How Restaurants Are Surviving Higher Minimum Wages

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From giving servers commissions to switching up whole formats, the tricks to tackling rising labor costs

For chef Nelson German, running a fulfilling restaurant meant full-service dining: It didn't feel right unless there were hosts at the door and servers whisking entrees from the kitchen to the dining room. When it came time to open his own business, Cajun-influenced Oakland, California, seafood restaurant AlaMar in 2014, he made sure it operated with the same attentive-service environment that he had grown accustomed to working in. But all that changed in December 2016, when the restaurant announced rather abruptly that it would be doing away with all the formalities of full-service dining in favor of a counter-service format. The root of the radical service change: minimum wage hikes.

“It was sad to make a change, honestly,” says German, who has 18 years of restaurant experience. “I’ve always been a full-service chef, and I was very, very reluctant.” But at the end of the day, the swap was necessary to keep the doors open. “I adapted, and it’s one of the best things I ever did.”

German is not alone. Minimum wages are on the rise across the country, with 18 states introducing new minimum wages on January 1. And as those changes are ushered in, restaurant owners like German might consider major adjustments in order to stay afloat in a dynamic environment with higher labor costs.

The Bay Area was one of the first regions to make a push toward higher minimum wages. In Oakland, voters passed a ballot initiative in November 2014 tying annual minimum wage increases to percentage changes in the Consumer Price Index, a Bureau of Labor Statistics measure that tracks the changes in price of certain products and services. As of January 1, 2018, minimum wages in the city increased by 37 cents to $13.23 per hour. Across the water in San Francisco, a November 2014 ballot measure, passed by 77 percent of voters, increased the minimum wage to $15 an hour starting July 1, 2018 (it currently sits at $14 per hour). In the following years, as in Oakland, increases to San Francisco’s minimum wage will be tied to changes in the Consumer Price Index.

German says he was hesitant at first, but “the change for us from full service to counter service has been great, honestly.” Sales at AlaMar have increased 17 percent since the full-service format, with a higher volume of customers since the transition. The restaurant was also able to slash the majority of menu prices by 30 to 50 percent, in part by cutting back on staff.

AlaMar’s front of house now consists of a single cashier. (It’s also joined the growing number of restaurants that have done away with cash transactions entirely; German says that transaction speeds are roughly seven seconds faster, not counting the time he personally saves by not having to make trips to the bank.) Back-of-house staff can also partake in a share of the tips through the quick-service format, unlike in the case of full-service restaurants, where the law (currently) prohibits that practice. Because ticket prices are lower, tips are somewhat adjusted, but German estimates employees now receive a 15 percent average tip.

In San Francisco’s Mission District, Bar Tartine alums Cortney Burns and Nick Balla similarly optioned the counter-service model as one way to cut costs. Their restaurant — initially a Japanese-influenced restaurant called Motze and now a Hungarian eatery named Duna — was established as a short-term experiment with an 18-month lease and the expressed goal of testing solutions to the restaurant industry’s pressing problems.

During its initial run, for instance, the restaurant went paperless and did away with tipping. However, following a crushing one and a half star review by critic Michael Bauer, the restaurant leadership changed direction, taking Motze fast-casual. Now in its second life, as Duna, the team has adjusted its format, instituting a counter-service model with food that would be more at home on a traditional restaurant menu than a fast-casual menu board. (It holds the occasional ticketed dinner, offering a more full-service experience.) Tipping is also back, and the restaurant offers delivery for those who’d rather eat in the comfort of their own home.

“The way to keep the price down and be accessible to people, [and still] make delicious food, is to make sure that we keep that lean labor model,” says Jamison Wiggins, Duna’s director of operations.

And like at AlaMar, creating a model where front- and back-of-house employees share in the tip pool helps alleviate the well-known pay gap between those groups of employees. A line cook might make $15 to $18 per hour on average at a traditional table-service restaurant in San Francisco, Wiggins explains, while servers might take home $40 to $50 per hour with tips. Duna’s format change, which has cooks delivering food and thus sharing in gratuities, has resulted in employee paychecks far closer to a living minimum wage — a pre-tax take-home of around $50,000 a year for full-time line cooks, plus a full benefits package. That heightened service expectation means more hospitality training is needed for cooks, but as Wiggins says, “The money’s there, and that keeps our staff very engaged.”

With Duna’s lease nearing its end, its owners are assessing the data they’ve collected as they prepare for the next chapter in a permanent space, expected to open in mid-2018. Wiggins anticipates much of the current format will continue in the new location, including counter service and ticketed events, with a few minor tweaks. Customers, for example, will have the option to text additional orders to the kitchen from their table rather than having to wait in line if they need more food or drink.

“We are excited for the pressures of a rising minimum wage and the other economic forces to really continue to push the industry to innovate,” Wiggins says, “so that we can get back to having a real middle class that exists in restaurants.”

For Tom Douglas Seattle Kitchen, new minimum wage rules forced the restaurant group to rethink how it approached gratuity. Seattle became the first major city in the country to pass a $15 minimum wage law in 2014, and large restaurant groups and franchises particularly took issue with the provisions in Seattle’s law requiring employers with more than 501 workers to raise wages on an expedited schedule — reaching $15 per hour by 2018. Tips were not allowed to be used toward the increases.

With multiple restaurants and more than 800 employees on its payroll, Tom Douglas Seattle Kitchen fell into this category. Chef Tom Douglas had been supportive of increasing minimum wages and reducing the wage disparity between front- and back-of-house employees, CEO/CVO Pamela Hinckley explains. However, she says the company felt that the ordinance was discriminatory toward bigger chains. “The number of employees you have doesn’t control what your profitability is,” she says.

Despite their objections to how the new requirements were enforced, the Seattle restaurant group began looking for ways to adjust. Hinckley says that increasing menu prices to make up for higher labor costs would have been more than “what the market could bear.” Reducing staff was also not an option. “You can’t [cut staff],” Hinckley says, noting that the restaurant boom — not to mention tech industry commissaries with competitive benefits — have made it difficult to find new service industry employees. “No! We’re looking for help. The hiring situation is ridiculous in Seattle.”

Rather than allowing customers to determine their own tip at the end of the meal, Tom Douglas did what many restaurants are beginning to do — he eliminated tipping and transitioned all of the group’s restaurants to a 20 percent service charge.

On top of the minimum wage, servers are now paid a commission based on sales and performance, accounting for 14 percent of the service charge. New servers are offered a starting commission between 10 and 12 percent based on experience. While each restaurant within the group has a slightly different checklist for determining the exact commission rate, servers are generally rated by managers based on criteria such as knowledge of the food menu, attendance, and communication with coworkers.

The rest of the revenue from the service charge is distributed to support staff, including bussers and hosts. The restaurant group had hoped to also share a portion with the back of the house, but in an effort to keep front-of-house “as close to possible to wages that they had been making with tips… there wasn’t money left over to go to the back of the house from that,” Hinckley says. Instead, back-of-house staff are paid out of the operating budget. “Needless to say, the labor expense is up companywide on average by close to 3 percentage points,” she says.

Hinkley says the most difficult part of implementing the new system was communicating the changes to customers. Tom Douglas made the switch three restaurants at a time, starting in 2016. “We had a lot of open house trainings and written materials, but you just can’t do enough for that,” she says. “It put our frontline people in very uncomfortable situations to have to talk about the economics of the restaurant business.”

Several years into the transition, the jury is still out on how the wage increases in Seattle will impact the overall restaurant industry. One study, by the University of California Berkeley, found that not only had the wage hike achieved its goal of improving pay for restaurant workers, but it did so without impacting jobs. A separate study, conducted by researchers at the University of Washington, also found that low-wage workers’ earnings improved as predicted, but observed a modest lag in hours worked compared to regional trends, and a small decline in the employment rate of low-wage workers. Researchers concluded that some of these numbers may have been overshadowed by a robust Seattle economy. However, others have found flaws in the University of Washington study.

Anecdotally, some restaurants have shut their doors in the wake of the minimum wage increases. And in the short term, restaurant owners in municipalities with newly implemented minimum wage increases will have to look to their peers in other trailblazing cities for ways to succeed in an unfamiliar economic environment.

For her part, Hinckley is glad that people are finally having a conversation about how to provide employees with better wages and benefits, even if that sometimes makes her job more challenging. “It’s really important to take care of our people because the hospitality industry needs to survive as an important social function,” she says. “So we’ve all got to figure this out.”

by Brenna Houck January 23, 2018, 2:21 Source: Eater.com

Brenna Houck is an Eater.com reporter and editor of Eater Detroit.