U.S. restaurants grappling with high costs and penny-pinching consumers are making a tough pitch to voters: that boosting pay to millions of workers is a bad idea.
At least four states are set to vote on measures to make restaurants pay servers a minimum wage regardless of how much they earn in tips. It’s a contentious move that business owners say will raise menu prices and kill jobs, Michelle Korsmo, chief executive officer of the National Restaurant Association, said in an interview at Bloomberg’s office in Chicago.
Worker groups have some momentum, though. Chicago last year approved the measure. Ohio, Arizona, Michigan and Massachusetts are now poised to ask voters for their input in November, a strategy that worked in Washington, D.C. If approved, it will be the first time a whole US state repeals the so-called tip credit in more than two decades.
“We have our work cut out for us,” Korsmo said last week. “The important thing for us is to get out early and say that this business model for the restaurants that employ it, it actually allows for them to keep prices on the menus lower and provide a really well-paying job.”
The battle over who’s supposed to foot the bill for restaurant workers’ wages is reaching a crescendo as eateries cope with still elevated labor costs. Restaurants have raised prices to offset inflation, but consumers are cutting back on dining out. Sit-down chains are among the hardest hit, and the industry argues ending the tip credit could harm small businesses and chains such as Olive Garden and Applebee’s.
The problem for the restaurant industry is that the issue is complex, and it doesn’t fit neatly into a snappy campaign slogan. Under the tip credit, workers earn at least $2.13, which employers have to supplement if gratuities don’t bring pay up to minimum wage.
Most of the workers make more than that, the association says, adding that the median tipped server earns $27 an hour. A higher base wage will force restaurants to raise prices, which would in term repel customers and potentially lead to fewer and lower tips, Korsmo said.
WAGE PRESSURE
The wage pressure on restaurants was evident in California, which doesn’t have a tip credit system. The state in April raised the minimum wage for fast food workers to $20 and hour, among the highest in the nation. The move was billed a win for workers but has also led outlets from Chick-fil-A to McDonald’s to raise menu prices and Bloomberg Economics to forecast as many as 90,000 job losses.
It may be hard to convince voters. Supporters of the measure say it will lift millions out of poverty, and labor advocate One Fair Wage, which is pushing efforts to repeal sub-minimum wages in 25 states, says the practice leaves workers at the whims of customers.
In a lawsuit against Olive Garden-owner Darden Restaurants Inc., advocates argued that relying on gratuities fosters sexual harassment and discrimination. The company, which didn’t reply to requests for comment, has denied the allegations.
“You are vulnerable to the fluctuations of weather, customer preference, customer biases,” said Saru Jayaraman, president of One Fair Wage, who expects voters to support the ballot initiatives. “All of those things go into how much you earn and whether you have enough to pay the bills and feed your family.”
RESTAURANT JOBS
In D.C., where the practice is being phased out following a ballot initiative, some restaurants have moved from the city to adjacent areas, Korsmo said. Full-service restaurants in DC shed more 2,800 jobs between May 2023 – when the phaseout started – and March, according to the association’s analysis of Bureau of Labor Statistics data.
In Chicago, restaurants are also gearing up to raise wages after the city adopted in October an ordinance to phase out the tipped credit by July 1, 2028. At the time, the trade group said the measure would boost costs for the city’s eateries by 15%.
Still, more than 60% of Chicago restaurant workers already make more than the city’s minimum wage for large employers before tips, according to data compiled by technology firm Square.
Pat Doerr, director of the Hospitality Business Association of Chicago, said that more operators might close on Mondays and Tuesdays, when traffic is already slower.
Restaurants will need to “really get out there early and explain the issue with clarity so that the citizens that are going to the ballot understand what they’re voting on,” Korsmo said.
Bloomberg writers Miranda Davis, Kim Chipman, Flynn McRoberts, Leslie Patton and Sarah McGregor contributed to this report.
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