Restaurant operators face an onslaught of changing wage and tip credit rules as state lawmakers increasingly scrutinize compensation, especially in the legislative vanguard states of California and New York.
“Restaurants are terrified,” said Jeremy Merrin, owner of three full-service Havana Central restaurants in New York, which faces both higher state minimum wage floors at the end of this year and new regulations on tip credits that they are allowed to take.
“Wages and tips are becoming increasingly scary,” he said. This summer, Merrin will open his fourth Havana Central restaurant in New Jersey, bringing his business to about 520 employees. “The whole wage scale goes up. It’s not just the minimum wage.
“We’re looking at what could be easily anywhere from a 15-percent to 30-percent increase in wages because you’re going to get this wage creep that goes all the way up the ladder,” said Merrin, who also serves on the board of the New York State Restaurant Association.
Lawyers and accountants are also working to keep up with the myriad changes across the nation.
“It’s really amazing to see how fast things have changed and are moving right now,” said Riley Lagesen, partner and chairman of the restaurant industry practice group at the law firm of Davis Wright Tremaine LLP.
Possible solutions to deal with the changes are varied, and operators must choose those “that fit their needs the best,” said Melissa Fleischut, president and CEO of the New York State Restaurant Association. “We’ve definitely heard from the larger chain restaurants that they are moving toward tablet technology at the table,” she said. “But there are other restaurants that that doesn’t work for.”
Wages and the handling of tips are “front and center for everybody in the restaurant industry,” Lagesen said earlier in April as he joined colleagues Roy Salins, partner in employment law in New York, and Janet Grumer, partner in employment law in Los Angles, for a webinar, “Crunched From the Coasts: New/Proposed New York and California Wage Legislation and Strategies for Handling.”
The federal minimum wage last increased in July 2009, when Congress raised it to $7.25 an hour from $6.55 an hour. That has forced lawmakers to deal with minimum wages at the state level, Fleischut said.
California and New York have a large impact on foodservice wage trends. In its 2015 forecast, the National Restaurant Association said the two big coastal states have a total of 2.4 million foodservice workers, with 1.6 million in California and 796,000 in New York. California this year ranks first in the size of its restaurant workforce, ahead of Texas, with 1.2 million, and Florida, with 943,600. New York ranks fourth.
The new regulations on wages and tips also come amid a nationwide “Fight for $15” effort that began in July 2013 to increase wages in retail and service industries. Restaurant operators are seeking ways to grapple with the changes, Lagesen said, while remaining fair to employees and customers.
“We’re seeing large businesses such as Walmart and McDonald’s affirmatively take steps to try to get ahead of it with wages increases across the board,” he said. “This is an area where we will continue to see a lot more activity. A lot of that legislative activity is happening in New York and California.”
Many states allow for tip credits, which essentially allow a deduction from an employee’s regular hourly wage, as long as the total of the tips and the pay combined equals or exceeds the state’s minimum wage.
Seven states including California require employers to pay workers the full state minimum wage before tips. The others, according to the U.S. Labor Department’s wage and hour division, are: Alaska, Oregon, Montana, Nevada, Washington and Wisconsin.
But in February, New York issued a change in how tip credits are assessed, Salins said.
“On Feb. 24, the acting commissioner of the New York State Department of Labor issued a wage order related to tipping practices in the restaurant industry,” Salins said. “The most significant portion of the order is that it significantly decreases the tip credit that restaurants are able to take for their foodservice workers and non-foodservice workers. And it also ends the distinction with respect to tip credits and minimum cash wages that can be paid.”
Eliminate tipping and take no tip credit
New York currently mandates an $8.75 hourly minimum wage. For restaurant servers, bussers and runners, Salins said that requires a cash wage of $5 and a tip credit of $3.75. For non-foodservice workers such as coat check and delivery people, that is a cash wage of $5.65 and a tip credit of $3.10.
“Under the new wage order, which will become effective Dec. 31, 2015, New York restaurants must pay all of their tipped employees a minimum cash wage of at least $7.50 an hour regardless of whether they are a foodservice worker or non-foodservice worker,” Salins said. “And since the New York minimum wage is scheduled to increase to $9 an hour starting Dec. 31, 2015, this wage order will effectively reduce the tip credit that restaurants in New York State take from $3.75 or $3.10 to $1.50 for all tipped employees.”
In California, Grumer added, the minimum wage is currently $9, and will rise to $10 an hour on Jan. 1, 2016. West Coast states of California, Oregon and Washington have no tip credit.
“We are paying the full freight here, even for tipped employees,” Grumer said.
Individual California cities have passed their own minimum wage laws.
“It’s startling,” Grumer said. “None of these are pre-empted by the California minimum wage standard.”
Berkeley, Oakland, Richmond, San Diego, San Francisco, San Jose and Sunnyvale have passed measures that raise or will raise the minimum wage above the statewide $9, and measures are under consideration in Los Angeles and Emeryville. Eureka, Calif., is the only municipality to reject an increased minimum wage.
In New York, restaurant operators have four options for dealing with the changes in tip credits, and lawyers said many other states will likely consider changes along similar lines.
The Davis Wright Tremaine hospitality legal team outlined those options as:
No. 1: Eliminate tipping and take no tip credit
This is the simplest option, Salins said, and it would require the operator to pay all tipped employees at least the minimum wage of $9 an hour and abolish tipping in the restaurant.
“One of the biggest issues with this is it’s a disincentive for wait staff to provide the kind of quality of service that restaurants want,” Salins said. “If there is no tipping at all and no tip credit beyond the hourly wage, you may find the wait staff may not be as attentive to the customers than they otherwise would be.”
The increased cost of labor would also have to be factored into menu prices, he said.
Take no tip credit
No. 2: Allow tips but take no tip credit
Lawyers said tipped employees would have to be paid the $9 minimum wage and would need to monitor tip pool compliance closely.
No. 3: Take no tip credit, eliminate tipping and charge an “administrative fee”
“This is probably the most complicated of the options,” Salins said. “If there are specific disclosures, employers can charge customers an administrative fee and use portions to pay the staff.”
Salins warned that it must be clear to the customer than any additional charges are not a gratuity.
Specifically, in New York City, if a mandatory “service charge” is added to the bill, it must be conspicuously disclosed to the consumer before the food is ordered, Salins said.
“Recently, last August, there was a case decided out of the federal court in Manhattan, involving Darden Restaurants, where an 18-percent mandatory gratuity was challenged as violating a consumer protection statute in New York State,” Salins said. “The person argued that it was a deceptive business practice to have this 18-percent mandatory service charge.”
The court upheld the mandatory gratuity on procedural grounds, Salins said. The New York State Restaurant Association has requested a legal interpretation, he added.
“Operators are encouraged to never use the term ‘service charge’ on a bill or menu,” Salins said. “Here in New York, the state will likely interpret such a charge as gratuity and then require it to be distributed in its entirety to the service staff. From an operational standpoint, you can see where the restaurant will run in into a series of troubles.”
The statute of limitations on wage issues is six years in New York State.
“The only acceptable term, according to the New York State Restaurant Association, and I agree with it, to use for a charge that’s not going to be distributed in its entirety to the staff is ‘administrative charge,’” Salins said, which would make it more palatable to the department of labor and an audit.
Grumer said the administrative charge is the same as what has been used for years for large parties in the restaurants.
Grumer said California has an “unfair business practices law” that might be used to challenge service charges that don’t disclose where those fees go.
Gary Levy, partner and hospitality industry practice leader at accounting consultancy CohnReznick LLP, said the tip credit changes also impact Federal Insurance Contributions Act deductions for Social Security and Medicare.
“Operators are looking at that and asking, ‘How can I offset that with changes in my operations?’” Levy noted. “There’s been dialogue among leading operators in the New York metro area about eliminating tipping altogether and becoming a restaurant that has a service charge, which may be a solution.”
In addition, he said, restaurants would have to seek rulings on whether or not sales tax would be applied to the administrative fee.
Business as usual
No. 4: Maintain business as usual
Under this option, Salins said New York restaurants would pay tipped employees $7.50 and hour and take a $1.50 tip credit.
Tip sharing would be subject to tip pooling regulations and, in New York, would apply only to non-managerial employees, Salins added.
Grumer said she has been talking with West Coast clients about allocating a portion of gratuities coming in to a tip pool and giving the employees a choice of participating in a mandatory tip pool that excludes the back of the house or a voluntary tip pool that includes them.
“This way, employees can choose to opt in to the voluntary or the mandatory, depending on what they want,” Grumer said.
Consumer sentiment also must come into play with a restaurant’s decision, Lagesen said.
“We’re seeing early indications of public sentiment that’s against surcharges of any kind,” Lagesen said, citing a Seattle restaurateur who initially added a surcharge to accommodate that city’s graduated increase in the minimum wage to $15 an hour.
Merrin of Havana Central said lawmakers are making restaurateurs’ jobs more difficult.
“It’s becoming an administrative nightmare,” he said. “My real fantasy is somebody has to sit down with a calculator and start calculating what all these additional rules, regulations and requirements are costing us. Small guys aren’t going to be able to deal with them.”