News


Guest Opinion: Rethinking minimum wage -- One size does not fit all

 

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

Michael Ekwall

Galen Fletcher
As a patron, you are probably unaware of the convoluted federal and state laws that govern our businesses and the tips that are left for your servers. The law prohibits your tips from being shared with employees who are not in the direct line of service -- specifically, dishwashers and cooks.

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.

Michael Ekwall, Jesse Ziff Cool and Galen Fletcher are owners of, respectively, La Bodeguita del Medio in Palo Alto, Flea Street Cafe in Menlo Park, and Sundance The Steakhouse in Palo Alto.

Comments

8 people like this
Posted by Gunn Parent
a resident of Gunn High School
on Oct 7, 2016 at 8:55 am

This discussion completely leaves out a large class of food service workers who are considered "front of the house" but do not get tips - baristas, cashiers and hosts/hostesses. These employees may share in a tip jar or may be tipped out by the servers but they represent a large class of employees that is frequently paid below minimum wage. Like other service worker jobs in Palo Alto, it is not teens who have these jobs but adults who need to pay rent and take care of their families. This trio of wealthy restaurant owners is making the case that they have no option but to raise prices and that an increase in the minimum wage will only hurt workers. Sorry,but there is another clear option, share your profits with the workers who help you earn them everyday.


6 people like this
Posted by Me
a resident of Old Palo Alto
on Oct 7, 2016 at 2:11 pm

"This trio of wealthy restaurant owners is making the case that they have no option but to raise prices and that an increase in the minimum wage will only hurt workers."

Very few restauranteurs are "wealthy." Clearly you have never run a restaurant (or any small business). Typical restaurant margins are less than 5%.

Maybe it's because of the "greedy customers" that are unwilling to pay more for their take-out food. Oh wait - that's called economics, where there is an intersection of supply and demand.

Prices go up, demand goes down. Imagine that.


Like this comment
Posted by john_alderman
a resident of Crescent Park
on Oct 7, 2016 at 2:24 pm

john_alderman is a registered user.

@Me "Prices go up, demand goes down. Imagine that."

For labor and goods!


4 people like this
Posted by Gunn Parent
a resident of Gunn High School
on Oct 7, 2016 at 5:01 pm

Me

Funny thing about internet posts - you don't know who you are talking at. Actually I am a small business owner. I pay my workers well above minimum wage. Why? I value loyalty and understand that constant training and turnover negatively impacts my workforce and more importantly my customers.


4 people like this
Posted by Plane Speaker
a resident of Crescent Park
on Oct 7, 2016 at 5:35 pm

Is it minimum wage or tax policy you are rethinking ... try to be clear before you write a big long article please. Since there are three of you on the byline it might also be fitting to disclose your motivations for this article?

Because it sounds like you want special legal treatment so you get to keep money that is made in tips by your employees, either directly or in tax savings? Am I reading that wrong?


3 people like this
Posted by Me
a resident of Old Palo Alto
on Oct 7, 2016 at 7:55 pm

@Gunn Parent,

Good for you. Most food and retail establishments don't do as well as you. Having family who have run restaurants in the past, I am intimately familiar with the low margins of restaurants. If you're such a wealthy small business owner that can afford high priced labor, maybe you can afford to pay higher prices for your restaurant food. So why are you complaining about another small business owner raising their prices?


4 people like this
Posted by Joe
a resident of Another Palo Alto neighborhood
on Oct 8, 2016 at 3:17 pm

[Portion removed.]

Both Perry Group International and The Restaurant Brokers have completed studies on the average life span of restaurants. Their results are slightly different but show the same trend. The Perry Group study concluded that most restaurants close during their first year of operation. Seventy percent of those that make it past the first year close their doors in the next three to five years. Ninety percent of the restaurants that are still operating past the five-year mark will stay in business for a minimum of 10 years. The Restaurant Brokers’ study, the only one to make a distinction between chain and independent restaurants, concluded that up to 90 percent of independent establishments close during the first year, and the remaining restaurants will have an average five-year life span.


5 people like this
Posted by Perspective
a resident of Barron Park
on Oct 9, 2016 at 9:27 am

Labor studies across the state and country show that most restaurant workers, tipped or not, are among the lowest paid in our society. So yes, the laws should be nuanced enough to compensate for tips, but let's keep in mind that many workers across the state do not make much, even with tips. PA wages are such an aberration that it's not relevant in a statewide or national level.


7 people like this
Posted by sea reddy
a resident of College Terrace
on Oct 10, 2016 at 11:41 am

We need wage increases.
Rents have gone up.

It's ok to pay $1-2 more to pay for hamburgers to pay for increased wages.

How else can the low end workers survive?

Respectfully


6 people like this
Posted by Native to the BAY
a resident of Downtown North
on Oct 10, 2016 at 12:42 pm

Sorry to say - I don't know of any local resturaunts who pay thier employees health insurance or paid holidays or vacation pay. A waitress earning $30 an hour for 4 - 7 shifts a week supporting her family frankly, gets eaten up (excuse the pun) rather quickly, would you not say? I read somewhere that in this area it would take earning $64 an hour to actually keep a family housed, clothed and fed - barely a head above water around here.


6 people like this
Posted by A Noun Ea Mus
a resident of Professorville
on Oct 10, 2016 at 2:43 pm

I read the article. All I see is a bunch of greedy disgruntled restaurant owners salivating at the tips they see on the tables. They want to use the tips "issue" to throw smoke at the fact that progress is finally being made against the lowering of effective wages. Why is this drivel being even printed or spread?


4 people like this
Posted by BrownJ
a resident of Menlo Park
on Oct 10, 2016 at 3:07 pm

In Paris, they have "service compris" which means the tip is included in the price. So if people don't have to tip I think they will be willing to pay more (15-20% more, at least) for their food. Then the increased revenue can be distributed equally. I've always hated tipping. But I love Flea Street Cafe and go there for most of our celebrations!


Like this comment
Posted by rocco
a resident of another community
on Oct 13, 2016 at 5:48 pm

The authors of this article have nailed it. The discrepancy in pay between the FOH and BOH is insane. Eventually tips will go away to be replaced by either : the tablet, the service charge ( so the monies can be evenly divided amongst all) or all inclusive pricing. Those in the business know the truth. The rest of you are just whining....


Sorry, but further commenting on this topic has been closed.

Salt & Straw Palo Alto to open Nov. 23
By Elena Kadvany | 0 comments | 4,332 views

Lakes and Larders (part 2)
By Laura Stec | 0 comments | 1,469 views

Can we ever improve our schools?
By Diana Diamond | 8 comments | 1,364 views