A restaurant server wearing a white shirt looks into the camera.
Unsplash/Mohamed Nohassi

Is a $15 federal rate coming? And if so, when?

As Biden Prepares to Take Office, the Minimum Wage Battle Returns

Restaurants are preparing for whatever comes next. But uncertainty, and controversy, abounds. 

As President-elect Joe Biden assumes office later this month, he’ll bring a host of potential changes to Washington. When it comes to the restaurant industry, no topic presses deeper or more controversial than minimum wage. Biden expressed previously, pointedly on his “Build Back Better” transition website, a desire to provide workers “a decent wage, at least $15 per hour.” He’s also pushed to end tipped minimum wage and sub-minimum wage for people with disabilities.

Just this week, Biden’s transition team pivoted from nominating Boston Mayor Marty Walsh for labor secretary to getting the former construction union leader up to speed, according to Bloomberg Law. He led the Greater Boston Building Trades Unions, representing 35,000 workers, from 2011 to 2013.

Biden wants to pass the Protecting the Right to Organize Act (PRO), which would provide public service and government workers with bargaining rights. He also intends to make it easier for workers to organize unions and collectively bargain. Other Biden goals include universal paid sick days and 12 weeks of paid family and medical leave.

Returning to minimum wage, restaurants grappled with surging rates leading up to COVID-19. But it was a state-by-state exchange. The current federal minimum wage is $7.25 and last increased more than a decade ago.

In 2019, the Congressional Budget Office released a study that suggested raising the federal figure to $15 an hour by 2025 would increase the pay of at least 17 million people. Yet it would also cost 1.3 million Americans their jobs.

A year earlier, economists from Miami and Trinity Universities used CBO methodology to measure the effect and found, if implemented in 2020 (which did not happen, clearly), it would reduce employment by roughly two million jobs. Hiking the minimum wage would also disproportionately impact entry-level positions where unemployment rates are the highest, the report said.

So where does that leave restaurants amid a COVID-riddled, politically supercharged landscape? There are several schools of thought jostling, from those that champion firmly for $15, like fast casual &pizza, which committed to the rate by 2022, to more hesitant brands lobbying for gradual steps over blanket mandates.

On the doorstep of 2021, the DOL also issued a final rule that allowed restaurants to require servers to pool tips with staff who don’t typically earn them. It softened restrictions on non-tipped work for employees who earn a lower, tipped minimum wage.

This enabled tipped employees, like servers, to pool tips with non-tipped workers, such as cooks and dishwashers, in situations where the restaurant pays the tipped workers equal to or greater than the minimum wage, in lieu of taking a “tip credit,” or paying tipped employees a subminimum wage.

Additionally, it dumped the “80/20” structure that previously required tipped employees to spend at least 80 percent of their time on tipped-wage duties. Before, when tipped workers clocked at least 20 percent of their workweek on duties that didn’t generate tips, they were entitled to the full minimum wage ($7.25 per hour), rather than the $2.13 base tip pay.

Under the DOL’s recent shift, restaurant can now take a tip credit for time that a tipped employee spends performing “related,” non-tipped duties.

For restaurants, the benefit is straightforward—the ability to narrow the pay gap between the front and back of the house. On the worker side, though, it could get dicey. Heidi Shierholz, a scholar at the Economic Policy Institute and former chief economist at the Labor Department under President Obama, told The Hill the ambiguity of “reasonable time” would be difficult to enforce and open a loophole for employers—a point capable of costing tipped workers a collective $700 million a year.

Yet what happens to the final rule under a Biden administration, if it gets amended or rolled back to Obama-era practices, is unknown for now.

Andrea Behrends

Once bartaco switched to QR dining amid COVID conditions, it started pooling tips.

Changes are happening in real-time, though. At 22-unit bartaco, one of the brand’s early pandemic tactics was to pivot to a QR-based dine-in model. Customers join a waitlist via bartaco’s app, or call in. They receive a text their table is ready. Once there, they use a mobile device to scan a QR code where they can order and pay. The brand anchored its virtual host system with Wisely and supported the QR experience with OneDine.

Given how the nature of serving guests suddenly flipped, bartaco decided to develop a more efficient labor model. It began to pool tips. Bartaco did so for the entire restaurant, including the back of the house, and put everyone on minimum wage instead of a taxed tip wage.

Results proved compelling, CEO and cofounder Scott Lawton says. “What we found is really incredible, which is we shaved 5 or 6 [percentage] points off of our labor pre-pandemic. And our average income of our staff is [now] between $23 and $25 an hour, including our dishwashers.”

Bartaco also ran 30 percent store-level EBITDA, despite being down 20–25 percent in sales compared to 2019. In terms of broader labor changes unfurling, and those that might surface under a Biden administration, bartaco feels insulated. “I don’t want to pay a tax-tipped wage because that exposes me to all those issues,” Lawton says. “The idea is pay full minimum wage and you’re not exposed. We can manage $15 an hour under this new construct because we can run the dining room much leaner.”

Before COVID, $15 was essentially the average wage for kitchen employees at bartaco. They’re making more today. Pooling helped stem turnover, too, Lawton says, and improved the quality of cooks and other back-of-house staff.

Retention was critical before COVID, of course, but is taking on added urgency of late. According to Black Box Intelligence, the number of restaurant jobs lost due to the pandemic remained at about 2.1 million employees during October and November.

The weak labor market fueled an environment in which wage pressures softened for frontline team members in limited-service restaurants, the insights company said. Average hourly wages for limited-service frontline workers stayed flat year-over-year at the national level during Q3. Meanwhile, full-service cooks saw average hourly wages increase rapidly (as Lawton attested).

Back-of-house positions were harder to fill before the pandemic and now may require some additional pay to attract and retain the best talent.

As staffing levels were cut in full-service restaurants, those that remained were likely more seasoned and tenured cooks, which also contributed to average wages showing bigger increases.

Lawton believes this trade-off could endure after COVID.

In the front of the house at bartaco, a server’s earning potential has undeniably changed, he says. You’ve likely forfeited those busy, spike nights. “So we’re looking for staff that is more, maybe not career servers, but people who are bright, energetic folks that understand team play and are excited to make a very predictable and great income,” Lawton said.

Bennigan's

“We as an industry having been talking about that for years,” Bennigan's CEO Paul Mangiamele says. “It’s a dangerous precedent to set and it needs to be thought through. But do people deserve a fair working wage? Absolutely. Positively."

Paul Mangiamele, CEO of Legendary Restaurants, which oversees Bennigan’s, Steak & Ale, and Bennigan’s on The Fly, says he understands why the $15 debate is heating up. State-by-state increases surged rates industry-wide in recent years, he says. “But to make it a mandate, take $7.25 [and raise it], that percent increase is a dangerous precedent,” Mangiamele says.

The issue not getting talked about, Mangiamele notes, is not the $15 rate itself; it’s the person who worked five years for $15. “And saying wait a minute, you’re going to pay this kid or person or individual that amount of money? And I worked for you six, seven, eight years?”

That ripple effect could put some more tenuous operators out of business, he cautions. “So instead of helping people with a living wage, the entire restaurant shuts down and everybody is out of work.”

“We as an industry having been talking about that for years,” Mangiamele adds. “It’s a dangerous precedent to set and it needs to be thought through. But do people deserve a fair working wage? Absolutely. Positively. But it should be talked about in a very gradual basis where operators can adapt and adjust and plan for. It can’t be just an abrupt change.”

There’s an underlying concern as well, of replacing labor as much as losing it. Robotics in the kitchen. AI at the drive-thru board. Kiosks in the front of the house. And so forth.

“It’s not a positive outcome but one that should be talked about, and should be planned for, but in a very intelligent way,” Mangiamele says.

The Bureau of Labor Statistics found that 1.7 million teens worked in restaurants in 2018. It’s a number that stagnated over the past decade but continues to represent a critical part of the restaurant workforce—a sector defined by its cyclical, seasonal nature and high turnover rates. From 2010–2017, restaurants accounted for one out of every seven new jobs, according to The Wall Street Journal.

Also, per the BLS, about 40 percent of employees in restaurants and bars work part time, which is more than twice the proportion for all other industries. Before COVID, it took 60–120 hourly team members to staff an Olive Garden, most of whom were part-time. 

“When you eliminate the first two or three rungs of the ladder of success, you’re creating a problem, you’re not solving it,” Mangiamele says. “… I grew up in the industry. I was the busboy. I was the dishwasher. I was the prep cook. I worked the line. I did serving. I did bartending. I did the management. I appreciate it. The apprenticeship in our industry is what builds the leaders for tomorrow. And to eliminate that opportunity is a horrible thing to do.”

Fogo de Chão CEO Barry McGowan hopes federal decision-makers consider the current state of restaurants, no matter what they choose. Operators today need help structurally with city mandates, municipalities, federal government and making sure decisions don’t exasperate the pain, but rather help restaurants drive out of COVID holes. “We have seen this, when we are just allowed to open and we are allowed to serve our community, we can manage through,” he says.

“We’ve got to be careful about all of the government support to make sure it’s not in a way that then it’s a payback or structural thing that we cannot handle,” McGowan adds. “Meaning, you can’t go from writing $2,000 checks and then say mandating $15 minimum wage. That might sound good in the short term, but we’ve got to think long term structurally about the health of our industry.”

Restaurants have long been the tip of the spear of hiring those that others won’t hire, McGowan explains.

“We’re not hiring programmers out of the market, we’re hiring people who need part-time employment,” he says. “We’re hiring people who may not have an opportunity to work for a Google. And just like me, look, I grew up hungry, poor, and this industry fed me and I’ve been in this industry ever since. I’m the CEO of a company. I’m blessed to have a college degree. But you know, I’ll just say this, I have a hotel restaurant degree and only because people talked me into getting a degree. If not, I would have been a restaurateur my whole life.”

“My point is we have a unique industry,” McGowan continues. “We hire people. We hire a lot of people. You want to look at an example of a community industry that I would say is the most diverse of any, and the most uplifting of any, we’ve got to make sure that we continue to lean into that so we come out in a healthy way and we continue to innovate and adapt for the consumer.”

Fogo de Chão

Fogo de Chão CEO Barry McGowan says restaurants have thrived when given the resources and ability to operate again.

When restaurants closed in March, it hit the most vulnerable people in communities, he says.

“The health of our nation and our communities is about getting restaurants back to health. And it’s not about saving us, it’s about underpinning us and letting us restructure and come back in a healthy way,” McGowan says.

Chuy’s CFO Jon Howie said most of the Tex-Mex chain’s back-of-the-house employees make $15 or above. So a lift in the federal rate wouldn’t affect that corner of the business much. However, it will surely factor in the front, depending on what happens with tipped wage, which the Biden administration talked about eliminating, as previously noted.

“Whether they don’t understand it or what their political agenda is, I don’t understand that,” Howie said Tuesday at the ICR Conference. “But to the extent that they would eliminate that, there are some structural changes and things that would need to happen in kind of a value-oriented full-service concept. However, if they were to do it like Florida is doing it and do it over a number of years, from [2021] to [2026], like they are, we’ll figure that out. That will give us some time for some price increases as well.”

“If they just drop the $15 an hour in one year, I mean, you just can’t do price increases to cover that,” he added. “You couldn’t. So you’d have to do something more structural to make your margins stay somewhat consistent. But you do it over time, I think we’ll figure it out. That’s one thing that’s great about our industry, we’ve been very flexible in things that have been thrown our way. We’ll figure it out, just like this COVID thing.”

“Our community of restaurants, not only us, but everyone out there, [have been] very resilient over the years,” Chuy’s CEO Steve Hislop said. “I’ve been in the business for probably 40 years. There have been a ton of changes and many administrations, and we figure it out.”

In November, Florida joined eight states and the District of Columbia as it barreled toward $15 per hour. More than 60 percent of state voters approved Amendment 2, which to Howie’s point, called for a phased-in approach to raising wages. It directed an increase from $8.56 to $15 by September 30, 2026. Then the wage rate will be indexed with the Consumer Price Index.

One thing that didn’t adjust, however, was the allowable tip credit of up to $3.02 per hour for tipped workers. Tipped workers presently receive $5.54 per hour (plus tips). That inched to $5.63 per hour on January 1, and will climb to $6.98 per hour on September 30 of next year. It will move upward alongside the full wage until it reaches $11.98 per hour, plus tips, in 2026.

Darden CEO Gene Lee, like Chuy’s, believes the industry would manage wage pressure one way or another, but the timing is delicate. “In this kind of environment, I’m not so sure how we can deal with that in the short term,” Lee said at ICR. “How can we put more pressure on businesses by raising minimum wage this year in the short term? I think it’s more of a mid-term thing that we’re going to have to deal with. But Darden, we’re situated in a position to better handle that than most.”

Additionally, he said the elimination of the tip credit is something politicians and activists want, yet consumers and employees don’t take issue with.

But Lee noted it’s hard to communicate that because it’s not a good “bumper sticker,” whereas activists and politicians can say “$2.13 is not a fair wage.”

An average Olive Garden server makes roughly $16–$17 per hour. One at high-end Capital Grille collects well over $40.

One example Lee referenced was Union Square Hospitality head Danny Meyer’s call to increase menu prices and cut tipping altogether. The company returned to tipping in July after five years of going without it.

“… we’re trying to solve a problem that really doesn’t exist, and that usually is not a good thing,” Lee said.

“No one’s making $2.13, but we need more than a bumper sticker to communicate that, and that becomes very hard for us to do,” he added. “I’m hoping that we can have the National Restaurant Association and some of the larger chains have conversations with the powers to be and explain how that works. … I think there’s a big misunderstanding out there, and we’re going to have to try to do as much education as we possibly can.”

Again, it’s something many restaurants prefer to plot on a case-by-case basis, Lee said. For instance, Darden is conducting a test in California where it’s paying a higher base wage to servers. The idea is fewer restaurants per capita enables operators to price higher. A different looking P&L, but a more favorable end outcome.

One potential Biden change that could aid restaurants, Lee added, is immigration changes. So far, Darden hasn’t seen as much benefit from a wider labor pool as expected, he said, given people appear to have been absorbed into other sectors.

“We have the best employment proposition out there. In certain markets, we’re going to have to work harder than others, but I think we’re pretty adept at getting our restaurants staffed,” Lee said.

Unsplash/Kate Townsend

More unemployment people hasn't necessarily led to a wider labor pool for restaurants. They're competing with higher unemployment benefits as well as other industries.

BTIG analyst Peter Saleh says restaurants continue to face staffing challenges despite millions of unemployed workers. The challenge stems from the fact some individuals are opting to receive unemployment benefits rather than return to work. The new stimulus bill provides jobless workers an additional $300 weekly boost to state-provided aid, as well as a $100 hike to people with wage and self-employment income, for 11 weeks through mid-March. It was $600 last time around, which pushed take-home as much as 270 percent above minimum wage levels in some markets.

“More recently however, operators have been struggling to effectively staff restaurants due to coronavirus exposure among their own employees,” Saleh said.

About 885,000 people filed for unemployment for the first time the week ending December 12, 2020, the highest weekly number since early September.

Looking forward, he believes industry unit closures tied to looser immigration restrictions (Darden’s point) will create slack in the labor market and help restaurant margins.

And on minimum wage? “While we recognize the new administration’s desire to raise the minimum wage to $15 per hour, we believe that if implemented, such an increase will be gradual, likely taking as many as five years to reach that level,” Saleh said. “Additionally, we note that many of our covered restaurants already pay well above the current minimum wage based on the states they operate in and market forces.”

Proponents of raising the minimum wage to $15 believe it would narrow racial and gender pay gaps and reduce turnover. Others say it would create a circular effect, almost like a stimulus check, as workers pour more money back into the economy. Business for a Fair Minimum Wage expressed support for $15 by 2024 and got some restaurants to sign on, like &pizza.

Even in Florida’s case, opinions split. A recent economic survey said Florida’s Amendment 2 would eliminate 158,000 jobs by 2026. But an article in The Palm Beach Post noted unemployment fell from 4.9 percent to 3.1 percent in 2005 the last time the Sunshine State raised minimum wage, from $5.15 to $6.15. Florida added 200,000 jobs that year. “While a small fraction of unskilled workers are paid the minimum wage, it sets the floor for other low-wage workers. And raising the minimum wage has the effect of raising the pay of other poor workers,” the publication said.

It added the survival budget for a single person in Florida is $12.30 per hour, and $17.30 per hour each for two adults in a family of four, according to the United Way.

The current minimum wage in Florida, though, is $8.56 per hour.

The United Way report, using data as recent as 2018, referred to “ALICE households,” or those above the federal poverty line that also work for less than a living age. That category grew from about 1.5 million households in 2007 to 2.5 million 11 years later.

These “unsustainable jobs,” The Palm Beach Post said, have represented Florida’s largest growing category, going from 30 percent of all positions to 47 percent by 2018.

Among those cited: servers. “These types of jobs are vital to keeping Florida’s economy running smoothly, but they do not provide adequate wages to cover the basics of housing, child care, food, transportation, health care, and technology for these ALICE workers and their families,” the report said.

This is really where the heart of the “improved turnover” possibility pulses for $15 banner holders. They suggest people leave restaurants because they can’t afford not to.

Starbucks CEO Kevin Johnson said in 2020 the company would raise minimum pay for all workers nationwide to $15 per hour over the next three years. Today, more than 30 percent of the company’s domestic retail employees are at or above the mark.

Nearly 10,000 people signed a CoWorker.org petition pushing Starbucks to raise wages to $15. If that happened in one federal swoop, it would affect the company’s bottom line significantly. Stifel analyst Chris O’Cull said in October Starbucks, Chipotle, and Shake Shack would feel the largest impact (among publicly traded brands) if a $15 rate went into effect. The reason being they boast heavily company-run footprint as opposed to franchised. Half of Starbucks’ U.S. stores, or 9.600 locations, are corporate. All of Chipotle’s 2,500-plus are.

&pizza believes it will get to $15 minimum wage across its stores by the end of next year. “2020 knocked us all on our asses, but these essential workers showed up,” Lastoria said in November. "In most cases, they had to for the paycheck—for their livelihood and families – and in all cases because they are the best of us—caring and committed—as we now need to be even more so for them. We must make the minimum wage in this country a living wage, and if Congress can't figure that out quickly, &pizza will show them how.”

&pizza has taken direct action before. It staged Washington, D.C. Mayor Muriel Bowser’s signing of the Fair Shot Minimum Wage Amendment Act at her local &pizza.

“Back in March, we instituted a pay raise for everyone at the beginning of COVID, and while many of the biggest retailers in the country were cutting back on those raises come summer, we made them permanent,” &pizza CEO Andy Hooper said Wednesday at ICR.