As states and municipalities across the nation continue to increase minimum wages, restaurants are placed in a uniquely difficult position. Most employers simply raise the price of goods or services to make up for the increased labor costs. For restaurant owners, kitchen staff and other employees often have different minimum wages than tipped bartenders or waitstaff. Many owners have followed a new trend – eliminate tipping and pay all workers at least the standard minimum wage.
Ideally, a restaurant owner may want to implement a policy in which the tipped workers would be compelled to share their tips with the kitchen staff to help offset the increased cost of wages. However, because forcing such tip sharing is unlawful, restaurant owners are instead implementing a no-tipping policy and charging customers a 20% “administrative fee.” Under this business model, customers who usually pay a 20% gratuity are instead paying that amount directly to the restaurant. The restaurant is then able to use those “fees” to help absorb the cost of higher wages, keeping prices lower.
This cost-shifting strategy may become increasingly prevalent as minimum wages rise. New York Governor Andrew Cuomo pledged last week to fight for a state minimum wage of $15 per hour, which is more than double what the federal government requires. Employers are changing their business models to keep up with labor costs, and the restaurant industry’s approach creatively helps these employers meet their goals.
Restaurant owners may save on labor costs by charging the administrative fee, as well as experience decreased pressure to drastically raise prices. However, many owners are losing their best waitstaff because the incentive to work harder for higher tips disappears. Individual restaurants need to assess their unique needs and design the best strategy to make up labor costs.