Like it or not, The Fight for $15 is a battle workers are going to win. The federal minimum wage has been stagnant for more than a decade now (it barely went up even in 2009), and more cities and states are already taking it upon themselves to force employers to give workers a much needed boost.
In reality, employers should be glad it’s just a Fight for $15 and not what an actual cost of living wage would be for their area. For example, a living wage for a family of three in Arkansas is about $25/hr. A single employee with no kids working in Oklahoma needs $17/hr to live.
The good news is that areas that have increased their minimum wage haven’t seen anything close to the catastrophic predictions coming from the National Restaurant Association and similar groups. In fact, it’s done the opposite for local eateries.
And while H.R. 582, the “Raise the Wage Act” passed by the US House is rotting away in the Senate “graveyard,” restaurant operators can’t expect that to be the case forever. The federal minimum wage will increase at some point in the near future and operators are better off prepping their business for it now than when a law is actually passed.
Here’s how to prep your restaurant for a minimum wage increase.
Calculate What an Increase Will Cost You
Labor costs typically eat up a huge amount of a restaurant’s expenses, so an increase in wages mean it’s going to eat into more of your (current) profit. Your first step in prepping is seeing how much a minimum wage increase would balloon your labor costs, and it’s best to consider worst case scenarios, too.
Take the “Raise the Wage Act” bill, for example. Not only would this raise the federal minimum wage to $15 by 2024, but it also will adjust annually for inflation costs. Not only that, but the bill would also eliminate the “separate minimum wage requirements for tipped, newly hired, and disabled employees.” That means your entire staff is making at least $15 an hour. No more sub-minimum tipped wages to help ease your labor costs.
Here’s how to figure out what an increase would cost you:
If your wage increases by $2/hour on average due to a mandated increase, and your previous average wage was $13/hour, then that is an increase of about 15%. Now, if your prices stay the same and your prior labor cost was 35% then your new labor cost is 40%. That is a profit loss of 5%. This is much you need to increase your prices to cover the new labor cost.
Increase Income or Decrease Labor?
Once you figure out how much a mandated minimum wage increase is going to cost their business, you need to decide to just eat that profit loss or find a way of making up the difference. The two major ways of doing this is to find a way to increase your restaurant’s income or decrease your labor.
Decreasing labor is typically the rallying cry of people opposed to the minimum wage, stating that an increase in labor cost will mean operators will cut hours or fire staff. However, data has shown that not to be the case when mandated wage increase have been adapted. The study concluded that minimum wage increases affect labor neither negatively nor positively. That said, it’s still an option on the table that operators can consider.
The upside of decreasing labor is that you don’t need to tweak your financials much, especially your menu prices which has been a hairy ordeal for operators in the recent past.
The downside to decreasing labor to make up the profit loss is that your service will suffer. You’ll be running understaffed most times and the staff you do keep will be working extra hard and burnout. This will affect the guest experience in your restaurant which can lead to bad reviews and, ultimately, business failure. Not to mention a cut in hours means a higher chance of your staff walking out the door for a better gig, and it’s extremely expensive to replace employees once they’re gone.
The downside of keeping everyone on staff at the same work volume is you need to either just eat that profit loss or find another way to increase your income. This can be done in creative ways such as selling branded products (such as jars of your famous pasta sauce, or t-shirts) or turning your dining area into a co-work space. But more likely than not you’ll need to raise your prices in some way.
The upside to this is that you get to keep your entire stellar staff at full capacity. This will keep your service quality high and guests happy. That can’t be undervalued.
Service Surcharge or Menu Price Increase?
If you’ve decided to keep your entire staff at their current work volume, you’re also probably not going to want to just eat that profit loss. That means you need to increase your cash flow somehow.
Outside of looking at alternative revenue streams, the two main strategies for this is to increase menu prices or add a service surcharge. They each have their strengths and weaknesses worth considering.
Starting with menu price, we mentioned that raising menu prices can be a bit hairy for restaurants, however, the instances where it failed have been specifically in attempts to get rid of tipping for a more standard and consistent staff wage. It made those tip-less restaurants appear more expensive when, in reality, the final bill would be roughly the same cost for guests. But when menu prices increase more uniformly across an area, the impact is less noticeable. An advantage of raising menu prices is that it doesn’t disrupt the guest experience too much from the normal. Their bill is their bill with the usual taxes applied. There’s no hidden fees that may come as a surprise. The downside, of course, is guests not wanting to spend more than they did yesterday. Give them the right experience, however, and it’ll be little concern.
Alternatively, operators could add a service surcharge to the bill instead of raising menu prices. The upside to this is that menu prices stay the same, so if all the other restaurants around you raise prices, you’ll look less expensive by comparison. The downside is that surcharges can be hit or miss with guests. It can appear to be an underhanded way of milking guests for every dime their worth. However, it can be done successfully. Adding a service surcharge to bills has be done thoughtfully, with care, and with clear communication to guests.
It’s Inevitable
Like it or not, the minimum wage is going to increase in the near future (if it hasn’t already yet in your city or state). Better to start preparing for the increase now so you’re prepared. Ambitious restaurants may even want to implement their own higher “minimum wage” so they’re ahead of the game. In that scenario, when a mandated increase hits, your guests won’t notice a change at all.
