There is a great irony in the new minimum-wage requirements that have swept across California, a point that ought to irk progressive-minded voters -- but it is often overlooked.
In restaurants, cafes and other businesses where employees earn tips, the increased minimum wage will go directly to the highest earners in those businesses. In most restaurants, the staff who receive the raise already earn, on average, at least $30 per hour and often much more. At the same time, the restaurant employees who would benefit most from an increase won't see their pay go up much, if at all. The reason: California is one of the only states in the country that do not allow tips to count toward an employee's income.
Jesse Ziff Cool
How is it that possible?
In most restaurants and cafes, typically only the tipped employees are paid minimum wage. That's because this group of employees (servers, bussers and bartenders) earn much more in tips, raising their total pay to an amount at least twice but often closer to six times the new $15 minimum wage. This is why servers love their jobs -- they want the tips.
Any restaurant owner will tell you how much they value their back-of-the-house staff (the cooks, janitors and dishwashers), who are doing some of the most demanding, labor-intensive work. As business owners, we work most closely with this group and we pay these workers better than the minimum wage. On average, our kitchen workers earn more than $15 even now -- that is the reality in this tightening labor market.
When there is a mandated increase in the minimum wage, our limited labor dollars get eaten up by bumping up the base pay to our tipped employees. Generally, tipped employees make up two-thirds of our staff. Over the course of four years, the minimum wage will increase over 60 percent, with most of the money going to our tipped workers. The initial cost, just for the authors' three local restaurants (without calculating employment taxes, workers' comp insurance and other taxes) will be well over $500,000. Again, almost the entire sum will be going to our most highly compensated employees and leaving us even fewer resources to compensate our non-tipped employees.
The irony doesn't end there.
Although current California law does not allow businesses to include tips toward calculating income, the state does consider those same tips as income for taxation purposes. State law reads, "Tips received in excess of $20 per month by the employee from the customer in the form of cash, check or any other monetary item of exchange are wages subject to Unemployment Insurance, Employment Training Tax, State Disability Insurance, and California Personal Income Tax." In addition, the federal government requires us and our employees to pay federal employment taxes on these same tips.
Last month, the City Council passed an ordinance that will move us to the $15 minimum by 2019, several years faster than the rest of the state. That's not necessarily a bad idea, and make no mistake, we do support an overall $15 minimum wage. As we wait for a second reading of this new ordinance, we continue to urge Palo Alto, and the state, to consider the unique situation of tipped workers by taking into account their total pay and compensation.
Organized labor groups and the unions that have pushed for minimum wage increases recently urged our City Council to pass an ordinance with no exemptions. That means no consideration for our tipped employees. Yet, under Palo Alto's new ordinance, unions and certain government agencies are exempt from the city's new minimum wage. More irony.
Most are thankful for the labor community's efforts to improve working conditions. In California, we pride ourselves on our progressive values. But we are also small business owners, who operate on thin profit margins. The average profit margin in restaurants is 5 percent. Think about what that means: $1 million in sales leaves $50,000 at the end of the year. In tech-heavy Silicon Valley, it's easy to forget that not all businesses have budgets in the billions.
We are trying to operate in an environment governed by blanket policies devoid of nuance or caution. Add to that the fact that our locally owned businesses are competing against national chains that have more marketing power and can regionally keep prices low. It's against that backdrop that those of us who operate small businesses are having to raise our prices -- in order to pay our most highly compensated workers. That doesn't seem progressive at all.
Accommodation for tipped wages may not be possible without the state's help. City Council members have acknowledged that they are concerned about legal action from organized labor groups and unions and are reluctant to challenge the state law that prohibits the recognition of tipped income toward wages. But, whether it's local or state government, small business owners -- who are already beginning to buckle under the weight of numerous new regulations -- must be allowed to receive some sort of credit for the total earnings of these tipped workers. That would make it easier for our businesses to balance the pay between the front and back of the house -- and that would be true progress.