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Servers want $12 an hour; restaurant owner says he can't afford it

By Lindsay VanHulle/Bridge Magazine • Oct 28, 2018 at 2:00 PM

The way he sees it, Tom “Dewey” Bramson doesn’t have a lot of good options if he has to hike what he pays servers at his Michigan restaurants from $3.52 to $12 an hour (before tips) over the next several years.

If Michigan’s new minimum-wage law takes effect in its current form, he says it would cost his company $1.6 million a year in wages alone — a cost he says he can’t absorb.

Bramson could pass it on to customers by, say, raising menu prices at Harrison Roadhouse, Rick’s American Cafe or The Riv in East Lansing. But customers are willing to pay only so much for a meal or a drink at a restaurant before they’ll go someplace else.

Or he could close all 10 bars and restaurants, but he said he has no intention of walking away after 33 years in the business. Instead, Bramson said, he likely will cut labor costs in other ways: By reducing servers’ hours, giving customers tablets to place their orders — or perhaps doing away with tipping.

“If I could charge somebody $5 for a beer right now, I would. But I can’t,” he said.

“I can’t raise prices 30 percent and then ask somebody to continue to tip. You know what I mean?” he said. “We can’t put all the onus on the guests.”

The restaurant industry has become a target of activists for its opposition to raising the state’s minimum wage for waitstaff and other workers who rely on tips.

While low-paid workers in all industries — including servers — will see a boost from a higher minimum wage law adopted last month in Michigan, criticism of the restaurant industry centers on its business model, in which waitstaff are paid far below minimum wage with the expectation they will earn the rest of their income in customer tips. (Restaurants must pay the difference, known as a tip credit, if they don’t.)

So-called “One Fair Wage” campaigns have entered the political fray across the country. Many servers support the idea, saying they can’t now consistently make ends meet by working one restaurant job. But others say they already earn more than $12 with tips on an average day and don’t want to see their earnings shrink.

While chambers of commerce and other Michigan business groups oppose the idea of raising Michigan’s minimum wage on grounds that it would weaken the state’s economic competitiveness with neighbors, the state’s restaurant lobbying group says the law poses an “existential” threat to the industry.

That’s as restaurants — which tend to operate on slim profit margins — already face disruption from automation, technology and new methods of delivering food. (Think Uber Eats, and ordering kiosks at McDonald’s.)

A Michigan Restaurant Association survey of members revealed 80 percent say the fair-wage law would have a significant negative impact on business, including a solid majority that would raise menu prices and lay off staff if the law takes effect as is.

Supporters of One Fair Wage — led in Michigan and across the country by a New York-based group, Restaurant Opportunities Centers United — say restaurant owners are overstating the wage burden in an effort to get lawmakers to sabotage voter-backed minimum-wage hikes and preserve the two-tiered wage system.

Lawmakers, in fact, have done just that elsewhere. In Maine, and more recently in Washington, D.C., voters adopted ballot initiatives to raise the minimum wage, including for tipped employees, only to have state and local legislators reinstate the tip credit.

And it is likely to happen here.

The Republican-controlled Michigan Legislature voted in September to adopt the One Fair Wage proposal, and a separate proposal to require employers to offer paid sick leave. By passing the voter initiatives and keeping them off the November ballot, lawmakers said publicly that they wanted to make it easier to change the initiative later. (Had it allowed voters to approve the measures in November, the Legislature would have needed a three-quarters vote to change it, rather than the simple majority they’ll need to change a law the Legislature itself passed.)

Supporters of the fair-wage initiative expect the Legislature to try to scale back the minimum-wage law in lame-duck session after the Nov. 6 election.

Ballot proponent Restaurant Opportunities Centers said the lower tipped wage, which it contends predominantly hurts women and minorities, perpetuates workplace sexual harassment, racism and poverty.

The group is a federal 501(c)3 nonprofit organization that reported total revenue of more than $9.8 million in 2016, according to its most recent federal IRS Form 990. It allows employers to become members, but asks those who join to “champion living wages, basic benefits (and) fair promotion policies,” according to its website.

Its ROC Action Inc. lobbying arm is a 501(c)4 group that does not have to disclose donors. ROC Action gave more than $687,000 in direct and in-kind contributions to the Michigan One Fair Wage campaign as of July, state campaign finance records show.

Rachel Burnett, a bartender at Krystal’s Korner on Detroit’s east side, said her current job gives her little reason to complain.

The job pays her, on average, $15 per hour with tips, more than she said she has earned at other jobs during a six-year career in restaurant service. Burnett said she can pay her bills, and the flexibility the job offers allows her to work around her two children’s school schedules. It wasn’t always that good.

Before this job, she said, a slow night, or construction traffic, or spending most of a shift attending to one large party rather than multiple smaller groups could determine whether she brought enough home to afford child care or buy gas for work the following week.

“It would be hit or miss. I might make good money one day, and then I might not get any business for weeks,” Burnett said. “Being able to have that substantial, decent minimum wage, that can kind of make up for those times.”

'A 241 percent increase'

Under the law Michigan legislators adopted in September, the minimum hourly wage for workers who don’t rely on tips will increase from $9.25 this year to $10 on Jan. 1, 2019 and incrementally each year until it hits $12 on Jan. 1, 2022.

Starting in October 2022, the minimum wage will be adjusted annually for inflation.

The increase will be more gradual for employees who receive tips. By 2022, when the full minimum wage hits $12, tipped workers will receive 80 percent of that wage. It will equal the minimum wage for all other workers by 2024.

Even then, under the law as passed, tipped workers still will be allowed to collect tips from customers. The industry today uses a process known as the “tip credit” — when an employee doesn’t make enough in tips to reach the full minimum wage, his or her employer is required to pay the difference.

Seven states — Washington, Oregon, California, Nevada, Alaska, Montana and Minnesota — require tipped employees to receive the full minimum wage before tips. One Fair Wage has launched state campaigns in Michigan and on the East Coast.

Michigan’s legislation, as adopted, equates to a 241 percent wage increase for restaurants, said Justin Winslow, president and CEO of the Michigan Restaurant Association, which placed a wage calculator on its website for its members to estimate the costs for their own business.

The Michigan Restaurant Association is leading its own ballot committee, Michigan Opportunity, that unsuccessfully sued to block the One Fair Wage proposal. The opposition effort had more than $281,000 on hand as of July, with at least $75,000 in contributions from the National Restaurant Association and thousands more from restaurant operators in state and outside Michigan.

“I’d love to know any industry that can absorb a 241 percent increase to their costs of doing business without having to make dramatic changes,” Winslow said. “I know it probably sounds like hyperbole, but there will be several restaurant closures if you went to a full $12.”

Raising the wage paid to servers and ending the tip credit could have unanticipated consequences for the industry, said Melissa Wilson, a principal at food service industry research firm Technomic Inc. in Chicago, which advises the restaurant industry.

Technomic’s chain restaurant clients have ruled out expansions in states that don’t have a separate tipped wage for future locations, she said.

Winslow, of the MRA, said he appreciates the good intentions behind the proposal. But he and others in the industry said servers could wind up making less in the long run, for a variety of reasons — reduced hours; cutting the gratuity option from customers’ bills; and more automation, which could lead to servers handling more tables at once, which could lead to less human attention paid to tipping guests.

“If I had been among the folks framing this proposal, I think I would have been happy to go for $12 an hour, but I’m not sure that I would have tried to disrupt this custom that’s built up in the restaurant industry,” said Charles Ballard, an economist at Michigan State University. “We don’t really know how tipping behavior is going to respond, and I think there’s a big chance that it would” be less generous to workers.

Restaurant Opportunities Centers pushes back against the notion that the One Fair Wage campaign is designed to kill tipping.

“Let me be very clear: None of this is about eliminating tipping,” said Pete Vargas, campaign manager for Michigan One Fair Wage and a national director with Restaurant Opportunities Centers United who helps with workforce training related to economic mobility.

“All we’re really doing is eliminating the sub-minimum wage.”

Yet Joshua Chaisson, co-founder and vice president of Restaurant Workers of America, a separate group that claims to represent servers and advocates for keeping the tip credit, said Vargas’ initiative will perpetuate wage disparities among restaurant workers.

The argument effectively says that servers deserve the same base wage as people who work in the back of a restaurant, Chaisson said, plus 20 percent more in tips that cooks and dishwashers aren’t entitled to claim.

“I don’t think that that’s fair,” he said.

The costs to restaurants

The restaurants’ opposition to the wage law, they contend, comes down to basic math.

Labor is among a restaurant’s three largest costs, along with rent and food, industry insiders said. In Michigan, labor averages about a third of restaurants’ operating costs, Winslow said.

A restaurant also has to account for equipment, inspection and licensing fees, utilities and maintenance, as well as plan for longer-term upgrades.

Bramson, the East Lansing restaurant operator, said it costs his company $36,000 a year just to play music at his locations and $26,000 a year to maintain one parking lot.

“Those are expenses that nobody sees,” he said.

Bramson got his start in the business by working as a bouncer at an East Lansing nightclub in the 1980s, and later worked his way up to management.

He has been president of Equity-Vest Inc., a hospitality and property management company with 10 restaurants and bars in its portfolio, since 1996, and later bought the company. His locations, mostly in East Lansing, are well-known to Michigan State University students, alumni and fans. He also operates Nuthouse Sports Grill in downtown Lansing and a few others in Michigan.

“A lot of people see a lot of people (at) a restaurant on a Friday or a Saturday night and they think, ‘Man, they must be making a lot of money.’ They don’t see Tuesday lunch, Sunday dinner or anything else,” Bramson said. “They just see that they could pay $1 for a beer at the store and I’m asking them for $4, and think that we must be making a ton of money.”

Effects still unknown

The impact on the restaurant industry, though, is still speculative in Michigan. The state law isn’t scheduled to take effect until at least March, roughly 90 days after the current legislative session ends in December, and it’s unknown whether lawmakers will try to amend it before then.

Researchers have found positive and negative outcomes from raising the minimum wage in places where it has happened. The range of results is partly because so few people actually make the minimum wage, said Ballard, of MSU.

Low-wage employers are increasingly raising their starting wages. McDonald’s, for instance, pledged to raise its entry wages by $1 more than the local minimum wage at its locations. Target Corp. is now offering starting wages of $12 an hour, with a goal of $15 by 2020.

Ballard said he thinks Michigan and the nation could absorb a $12 minimum wage with only slight negative effects on employment, because the wage increases so far have been modest. Those effects would be more pronounced the higher the wage goes, Ballard said, though economists can’t say for certain how high is too high.

“We’re not saying $12 an hour up front. We’re saying over a period of time,” said Vargas, of Michigan One Fair Wage. “If they’re an employer that doesn’t feel that their labor is worth $1 more an hour now, I don’t know what to tell them.”

In places that have already raised the minimum wage, research has been mixed on how successful the policies are. One recent paper from researchers at the University of California, Berkeley, analyzed wage hikes on the food service industry in Seattle and a handful of other American cities and found that a 10 percent raise in the minimum wage correlated with higher earnings, with no significant job losses.

“I’m not saying every business will be able to survive — the weaker ones probably won’t — but they will be replaced by stronger ones,” Michael Reich, one of the Berkeley researchers, told Bridge. “From a societal standpoint, if one restaurant is replaced by another, that’s not a negative effect, even if that former restaurant owner feels hurt by the minimum wage.”

His findings were contradicted by a separate study of Seattle’s minimum wage increase, conducted by researchers at the University of Washington. They looked at low-wage work in all industries, not limited to food service, and found that even though hourly wages increased, hours worked were cut and average earnings in 2016 fell by $125 per month.

The Michigan League for Public Policy, which advocates for policies to support vulnerable populations, said that more than 450,000 Michiganders would directly benefit from raising the minimum wage, and another 565,000 already earn more than what the minimum will be raised to, but their employers also would raise their wages, citing an analysis it requested from the Economic Policy Institute. The Michigan Association of United Ways has found that 40 percent of Michigan households can’t afford basic necessities, even as many of them are working.

“These are folks that, although they go to work every single day, they still — because their wages are so low — have to rely on food stamps,” Vargas said.

“We’re always trying to raise the floor for all workers,” he added, “because we know that the more money that workers make in this economy, the better the economy is.”

That sentiment has given rise not just to One Fair Wage, but also to the Fight for $15, through which fast-food workers, among others, advocate nationally for a higher wage and union representation.

Servers: Keep tipping intact

Restaurant Workers of America, the group that wants to keep the tip system for servers, formed this year after efforts to reinstate the tip credit were successful in Maine.

Chaisson, its cofounder and a bartender in Portland, Maine, said many of his group’s members are college-educated and working in the hospitality industry by choice. They understand the economics of the industry, he said, and their place in it.

Restaurant Workers of America is organized as a federal 501c4 organization, which is not required to disclose its donors. Its website notes that it accepts restaurant operators as members, along with employees. (BuzzFeed News and the Columbia Journalism Review have noted the group’s ties to the restaurant industry.) Chaisson told Bridge his group has not accepted any money from the National Restaurant Association.

Restaurant Workers of America says it is not opposed to a higher minimum wage, Chaisson said. Its primary focus is keeping the tip credit.

“Folks often say, ‘Well, you sound like someone who works for a restaurant owner or as a restaurant owner,’ but the reality is, is that the writing is on the wall for the entire industry,” Chaisson said.

On Saturdays, when MSU’s football team plays at home, Derik Jorgensen said he can make at least $15 an hour waiting tables at Harrison Roadhouse in East Lansing, once tips are included. He said he earns closer to $10 an hour on average in the fall, but business slows down in the summer months when college students leave town. Jorgensen said he will pick up odd jobs when his restaurant job alone is tight.

He said he would like to see Michigan increase the minimum wage for tipped employees, but that it doesn’t need to be the same wage paid to workers who don’t also earn tips.

“I don’t necessarily feel that it’s necessary for us to make that much,” said Jorgensen, who added that he participated in some recent Restaurant Workers of America events in Lansing and wants tipping to be maintained. “I can take those down weeks every once in awhile and eat less and go out less, but it would be a much more comfortable life if the wage was up just a little bit more.”

Winslow, of the Michigan Restaurant Association, said he would like legislators this fall to return to the 2014 version of the minimum wage law, with its inflationary increases and tip credit intact.

“The tip credit is so fundamental to restaurant economics,” he said. “To me, restoring that bipartisan 2014 deal is a good landing spot, and a fair one.”

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