Potential 156% cost increase rattles restaurant industry

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“Be patient, we’re like 3” reads the slogan on a T-shirt worn by a server at a popular restaurant in East Grand Rapids. The patio is full of customers, but as the waiter’s uniform indicates, the staff are few and far between.

Two years ago, unprecedented pandemic-related closures reduced once-bustling pubs and restaurants to glorified drive-thrus. Contactless payments and GrubHub orders have replaced sit-down meals, creating a shift in the customer service experience.

“No one wants to work anymore,” has been repeated, nauseatingly, by disgruntled hiring managers and restaurateurs since mandates restricting restaurant operations were lifted last summer.

Despite a widely acknowledged shortage of servers, a quick look at local help wanted ads on Craigslist reveals a few ads for kitchen help, but few, if any, requests for servers. Uncertainty about an impending pay rise for tipped workers could be one reason.

For decades, Michigan employers were required to pay just $3.75 an hour to workers who averaged more than $6.12 an hour in tips. A 2018 ballot initiative, the Workforce Opportunity Enhancement Act, sought to raise the standard minimum hourly wage to $12 for all employees, in all fields. The legislature passed the initiative and amended it, reducing the minimum wage to $10.

In late July, Michigan Court of Claims Judge Douglas Shapiro ruled that the legislature’s lowering of the minimum wage after the ballot initiative was passed was not legal and ordered Michigan businesses to raise the minimum hourly wage at $12.

As part of the ballot initiative, the minimum wage for tipped employees was to increase to 80% of the standard minimum wage on January 1 and 90% of the standard minimum wage on January 1, 2023. Starting in 2024, the credit for tipping will be completely eliminated.

The decision was immediately appealed and the implementation of the wage hike has been postponed until at least February 2023 while the case is under review. If confirmed, Michigan would be one of eight states to operate without a special wage concession for tipped workers. If implemented, operators would have to comply with labor cost increases overnight. This could be particularly problematic for small private restaurants.

“Thousands of independent restaurants are struggling to operate profitably right now, and many remain in debt due to the pandemic, so their ability to pivot to a new business model that would increase their cost of doing business by 156% overnight simply doesn’t exist,” Michigan said. President and CEO of the Restaurant & Lodging Association, Justin Winslow. “Tens of thousands of jobs would be lost and hundreds, perhaps more, of restaurants would be forced to close.”

The result could be the decimation of a Michigan industry that employs more than 595,000 people and generates $40 billion in sales each year.

In addition to a looming increase in operating costs in the salary category, results from a recent National Restaurant and Lodging Association survey reveal tough economic conditions in several categories across the books:

  • Compared to operating conditions in 2019, 90% say their restaurant is less profitable, 89% say total food and beverage costs are now higher, 67% say higher utility costs, 57% higher occupancy costs and 42% say business conditions are worse now than they were just three months ago.
  • When it comes to labor shortages, 93% said they have hard-to-fill vacancies and, even in light of operating cost issues, 92% of operators say they are likely to hire employees more over the next six months.
  • Additionally, 73% of Michigan restaurants said they do not have enough employees to meet customer demand, and 67% of full-service operators (restaurants that employ servers who earn tips) say their restaurant is currently more than 10% below required staffing levels, while 20% of limited service operators report that their restaurant is more than 20% below required staffing levels.

“The clearest conclusion from this data is that the industry remains extremely vulnerable and that another external shock, such as the immediate loss of tip credit, would have catastrophic consequences,” Winslow said.

Holly Wetzel, director of public relations for the Mackinac Center for Public Policy, which bills itself as a free-market research and education institute, commented on the findings.

“Restaurants in Michigan are still grappling with the aftermath of multiple government-imposed lockdowns and restrictions, in addition to dealing with rising inflation and supply chain issues. Additional burdens on these businesses, such as a higher mandatory minimum wage or the elimination of tipping altogether, could be detrimental to local restaurants. Business owners know their cost structure best and should be able to determine for themselves how to properly pay their employees,” Wetzel said.

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Cecil N. Messick