In an earlier edition of the Hospitality Headline, I wrote about how tipped wages had hit an inflection point across the United States and was in line for a major transformation. Specifically, the article detailed three major cities (Los Angeles, Chicago, and New York) who were all discussing significant changes to hospitality wage structures.
Again, political decisionmakers have resurfaced with potentially significant ramifications. Chicago looks set to approve a law that would abolish tips credits, while California wants to enact a law that could raise minimum wage for fast food workers to $20. This week, I want to examine the financial implications to owners and operators.
First, Chicago is considering a law that will abolish tips going toward minimum hourly wages, also known as tip credits. This law is not a new concept as they would be joining nine other states who operate under this law. Michael Roper, a restaurant owner just outside of Chicago, understands that this proposed law would require him to overhaul his entire system. “There’s going to be a manager meeting and full staff meetings, in which we’re going to start new protocols — where tip money goes and how we’re going to staff.” (Eater)
It is widely believed that this law will force restaurants to raise their prices to cover added labor costs, which in turn may discourage customers from dining out. Food prices in Chicago have already risen sharply since the beginning of the pandemic, according to the Bureau of Labor Statistics, reaching an 8 percent rise from the previous year by the end of 2022. “Prices will probably rise and I do think that we will probably be a little more careful about how many people we have on the floor,” says Roper. (Eater)
According to Toast, an industry leading POS system, tips in the second quarter of 2023 were down to 19.4%, the lowest tip average since the start of the pandemic. Toast believes this could be due to tipping fatigue, inflation, or the new addition of service fees in restaurants. (Eater)
Service fees in particular, typically 3.5%, are becoming increasingly popular. Sam Toia, president of the Illinois Restaurant Association, says that the addition of service fees means that servers don’t necessarily reap the direct benefits of their effort. Restaurant owners can do whatever they want with these fees, including paying more to back of house workers. As servers make less money, quality of service will continue to drop, and restaurant owners will hire fewer of them, potentially opting for technology to help out. (Eater)
Over the long term, fewer restaurants will operate on a full-service model, instead pivoting to counter or limited service as it requires fewer staff members. Another option would be to employ digital kiosks to take orders, where Chicago restaurants like Honey Butter Fried Chicken and Wow Bao are ahead of the curve, already adopting touchscreen ordering.
Meanwhile, in California, the state is close to enacting law that would raise the wage floor to $20 for workers at fast food chains with at least 60 locations. Even though minimum wage is $15.50 in the state, this increase is projected to cost each restaurant in the state $250,000 annually, a cost that “cannot simply be absorbed by the business model.” The National Owners Association, an independent advocacy group of more than 1,000 McDonald’s owners, believes this new legislation will “destroy the franchise model in California and strip thousands of restaurant owners of the right to run their business.” Similar to Chicago, this increase in wages will also fall onto the consumer in the form of menu price hikes. (CNBC)
While California might believe they are attacking a global food superpower in McDonald’s, in fact, this new law will fall onto individual owners. The NOA argues that 95% of California’s 1,3000 McDonald’s are locally owned and operated by small business owners who will require serious financial help to adapt to these news requirements. (MSN)
I do not believe either these laws will be detrimental to the majority of operators. Instead, it should be seen an acceleration of tipped workers being paid for what they are worth, with an increased reliance on technology to make up the difference. While it might lead to a financially challenging transition, the future of the industry will be better for it.