Labor shortages, rising wages, and mounting overhead costs are pushing the restaurant industry to think broader than the bare minimum.

Sonja Finn started her culinary career as a prep cook at age 18 in her hometown of Pittsburgh. After graduating from The Culinary Institute of America in Hyde Park, New York, she headed to San Francisco and worked her way up through high-profile kitchens like Zuni Café and Rotunda at Neiman Marcus then to Cambridge, Maryland, where she helped open Bistro Poplar.

“All that time, I disagreed with how the restaurant industry was run,” Finn says. She returned to Pittsburgh in 2008, to open Dinette as a referendum on the old model, paying staff a living wage and offering health insurance to full-time employees. Dinette servers start at $15 per hour, and the lowest paid back-of-house employee starts at $13.50 in a state that pays the same minimum wage as the federal level, with a slightly higher tipped wage of $2.83.

READ MORE: What is rising minimum wage really doing to restaurants?

“The whole idea behind Dinette was that yes, I was a chef and opening a restaurant with my food, but it was a restaurant based in sustainability—not just environmental—but also that there could be a better way to run a restaurant, where people are treated as professionals and paid a good wage, where food prices on the menu were not subsidized by underpaying staff,” she says.

Those first few years the restaurant was instead subsidized by Finn’s own labor and meticulous bookkeeping; she was at once the chef, sous chef, HR department, and front-of-house manager, supported by a handful of line cooks and servers (she’s since hired a salaried sous chef). In 2017, she eliminated tipping altogether, which she compensated for by raising menu prices 15 percent—far below the 22 percent average tip on top of tax. Dinette has always been profitable, though Finn runs labor costs between 40 and 45 percent.

“While I have the agency to do this, what I’m doing is very difficult and at a huge cost to myself,” she says. “Everyone else doing this would suddenly get to profit like everybody else is if they just raised the minimum wage, made these requirements universal, and helped small businesses get there so everybody had to charge for food what labor and food actually cost.”

‘$15 in New York is not $15 in Georgia’

The minimum wage has been on the rise in cities and states around the country for years. Twenty-nine states and D.C. have a higher wage floor than the federal level, and some 44 cities have adopted minimum wages above state levels. Eighteen states began 2019 with higher minimum wages—10 of them due to previously approved legislation or ballot initiatives.

In Milwaukee, where the wage floor still mirrors the federal level, chef Justin Carlisle decided the best way to pay a living wage at his three restaurants was to eliminate the front- and back-of-house distinctions, hire fewer people, and pay them better. Starting hourly wages at fine-dining Ardent, counter-serve spot Red Light Ramen, and the Laughing Taco taqueria are $11 or $12. Almost 40 percent of his 26 employees are salaried, and staff are all cross-trained on everything from cooking to running food to polishing silverware.

“All my restaurants are entirely open kitchens,” Carlisle says. “I don’t have a front of house and back of house; I have employees. I wanted to give everybody a better opportunity than the setting we grew up with.”

He compensates through seeking out lower-rent establishments and ensuring employees are diligent on food and liquor costs. Still, Carlisle’s labor cost averages anywhere from 37 to 46 percent. Operating without front- and back-of-house designations hasn’t been easy; to prove to the Internal Revenue Service he wasn’t personally skimming from employees, Carlisle has had to go through his personal and business taxes with a fine-tooth comb, resubmitting them every year since opening Ardent five years ago.

Carlisle grapples with the potential impact of eliminating the tip credits. He says that the lack of clarity surrounding legislation like H.R. 582 could create more loopholes for predatory investors and owners.

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“The bill states nothing about what’s going to happen to tips,” he says. “How will that be allocated and taxed? For those of us that are already paying employees more—even the kids at Laughing Taco make $15 or $20 per hour per shift—do we say no more tips or set a service charge? There’s this large lump sum of money now that there’s no discussion about.”

His fears are echoed by the National Restaurant Association (nra), which slammed HR 582 as “the wrong wage at the wrong time, implemented the wrong way,” citing a Congressional Budget Office (cbo) analysis that the bill could end up eliminating 3.7 million jobs.

The association is calling for a common-sense approach to minimum wage that reflects the economic realities of each state and region. “Fifteen dollars in New York is not $15 in Georgia,” says NRA advocacy spokesperson Jeff Solesby. “Because 90 percent of restaurants are small- and family-owned businesses, we know that increasing it too high or too soon can cripple these restaurants, which are an integral part of their community fabric.”

In places where unemployment remains elevated and wage growth has been stagnant,  new restaurant openings will be severely constrained or will turn negative, says Micah Rowland, chief operating officer of hiring automation software provider Fountain. “When unemployment is near the national average or even lower, job growth will slow, and wage increases will be more moderate.”

He anticipates that the shift toward automation and delivery will increase as operators seek more revenue out of fixed assets and tighter competition slows hiring.

Yet for all the negative outcry surrounding the CBO analysis, it’s hard to deny the benefit that a higher minimum wage would have for an overwhelming share of low-income workers. A $15 wage floor in 2025 would boost the wages of some 27.3 million low-wage workers, increase the income of families earning below three times the poverty rate by $21.9 billion, and reduce the number of people living in poverty by 1.3 million, nearly half of them under age 18.

“I think there are different paths to getting to a living wage,” says Adam Orman, co-owner and general manager of L’Oca d’Oro, a tip-free restaurant in Austin, Texas. “At some point you can’t just keep raising hourly rate. There has to be a point where it becomes about profit sharing and mixing salary in with that.”

The problem with tipping

America’s relationship to tipping is unique, as one of the only countries that allows businesses to leave a fair wage to customer discretion. A 2008 Cornell University report found that some diners let race, gender, and attractiveness impact how much they pay servers and that diners of all races tend to give higher tips to white servers and lower tips to black servers. Both male and female servers working in tipped-minimum wage states report higher rates of sexual harassment; women are twice as likely to report experiencing sexual harassment in those states, according to Washington, D.C.–based advocacy group ROC United.

In Seattle and San Francisco, which have high minimum wages and no subminimum wage, tipped workers receive higher take-home pay than their counterparts in cities like D.C., according to the bipartisan Economic Policy Institute. The institute also reported 20 percent lower poverty rates compared to cities with a separate tipped wage, plus a significant decline in reports of sexual harassment—all without damaging business.

Solesby notes that eliminating the tip credit remains unpopular in a lot of circles, particularly among servers who make an average of $19–$25 an hour on top of minimum wage. He points to efforts to end the tip model in Maryland, D.C., Michigan, New Mexico, and Maine, which ultimately failed because voters and employees overwhelmingly support tipping.

Staff and customer buy-in was the biggest challenges for L’Oca d’Oro for the first six months after it opened tip-free in 2016. Servers start at $8 per hour, and all back-of-house employees start at $12, and a 20 percent pre-tax service charge is distributed to all front- and back-of-house staff based on hours and role. Staff make 23 percent of net sales on average.

Orman attributes the initial hesitation to not marketing the service charge positively or aggressively enough. Now the charge is communicated on all menus, every page of L’Oca d’Oro’s website, and itemized and signature receipts; servers highlight it, too. But Orman is careful to minimize its impact on the customer experience. Servers are instructed to pick up receipts before customers leave to make sure they haven’t left an additional tip by mistake.

Restaurant Customers Cheers Glasses Around A Table

Ashley Christensen has instituted performance evaluations for annual compensation reviews.

The kitchen has seen the most obvious windfall, though Orman notes that servers don’t have to worry so much about making up tips for taking off Friday or Saturday nights. Engaging the kitchen in the hospitality charge is also a motivator for the whole staff on busier nights.

From an operator perspective, having control over all of the restaurant’s revenue has been another notable benefit. “We’re not letting whatever-in-tips walk out the door every night,” Orman says.

When Dinette eliminated tipping, Finn opted not to include a service charge or tip line to create a more hospitable experience for the customer that doesn’t end with tip lines or service charges. She admits that she worried about losing customers because her prices went up across the board, but the restaurant remains profitable.

As operators uncover economically feasible ways of paying a living wage, the onus shifts to the customer to ask questions about and better understand the price, which could help reduce some misperceptions about what getting food on the diner’s table actually costs.

“The price of everything goes up, but food that has been made for you in this space where [everything] is supposed to stay the same price,” Finn says. “It’s always in our minds as restaurant owners, that fear.”

Professionalizing the restaurant industry

A higher base wage also represents another stride toward professionalizing the restaurant industry, which for most positions is still considered more of a transient job than viable career.

“If the government says it’s OK to pay somebody $2 an hour, how are we supposed to tell a 45-year-old parent that they have a real career?” Orman says. “We absolutely believe it’s better for our community to have workers making a real wage and receiving a baseline of benefits that are more similar to the corporate economy.”

Orman joined a few socially responsible Austin businesses to start a trade association called Good Work Austin. By establishing criteria, the group helps businesses qualify for economic development incentives through the city government, which, in turn, eases the burden of higher wages. It also promotes the notion that healthy workers and a healthy workplace beget a healthier community with more sustainable growth.

Ashley Christensen, the North Carolina–based chef and owner of AC Restaurants, is taking a more gradual approach to increasing wages. Because of the size of her restaurant empire—which includes Poole’s Diner, Death & Taxes, and Chuck’s—her expenses are greater.

The starting pay for servers and bartenders is the tipped wage of $2.13 an hour, while kitchen staff start at $10.50. (North Carolina aligns with the federal minimum wage and tipped wage.)

Instead of financial incentives, the company emphasizes education and professional development for managers. Staff have full transparency on their restaurants’ profits and losses and are empowered to invest in their teams through thorough training. The company systemized performance evaluations, too, so every employee has the opportunity to be reviewed for a compensation change on an annual basis.

“These practices have enabled us to keep our labor costs in line and even lower, at times than where we’ve been previously,” Christensen says. “Nothing is more expensive than attrition, so our approach to controlling labor is to create a managerial environment that encourages longevity for our employees … through wages, but also through professional development and thorough training.”

Indeed, as restaurants continue to open at a breakneck pace, workers will increasingly flock to employers who can offer decent pay with room for professional development.

“I’m a strong believer in supply and demand,” says Dinette’s Finn. “There are so many restaurants out there. We don’t need another new one; we don’t even need the ones we have. But we do need more good jobs. I think those of us creating good jobs will be valuable because that is what is needed.”

Feature, Labor & Employees, Legal