Restaurant operators face an increasingly complicated patchwork of minimum wage increases that have been building ever since the last Congress-approved hike to $7.25 an hour in July 2009.
Fueled by increased pressure from worker groups and public sentiment that favored higher minimum wages, cities and states over the past two years have been quilting together increases that have especially flummoxed restaurant operators affiliated with national brands and franchisor organizations.
On Thursday, for example, New York Gov. Andrew Cuomo’s administration approved plans to phase in a minimum wage for limited-service restaurant employees of $15 an hour from the current $8.75. The increase was approved by the state labor commissioner after the New York Fast Food Wage Board made the recommendation in July.
That New York panel, convened at the governor’s direction, roughly followed a path forged by the Seattle city council, which in June 2014 approved raising the city’s minimum wage to $15 an hour, becoming the first of a growing number of municipalities to raise the base wage to that level.
But Seattle’s council approved a tiered plan that required business with 500 or more employees, including franchised restaurants, to phase in the $15 an hour minimum by 2017, giving smaller businesses until 2019 or 2021 to meet the new level.
As one Subway franchisee with two units in Seattle and one in Everett, Wash., told Nation’s Restaurant News: “All my roads lead to: I’ve got a tough year coming up.”
David Jones, president of Jones Brothers Inc., which owns those Subway units, as well as the Blazing Onion restaurants outside Seattle, added: “It’s simple for me. A dollar increase an hour for my employees, if you run it across the schedule, takes away roughly 25 percent of my income.”
Jones said the 17 workers at his Seattle units are scheduled to get hourly increases to $13 from $12 an hour on Jan. 1, 2016, and to $15 on Jan. 1, 2017. The problem, he explained, is that his Seattle University store is on a street with eight restaurants in a three-block area, and only his and another eatery are part of a national franchise brand. The other six restaurants face a minimum-wage increase to $12 on Jan. 1, 2016, and to $13 on Jan. 1, 2017.
“That means next year, on Jan. 1, when the minimum wage goes up two bucks at my restaurants, I will lose 50 percent of my income and the other restaurants will possibly lose 25 percent of their income,” he said.
On Sept. 1, lawyers for Seattle franchised restaurants and the International Franchise Association argued before a three-judge panel of the U.S. Ninth Circuit Court of Appeals that the fast-tracked wage increases unfairly discriminate against local franchisees. The franchisees and the IFA are seeking to overturn a U.S. district court judge’s denial in March of a preliminary injunction to keep them from having to meet the master timeline. No timeline has been set for the appeals court decision.
Jones said wanted to be clear that he does not oppose raising the minimum wage if all worker groups are treated the same. “This trend of classifying groups as they want, it doesn’t make sense to me,” he said. “For everybody to survive and for people to enjoy going out to eat, everything needs to be equal,” he said. “Right now, they are picking out people who will make more.”
The pressure has been building
The restaurant industry, which with about 14 million employees makes up about 10 percent of the nation’s workforce and is the largest U.S. private-sector employer behind health care, has grown into an especially big target for proponents of those groups seeking to increase the minimum wage.
And, while total U.S. employment grew only 1.9 percent in 2014, the National Restaurant Association said industry employment grew 3.5 percent.
In addition, the U.S. has about 1 million restaurant locations, the NRA said
“Restaurants are pervasive, and many people get their first job in restaurants,” said Jonathan Seyoum, co-owner of seven Original Pancake House restaurants in Dallas-Fort Worth, Texas area. “The entry into the industry is very easy.”
With so many restaurants offering so many entry-level jobs, and with some states allowing tip credits, the number of workers earning less than the federal mandate is sizable.
The Bureau of Labor Statistics said that in 2014 about 1.7 million U.S. workers were paid less than the federal minimum of $7.25 per hour. And a gender gap exists. Among workers who were paid hourly rates in 2014, five percent of women had wages at or below the prevailing federal minimum compared with about three percent of men, that BLS study found.
Those BLS numbers do not include tip credits, whereby many states allow table-service restaurants to pay a cash wage of $2.13 or more an hour and calculate tips to bring the hourly wage up to $7.25 or more.
For example, Seyoum of Original Pancake House in Texas, said, “We try to pay competitively and include a premium for skills. We still do the tip credit $2.13 an hour plus tips for servers, who generally end up getting between $14 and $15 an hour.”
But violations still exist. A report by the Department of Labor in December estimated that in New York and California alone, there are 560,000 violations of the law every week, representing $33 million in lost income.
The stereotype of restaurant jobs as a low-skill positions with little room for advancement hasn’t been helped by a smattering of “bad apple” operators who prey on workers, Seyoum added. “They do make it a good target.”
For example, a federal judge in August ordered the popular Hibachi Grill and Supreme Buffet in Jonesboro, Ga., just south of Atlanta, to pay nearly $2 million in unpaid wages and damages to 84 employees after the U.S. Labor Department investigated. The department’s wage and hour division found the restaurant never paid overtime and forced employees to only work for tips, some of which it took between 2010 and 2013. One worker was found to be owed $154,000.
The 18-month Great Recession, which officially began in December 2007 and ended in June 2009, left many workers unemployed or under-employed and wages stagnated. On July 24, 2009, the federal minimum wage rose from $6.55 an hour to $7.25, the last of a three-step increase Congress had passed in 2007.
Amid unemployment at 10 percent in December 2009, organized labor, such as the Service Employees International Union, began looking at the restaurant industry for its potential membership. Those groups began forming coalitions with other movements such as Occupy Wall Street and Restaurant Opportunities Center United.
Saru Jayaraman, co-founder and co-director of ROC and director of the Food Labor Research Center at the University of California Labor Center, appeared on television programs to point out the inequity in executive and line worker pay.
Many of those restaurant-industry pay chasms remain. In a survey released in August, for example, Chipotle ranked No. 2 among S&P 500 companies in CEO-to-worker pay with a ratio of 1,522 to 1, lagging only Discovery Communications with a ratio of 1,951 to 1. Glassdoor compared Chipotle CEO Steve Ells’ total pay of $28.9 million to the median work’s total pay of $19,000 a year.
Chipotle shareholders have raised concerns about executive pay, with about 77 percent of them voting at Chipotle’s annual meeting in 2014 opposing the co-CEO’s compensation in an advisory ballot.
Pay-disparity concerns raised in other industries led the Securities and Exchange Commission, beginning in 2017, to require public companies to disclose the ratio of CEO pay to median worker pay.
But “fast-food” executives have drawn special attention. Bloomberg Industries data found “fast-food” companies had a CEO-to-worker compensation ratio of 1,203 to 1 in 2012. That figure was just 211 to 1 in 2000.
The CEO-pay argument resonates with the public and has led Democratic politicians to push for minimum-wage increases.
President Barack Obama in 2013 called for Congress to raise the minimum wage from $7.25 to $9 an hour, and in his 2014 State of the Union address supported a Democratic lawmakers’ proposal to raise it to $10.10 an hour. Those efforts have been stalled in the Republican-led Congress.
With no action at the federal level, individual states and cities have stepped in to raise the minimum wage in their jurisdictions.
Operators' approach
The local efforts to raise the minimum wage hit especially hard on limited-service chains. Most limited-service restaurant chains spend between 20 percent and 25 percent of revenue on labor.
Todd A. Penegor, The Wendy Co.’s chief financial officer, told analysts in an early August second-quarter earnings call, that his company continued to see pressure on wages from two fronts.
“One is minimum wages at the state level continue to increase,” he said, which leads Wendy’s to raise wages to be competitive in certain markets.
“We've made some adjustments to that starting wage in certain markets,” Penegor said. “The impact hasn't been material at the moment, but we continue to look at initiatives on how we do work to offset any impact to future wage inflation through technology initiatives, whether that's customer self-order kiosks, whether that's automating more in the back of the house in the restaurant, and you'll see a lot more coming on that front later this year from us.”
Other brands, such as Chipotle Mexican Grill, are watching regions and, in some cases, prices to accommodate necessary increases in wages.
John R. Hartung, Chipotle’s chief financial officer, said in a recent earning call that “we typically pay above minimum wage in all of our markets, so a normal increase in local wages usually has little effect on us. But in some local markets the minimum wage has been or soon will be pushed well above our national average rate.”
Hartung cited the San Francisco Bay Area as an example.
“The minimum wage was recently increased to over $12 an hour,” he said. “This increase coupled with higher occupancy and other operating costs excluding food costs contribute to an overall cost of doing business of 30 percent or more than our average Chipotle.”
Hartung said menu prices in the San Francisco area were until recently only about 4 percent above the typical Chipotle and were lower than most competitors in the area.
“So as a result of looking at all of these factors, we decided we were underpriced in San Francisco and we recently increased prices by 10 percent in the 10 restaurants within San Francisco and by seven percent for the 74 restaurants outside San Francisco in the Bay Area,” he said.
Hartung said, however, that Maryland’s recent minimum-wage increase to $10 an hour was being absorbed because the overall costs of doing business in that state were what he called reasonable. The company was planning no immediate increase in pricing the Maryland restaurants, he noted, and the same held for prices in Chicago after a higher minimum wage was enacted there.
“Our objective will always be to keep our menu accessible to our customers,” Hartung said, “while being able to recruit the best people we can with competitive wages in each market and also while considering the overall cost of doing business and competitive prices in the area.”
With restaurant companies adopting compensation packages to meet regional labor pressures and states and cities enacting their own thresholds, the patchwork of minimum-wage standards will likely continue into the foreseeable future.
Contact Ron Ruggless at [email protected].
Follow him on Twitter: @RonRuggless
