From job cuts to hefty service fees, Initiative 82 is forcing operators to make tough adjustments.

Restaurants in Washington, D.C., are undergoing a major shift in the wake of Initiative 82. Approved by voters in 2022 and taking effect last spring, the measure gradually eliminates the system that allows employers to include tips in their wage calculations.

Previously, servers and bartenders in the nation’s capital earned a base wage of just over $5 an hour. Employers could use tips to bridge the gap and meet the district’s minimum wage requirement. They had to make up the difference if total earnings including tips fell short of the standard. 

I-82 set in motion a series of changes that will phase out the tip credit completely by 2027 and bring the base wage for tipped employees in line with the minimum wage for non-tipped workers, which is currently $17 an hour but increases periodically according to inflation. It started with a jump to $6 in May, followed by $8 in July. 

The nearly 50 percent increase, coupled with an already challenging operating environment, has left restaurants in the city scrambling to adjust. Another jump to $10 coming this summer adds to the pressure.

“I don’t think it’s an exaggeration to call it a catastrophic impact,” says Michael Saltsman, executive director of the Employment Policies Institute, a nonprofit research organization studying policy issues surrounding employment growth. “What we’re living through right now is a real-world experiment in D.C. Frankly, I think it validates a lot of the fears that people had.”

Restaurants in the district shuttered at a rate of roughly one per week last year, the highest peak since the pandemic, according to the Restaurant Association of Metropolitan Washington (RAMW). Employment took a big hit, too. Data from the Federal Reserve show D.C.’s full-service restaurants cut at least 1,300 jobs in the first six months after I-82 went into effect. That’s a 4.4 percent reduction in the workforce from May through November. 

Compounding factors like persistent inflation, fewer white-collar workers commuting to downtown offices, and an uptick in crime share some of the blame for the closures and job cuts. But those aren’t fresh challenges that emerged last year, and full-service employment in D.C. still grew 7.7 percent during the same six-month period in 2022, when those headwinds were already being felt.

RAMW’s 2023 member survey paints a clear picture of the struggles facing restaurants in the district. Almost all (96 percent) have raised menu prices, but inflation is outpacing the average increase of 16 percent. Eight in 10 restaurants are paying more for ingredients. Food costs are averaging 23 percent higher than in 2019. Six in 10 are facing higher occupancy costs, with an average uptick of 18 percent. Over 90 percent are paying at least 25 percent more in wages.

Moreover, three-quarters of restaurants surveyed by the group last fall are seeing diminished income, with profitability declining by an average of 34 percent versus pre-COVID levels. 

“I don’t think it ever would have been pain-free, but the fact that it’s happening now at a time that is uniquely difficult for the district’s restaurants just makes it that much more of a catastrophe,” Saltsman says. “The big thing that operators have been confronted with is figuring out how to offset this massive, unprecedented increase in labor costs in a way that minimizes the negative impact on employees and guests.” 

How are Restaurants Responding? 

Full-service operators are embracing QR codes, tablets, and other self-order technologies that enable fewer servers to cover significantly more tables per section. 

“There are some tangible ways to get labor out of the restaurant, but it sort of turns the tipped worker into a glorified food runner, so it reduces the opportunity for service,” Saltsman says.

Business owners also are embracing counter-service models. Take chef Matt Baker as an example. He operates an upscale French-American brasserie called Michele’s, a Michelin-starred tasting menu restaurant called Gravitas, and a fast-casual cafe called Baker’s Daughter. He told the Washingtonian late last year that he’s only considering expanding the quick-service concept thanks to I-82. 

In the past, Baker aimed for labor to fall below 35 percent of his operating costs. Lately, that figure is closer to 45 percent for his full-service restaurants. The fast-casual cafe, in contrast, is seeing labor come in below 20 percent.

By and large, the primary response has been tacking on supplementary charges as a portion of the total bill. Over 200 restaurants in the district have implemented service fees on customer checks to adapt to rising wages without further hiking menu prices. 

“Nationally, there’s a broad view that going out for a normal bite to eat has become more expensive, and that’s even more visceral here in D.C., where it’s becoming more and more expensive at an increased rate,” says Adam Halberg, CEO of Barcelona Wine Bar & Restaurant, a national tapas bar chain with two locations in the district. “It’s changing the attitude with which people are approaching restaurants in general.” 

The response from customers isn’t too surprising considering most operators already raised prices before the tip credit started phasing out. More than a third of local restaurants experienced a significant drop in sales over the summer and early fall, often between 30-40 percent, according to RAMW. Customer traffic was down for roughly half of local restaurants, with an average drop of nearly 30 percent. Similarly, research from the National Restaurant Association found 52 percent of customers in the district are eating at home more often because restaurants are levying surcharges. 

“Places like high-end steakhouses and Michelin-starred restaurants have always been expensive occasions, so I don’t think that’s a concern,” Halberg says. “Places that already had a more transactional experience can just continue leaning into technology to reduce the number of employees in the building, so that’s not really a concern, either. The real problem is the large swath in the middle—those places that don’t charge an egregious amount but still provide the experience of someone chatting with you at the table, those places you visit weekly or monthly and not just for a special occasion. Those are the places that are really hurting. We’re all doing our best to hold the line and remain affordable, but at some point, the math just doesn’t work.” 

Case in point: Baker has more flexibility to tackle profitability by adjusting prices for the tasting menu at Gravitas. He switched from five courses for $150 to four courses for $130 or six courses for $180 last spring. There’s a lower threshold for what customers are willing to pay at a brasserie like Michele’s, though, and that’s where he’s felt the biggest squeeze. He told the Washingtonian the restaurant faced substantial losses last year, requiring financial support from him and investors to cover the shortfall. 

Industry advocates warned that customers would shift their spending and take their business to neighboring areas once restaurants in D.C. started adding surcharges to offset the cost of the new wage structure. That prediction appears to be coming true. A third of local consumers polled by the National Restaurant Association say they’re eating in Maryland and Virginia more often. 

It isn’t just customers that are flocking to the suburbs. Operators and servers are making the move, too. Data from the Bureau of Labor Statistics show employment at full-service restaurants in neighboring cities grew 3 percent in 2023 after I-82 took effect. 

“Talk to real estate brokers that focus on restaurants, and you’ll hear that people who were going to sign leases for restaurants in D.C. have backed out,” Halberg says. “They’d rather go somewhere else where it’s more viable for them to run their businesses. That’s true for employees, too. It’s a pretty easy choice to go get a job in a place where they still have the potential to earn more.”

How are Servers Impacted?

There’s no set playbook for instituting service fees. Some restaurants are going as low as 3.5 percent to keep price-sensitive customers coming through the door. Others are going as high as 20 percent to protect margins and limit the impact on paychecks. 

The inconsistency from one restaurant to another perplexes diners and results in complaints, says Joshua Chaisson, a professional server and board member at Restaurant Workers of America, an employee advocacy group focused on preserving the tip credit. Plus, service fees can diminish the hospitality element of the job by creating uncomfortable and even confrontational interactions with customers. 

“These charges are a turn-off for the guest, and they create a very weird dynamic for the workers,” he says. “Nobody wants to have a lengthy conversation with guests about how they get paid, but that’s what workers in D.C. are facing now.”

Chaisson got involved with the issue after Maine voted to kill the tip credit in 2016. He helped organize a lobbying effort that saw it reinstated a year later. Now, he works to build grassroots movements of restaurant servers in their own markets, including D.C. 

“Right after it passed in Maine, people started coming in and saying things to us like, ‘Oh, you make minimum wage now. Do you think I should still leave 20 percent?’’’ he says. “We also had people who simply heard about it on the news and just tipped a lower percentage as a direct result.” 

There’s plenty of data supporting the notion that tips left by customers go down as tipped wages go up. Michael Lynn, a professor at Cornell University’s School of Hotel Administration who studies the food and beverage industry, has raised a cautionary flag to those contemplating reducing or eliminating the tip credit. His research suggests changing the wage structure may not increase servers’ overall incomes as much as expected and may even decrease those incomes.

“Our team members are pretty upset about it,” Halberg says. “One of them said it’s like throwing a turtle into the ocean to save its life, and then realizing afterwards that it wasn’t even the type of turtle that lives in the ocean. They’re terrified that people are going to start tipping less because of this very public view that they’re now making a lot more money.” 

There isn’t a clear consensus on what’s happening in D.C. because the direct impact on servers varies from one case to the next. One operator told FSR he hasn’t seen much of an impact on tipping levels, and his servers are enjoying a slight uptick in overall earnings. Some say they’re using service fees to offset a decline in tips. Others are seeing different results at different locations, while some are seeing higher wages and lower tips translate into less take-home pay for employees. Most expect tipping levels to trend downward as hundreds of thousands of dollars in increased labor costs over the next few years necessitate higher fees on the bottom of the check.

Proponents of I-82 and other similar regulations argue the change increases the sustainability of wages and working conditions in the service sector. In practice, many operators and workers say it caps what servers are able to earn. 

Prior to I-82, servers in D.C. earned an average of $24.42 per hour, more than $7 above the current minimum wage, according to the Department of Labor’s most recent statistics from May 2022. With the first round of changes prompting layoffs, closures, and extra charges that spurred traffic declines, operators say adding a large enough fee to guarantee a similar level of compensation just isn’t feasible, especially when they’re working with razor-thin margins in an expensive market. 

“There’s this false narrative that people who run restaurants want to have their employees earn less money because it makes them more profitable, but the reality is that it’s in everybody’s best interest for employees to have the highest possible earning potential,” Halberg says. “If we had access to the tip credit but were required to make sure employees earn $20 an hour with tips, I think most restaurants in that middle range like us would happily do that and put our money where our mouth is.”

What’s Next?

I-82 is identical to D.C.’s Initiative 77, which narrowly passed before the pandemic and was subsequently repealed by the city council amid pushback from operators and tipped workers. A second rollback isn’t likely, but several proposed adjustments are in the works. 

A restaurant relief bill put before the city council last summer seeks to speed up the timeline for reaching the full minimum wage requirement by 2025. The idea is to help operators avoid a slow bleed. It’s been met with a mixed response. 

“Some operators I’ve spoken with just want to rip the Band-Aid off, but I think that perspective is counterproductive,” Saltsman says. “If anything, given how disastrous this has been, there’s a strong case you can make to the D.C. Council for more meaningful relief. At minimum, there shouldn’t be another increase in the tipped wage until an independent third party comes in and studies what’s going on. It’s clear things aren’t going well, so I’d be reticent to speed anything up.”

The proposed bill also would lay out clear guidelines for service fees. Currently, there are no rules dictating how revenue from those charges should be distributed. Restaurants are only required to explain why they’ve added them. That lack of clarity has caused some headaches, with the attorney general in D.C. sending out letters last spring warning operators that some fees may violate the district’s consumer protection law if they aren’t clearly disclosed to customers before an order is placed. 

The restaurant relief bill would define a service charge as a percentage of food and beverage sales that cannot exceed 22 percent and pays the base wages of employees. Fees that meet that criteria would be exempt from sales tax, which could help limit the impact on guests. Those fees also would be excluded from counting toward revenue if a restaurant’s rent is based on sales, which could help free up more money for workers.

From a big-picture perspective, operators and industry advocates say there’s a silver lining from all the havoc I-82 is wreaking on restaurants in the capital—as well as from the similar story that’s unfolding in Chicago. These case studies offer a valuable resource for those looking to preserve the tip credit in other parts of the country where the fight is playing out.

“It’s not lost on us that at face value, it looks like we’re fighting for less money,” Chaisson says. “Voters think they’re doing the altruistic thing by supporting a higher wage, and the opposition is able to make a more emotional case, so it’s a tough position to be in, especially when the issue is complex enough that legislators often need a thorough walkthrough about the policy. I’m thankful we finally have some data to point to and say, ‘Look, this doesn’t work. It’s never going to work.’”

Consumer Trends, Feature, Legal