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Debate over restaurant pay rates wages on

Restaurant pay practices have come under fire in the wake of worker protests across the country, with some government officials seeking to raise the minimum wage to as much as $10.10 per hour.

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Since last December, protests by quick-service restaurant workers demanding higher wages and the right to unionize have become commonplace, occurring regularly at select sites nationwide and culminating on Aug. 29 in a 60-city blitz.

At issue are pay rates that put workers below the poverty level and the ability to effectively advocate for better benefits, according to protesters. To rectify the situation, protesters are calling for wages of $15 per hour — more than double the current federal minimum wage of $7.25 — and freedom to organize without pressure from corporate or franchise management.

The gatherings have garnered headlines from Boston to Los Angeles, highlighting stories of single parents struggling to make ends meet and putting the restaurant industry in the crosshairs of the ongoing debate over increasing the minimum wage — a rate few operators say they even pay.

“You have to pay more than minimum to get talent,” said Tom Holt, founder and “chief bread head” of the six-unit, fast-casual Urbane Cafe chain based in Ventura, Calif., where the starting wage is $9 per hour, $1 above the state’s minimum wage of $8 an hour.

Still, labor organizers and sympathetic critics are pushing the Fight for $15 campaign, with the goal of increasing the minimum wage to $15 an hour. Along with showcasing individuals making $7.25 per hour, stories have surfaced of workers pocketing only the $2.13 per hour some states allow employers to apply to a tip credit.

That argument gained traction in early September, when an opinion piece by Scott Klinger, an associate fellow at the Washington think tank Institute for Policy Studies, was published in several newspapers. The piece, titled “Why Your Waiter Hasn’t Gotten a Raise in 22 Years,” explained that the $2.13 per hour tip wage has not changed for decades, helping “large restaurant corporations and their CEOs pad their bottom lines while trapping millions of American workers in economic insecurity.”

Klinger wrote: “From 1966, when the tipped minimum wage was first introduced, until 1996, it was pegged at 50 percent of the prevailing minimum wage. But aggressive lobbying by the National Restaurant Association, which is dominated by large restaurant chains, removed the linkage and froze the minimum wage for tipped workers at its 1991 level of $2.13 an hour. Since then, about half the states have either raised the tipped minimum wage or have no minimum wage at all for tipped workers. For the rest, $2.13 an hour remains the standard.”

The article also called out Darden Restaurants Inc., the casual-dining behemoth with more than 2,100 restaurants worldwide and more than 200,000 employees. Klinger noted that in 1991, when the tipped wage was frozen, “Darden reported $2.6 million in sales per restaurant. By 2013 sales per restaurant increased 52 percent to $4 million. During the same period, the hourly pay of much of Darden’s wait staff increased by, well, zero.

“Only employees in Darden’s fine-dining Capital Grille restaurant chain and those in states that have adopted a tipped minimum wage that is higher than the federal minimum earn more.” 

Darden officials were quick to respond. Samir Gupte, the Orlando, Fla.-based company’s senior vice president of culture, penned a letter that was also widely published, defending Darden’s pay practices and asserting, “The accessibility of the American Dream may be in question in our country as a whole, but it is alive and well in the restaurant industry and is a passion and mission for us at Darden.”

Salaries range

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The opposing Klinger and Gupte op-eds exemplify the long-running debate between those who view the restaurant industry as the bastion of low-paying, dead-end jobs and those who see the industry as a first step toward prosperity for the talented and motivated.

Many operators maintain that their hourly pay rates are already higher than the federal minimum, and data from different research groups support their claims, finding that pay levels for hourly employees — both tipped and non-tipped — vary widely, depending on the state, the market, the employee’s experience and other factors.

Only about 12 percent of quick-service employees are paid the minimum wage, and those workers tend to have little to no experience, said Michael Harms, executive director of operations for People Report, a Dallas-based firm that tracks workforce trends in the foodservice industry.

“When we look at all hourly employees, 92 percent are paid above minimum wage,” he said. “As for those who are making the minimum or less, 25 percent have experience levels of 0.1 years tenure or less, 50 percent have half a year of experience or less, and 75 percent have 1.5 years of experience or less.”

Most of those earning minimum wage are also younger workers, with about 50 percent 23.9 years of age or younger. Twenty-five percent are age 20.5 or younger, Harms said.

Government data support Harms’ estimates. According to the Department of Labor’s Bureau of Labor Statistics, the mean hourly wage for a quick-service cook in 2012 was $9.03, with that rate ranging from $12.94 for the same position in New Haven, Conn., to $8.14 in rural Kansas.

Some QSR chains, like Irvine, Calif.-based In-N-Out Burger, have long been known for offering higher wages — and for attracting higher-quality workers.

Carl Van Fleet, vice president of planning and development for In-N-Out, which operates more than 280 units in California, Texas, Arizona and Utah, said the starting hourly wage for employees is $10.50 per hour, and most workers have the opportunity to increase their pay rate fairly quickly as they master different positions.

In-N-Out Burger
In-N-Out Burger starts entry-level associates at $10.50 per hour, well above the minimum wage. Credit: Newscom

In-N-Out’s pay practices can be traced to the chain’s founders, Harry and Esther Snyder, who focused on “taking great care of our customers, taking great care of our associates and maintaining an intense focus on quality,” Van Fleet said. “That focus remains firmly in place today, and paying our associates well helps us maintain it.”

The result is relatively low turnover in an industry where it’s not uncommon for restaurant workers to last only about six months, he said.

Kevin Burke, managing director for investment banking firm Trinity Capital LLC, said he has studied the profit-and-loss statements of hundreds of franchise operators within the quick-service world and “they do not and would not pay $7.25” as a matter of policy.

“They want a better cut of the bottom-wage universe,” he said. “If you pay more, you’ll get a better-quality employee. If you pay peanuts, you get monkeys.”

In addition, said Burke, workers who stay will see their wages increase in the second year.

“If someone’s making minimum wage after nine years, that’s a horrible indictment of the individual, not the system,” he said.

In an analysis of how a higher minimum wage would affect a strong quick-service operator today, Burke concluded that a mandated rate north of $10.25 per hour would seriously erode profits. At a mandated minimum wage of $11.25 per hour, the QSR operator, assuming all expenses except labor are constant, is posting a substantial loss.

Todd Scherwin, regional managing partner of the law firm Fisher & Phillips LLP in Los Angeles, which has a large hospitality clientele, agreed that the trend is to pay more than minimum wage.

“In my experience, other than the brand-new employee on probation, [pay rates are] 50 cents to $2 [per hour] over minimum wage,” Scherwin said. “Even in the smaller-run operations, $8 to $10 an hour is more common.”

Tipping points

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At full-service restaurants, dishwashers earn a mean hourly wage of $9.10 per hour, according to the BLS. Cooks have a mean wage of $11.20 per hour, and chefs and head cooks earn a mean of $22.39 per hour.

For servers, the mean hourly wage before tips is $9.95 per hour — ranging from $13.69 in the Boston area to $8.38 in Brunswick, Ga., according to the BLS.

Critics who point to states where the tip credit allows employers to pay servers as little as $2.13 per hour are neglecting to note federal law that requires employers to ensure those workers are making at least the minimum when the base pay is added to tips. Many servers make much more when tips are taken into account.

“No one makes $2.13 an hour,” Darden’s Gupte said.

Across Darden’s eight concepts, which range from the more value-positioned Olive Garden and Red Lobster chains to the high-end The Capital Grille, wages for hourly employees average $13 per hour and go as high as $21 per hour, with tipped employees earning $1 to $4 per hour more than non-tipped, Gupte said. Even bussers earn, on average, about $11 per hour at Darden restaurants.

Across the board, almost all workers earn more than $9 per hour at Darden, the minimum wage rate President Barack Obama called for in early February by the end of 2015. The president also called for that rate to be indexed to inflation going forward. Shortly after, Sen. Tom Harkin, D-Iowa, and Rep. George Miller, D-Calif., introduced the Fair Minimum Wage Act of 2013, calling for a federal minimum rate of $10.10 per hour by 2015. That wage hike would be phased in through three 95-cent-per-hour increases.

Meanwhile, California is the first state whose minimum wage is set to come close to that pay rate.

In September, state lawmakers approved a $2-per-hour increase by 2016. The minimum wage will rise in stages, with the first increase to $9 per hour set to take effect July 1, 2014. Jan. 1, 2016, the rate will jump to $10 per hour, giving the state the nation’s highest minimum wage — unless another state increases its rate before then.

Projected effect of an increasing mandated minimum wage, according to investment bank Trinity Capital LLC

So if restaurant operators are already paying more than minimum wage, why are proposed increases at the state and federal level so vociferously opposed?

Holt of Urbane Cafe said increases to the minimum wage have a ripple effect. As farm worker pay goes up, so does the cost of commodities, for example. With the combined impact of the health care mandate, minimum wage increase and food inflation, he said, “prices will have to go up.”

Chuck Conine, vice president of human resources for LYFE Kitchen Restaurants, based in Chicago, and a human resources consultant to the industry for many years, said it’s more about not wanting to be told by the government what to pay workers.

“The minimum wage is a floor; each time that floor is raised, employers may feel compelled to raise wages across the board,” Conine said. “That increases the cost of business for everybody, and it has the potential of raising menu prices.”

While putting more money in the pockets of workers could benefit the restaurant industry in the long run as people have more cash for dining out, it remains to be seen whether a minimum wage increase will do more harm than good.

“Will raising the minimum wage really put more money in some people’s pockets?” posed Scherwin of Fisher & Phillips. “Or will it lead to more people being out of a job?”

Contact Lisa Jennings at [email protected] [5].
Follow her on Twitter: @livetodineout [6].