest minimum wage at $15.00 an hour. In 2015, we are expecting 21 states to raise their minimum wage. A majority of states will have a higher minimum wage than the federal level in 2015.

At the City Level

San Francisco raised its minimum wage in January 2014 from $10.55 to $10.74 – the 2nd highest in the United States currently. In November, the voters passed a ballot measure to raise the minimum wage to $15.00 by 2018. The city of San Jose raised its minimum wage from $10.00 to $10.15 per hour. It is important to note that “charter” cities have the right to dictate their minimum wage amounts – Los Angeles being a Charter City. Certain home rule provisions in California’s state constitution give greater local control than that of the California Legislature. Charter Cities in the Southern California area include Los Angeles, Alhambra, Burbank, Culver City, Glendale, and Pasadena. With the Los Angeles Mayor Garcetti and a supportive City Council, the push is on the raise the minimum wage in Los Angeles City to $13.25 by 2017 and $15.25 by 2019. Currently, the city follows the minimum wage laws of the state.

Currently, the census bureau reports that nearly a quarter of California workers live in poverty. At $9.00 an hour, an average worker makes $18,720.00 annually. The federal poverty level for a family of four with a single wage earner is $23,850.00.

So as we enter into this New Year it is hard not to accept that minimum wage is going to increase probably at the federal, state and local level to some degree. How will an industry where most operators have an average of 50 employees or less deal with these increases? There are so many different ways that this could go that it is very difficult to come up with a strategy that will work.

Certainly, this is the time to start to track what your tipped employees hourly rates actually are when you factor in the tip income. Most of you will be surprised at how much the tipped employees, in particular servers, actually make an hour for part-time work. It’s a pretty good job still, even if they are declaring their tipped income. That data is going to become very important soon as we move closer to the European module of non-tipping establishments and mandatory service charge on every check. This really is the only way we will be able to survive these increases in the future. I’m not talking about all these crazy surcharges and add-ons restaurants are experimenting with – we are talking about changing the landscape on how customers tip and how employees receive compensation. The question is who will be the leader in our industry to start this type of concept when no one ever wants to be first on these types of changes – but change is coming whether we want to recognize it or not.

Minimum Wage Effect Case Study

For this client case study, we simply pulled the labor hours for an entire period and extended what the direct wages would be based on their standard pay rates. Based on the original pay rates there is a restaurant standard gap between positions. For example, the gap between a minimum wage employee and a cook at the current level is $3.50 – we maintained the same “gap” as we worked across the calculation of pay rates. This, of course, is one of the considerations that often get missed when discussions happen about the effect of the minimum wage in the restaurant industry. The raising of minimum wage raises all other positions as well. The fact that California does not allow for a tip credit as many other states do, takes away the ability to balance the gap between positions. A minimum wage increase in California only benefits one group of employees, the servers, the group that least needs any additional income. If the purpose of raising the minimum wage is to get non-tipped employees to a reasonable living income, not taking into consideration a credit or offset of some kind in regards to tipped employees will actually work against the very employees it is trying to help.

As you can see by the chart, the increases we will experience in January of 2016 with the minimum going to $10.00 an hour is 10% on tipped employees. As a percentage of sales, it will result in a 1.6% increase in payroll wages. This increase will also drive up the cost of payroll taxes and workers comp as both of these calculations are based on total payroll dollars. The change from the current minimum wage to the upper level of $15.00 per hour would result in a 36.2% increase and a labor cost to the sales increase of 9.8%. These increases will change everything about the way we currently view payroll in the industry. For the most part, we view tipped employees as part-time flexible hours and BOH employees as nonflexible fixed hours. We will not be able to maintain that type of distinction with these proposed minimum wage increase as we will have to look at all positions as part-time flex hours in order to stay in business. This brings on so many issues with maintaining employees and consolidating hours that it is going to be very difficult.

The reality is that minimum wage will change the way we operate as restaurants, creating a different module than we have experience in. Regular scheduling patterns and employee job rates will all be different in the future. During this upcoming year paying attention to your job rates and the amount of money earned per hour by tipped employees is essential. You might make it through 2015 and maybe even 2016 with the price increase to offset minimum wage hikes – but you won’t make too far beyond that. Keep good data – you will need to make decisions going forward.

Author: Jean Hagan, Principal – Restaurant Operations Practice Leader

About the Author

Jean Hagan, PrincipalJean Hagan
Restaurant, Hospitality
Jean has owned, operated, and consulted in the restaurant industry for more than 30 years. During that time, she worked with a well-known national chain; owned a food and beverage company that operated multiple restaurants, bars, and event spaces in the Squaw Valley area; and became the president, CEO, CFO, and shareholder of one of the highest-grossing restaurants in California. Today, Jean is Principal and leads the Restaurant Operations Consulting practice at KROST. » Full Bio