I purchased my first restaurant in 1985, and I am currently the managing partner of 11 restaurants in Los Angeles, including Bestia, Republique, Barrel and Ashes, Redbird and Pettycash. Like everyone in the service industry, I have a keen interest in the debate over whether and how to raise the minimum wage in the city of Los Angeles.
My chef partners and I, along with about 200 other casual dining restaurant operators, support the proposals to raise the Los Angeles minimum wage, specifically one put forward by Mayor Eric Garcetti. However, our support is subject to two very important caveats: The law must include the “total compensation” concept and a longer phase-in period.
To understand our concerns, let me first explain the pay structure in our restaurants.
In casual dining, typically 50% to 60% of the employees are front-of-the-house employees (servers, runners, expediters, bus people and hosts). The rest are kitchen staff.
In a busy restaurant, the average tip is about 20% to 22% of revenue. This means an establishment with total annual revenue of $10 million has about $2 million in gratuities that can be shared annually among employees.
What many people don't realize is that all of that tip money goes only to front-of-the-house employees. None of it can be shared with the kitchen staff, according to California law.
The front-of-the-house employees in our group of restaurants are paid minimum wage by the restaurant. But when that is supplemented with tips, they actually make $30 to $60 per hour. The hourly kitchen staff makes $10 to $20 per hour, all paid by the restaurant.
Everyone in the industry understands that tips are fundamentally wages; so does the Internal Revenue Service. More often than not, the employer and employee must pay tax on these “supplemental wages.”
To ignore tips in a minimum wage discussion is, therefore, disingenuous. It would also be disastrous to the economy of our industry. Even if we raise prices, restaurants' labor costs would drastically increase, forcing some establishments to close and others to change to operations that need fewer employees.
The proposed city minimum wage increase is to either $13.25 or $15.25 per hour, depending on which plan is adopted. That is a 47% to 69% increase from the current state minimum of $9. Overall labor costs in a restaurant would go up by almost the same percentage, cutting deeply into profits and, given the tight margins in our business, quite possibly resulting in a net loss.
If, however, the city adopted the total compensation concept, I could see my way to maintaining a successful business.
Under that system, tips would count toward the new minimum wage — whether it's $13.25 or $15.25 — for employees who share in tips. If for some reason base pay plus tips didn't add up to the required amount, employers would of course have to make up the difference.
Labor costs would stay about the same for tipped workers, but still rise overall, because kitchen employees making minimum wage would get a boost to the new standard. That makes sense; it's the kitchen staff that's most in need of a raise.
For restaurants in the casual dining sector, the total compensation concept is absolutely essential. Any minimum wage plan that does not include this element would cause many restaurants to go out of business or move into the quick-service category, eliminating front-of-the-house employees.
As it happens, total compensation language is central to the new Seattle law that raises the minimum wage to $15 over three to four years for large companies and five to seven years for small companies.
And as in Seattle, it is vital that businesses have a long implementation period. Garcetti's plan calls for the minimum wage to reach $13.25 by 2017. Other proposals talk of reaching $15.25 by 2019. Employers need additional time to allow for a more gradual increase, especially if prices must be raised to offset the higher wage. A five-to-seven-year time frame, as in Seattle, would be reasonable.
These two fixes are what's needed to make the minimum wage plan fair to everyone.
Bill Chait is a restaurateur in Los Angeles.