The times, they are a changin’. New York’s hospitality industry is currently undergoing significant changes in how employees are compensated, and these changes are having a tremendous impact on how the industry operates.
How is the Big Apple’s minimum wage increase having an effect on hospitality statewide – and restaurant owners specifically? We looked into it. Here, we share a few of the different ways that industry professionals are reacting and responding to the wage increase.
The Numbers Behind the Law
The new year brought about new wages for more than 750,000 New Yorkers who are employed in the restaurant industry. As of December 31st 2015 wages increased 50 percent for tipped workers from $5.50 to $7.50 per hour. If a worker doesn’t make $9 per hour after being tipped then the venue is required to pay the difference. These changes are all part of Governor Cuomo's goal to raise minimum wage for non-salaried, non-tipped workers to $15 per hour by 2021.
For back of the house employees (BOH), including line cooks, dishwashers and chefs, wages will increase from $8.75 to $11 by the end of 2016. Within two years, all BOH employees will be making a minimum of $15 per hour.
How Does This Impact Owners?
Hospitality is a hard industry to profit in. More than 60 percent of all new restaurants fail within their first three years of business. The average full-service restaurant spends 32 cents per every dollar on food and alcohol costs. It spends an additional 33 cents of each dollar earned on salaries and wages. This leaves roughly 35 cents per dollar to cover rent, utilities and other operational expenses. When owners experience labor expense increases, it cuts into their sometimes already fatally low profit margin.
For many New York restaurateurs, the minimum wage hike is already negatively impacting their bottom line. According to the New York State Restaurant Association President Melissa Fleischut, “This increase has already forced restaurants to close, business owners to cut hours and lay people off, and made owners look to incorporate more tablets at tables. Any further increase will just exacerbate these problems.”
Reactions from Restaurateurs
In order to compensate for these changes, many owners are raising food prices, while others are incorporating self-order kiosk tablets thereby eliminating the need for servers all together.
In New York City, notable restaurateurs David Chang and Danny Meyer have already raised food prices by 20 percent via a service charge, and have implemented standardized wages for all workers to $15 per hour and eliminated tipping. The 20 percent service charge is what pays the increase in wages for both FOH and BOH employees and equalizes pay within the restaurant.
Chang and Meyer’s decision to eliminate tipping was done to alleviate the divide between the front of the house and back of the house employees. Meyer said, "We believe hospitality is a team sport, and that it takes an entire team to provide you with the experiences you have come to expect from us.”
While Meyer and Chang’s ideas might seem idyllic to some, the reality is the application is often more complicated than expected. Standardized wages backfired big time on San Francisco restaurateur Thad Vogler when he implemented a no-tipping system in his two venues. Within 10 months Vogler lost 70 percent of his staff members because their wages decreased by nearly 33 percent after their gratuities were taken away.
So what’s the alternative for venues wanting to eliminate tipping without losing staff in the process? Some NYC restaurants have opted to pay employees based on position, rather than an across the board wage.
Meadowsweet, a Brooklyn-based Michelin-rated restaurant has done this successfully by raising food prices and offering $27 per hour to servers and $13 for kitchen cooks. It will continue to raise BOH prices in accordance with the minimum wage increase, and both FOH and BOH are eligible for bonuses and pay increases based on performance and sales. By incentivising staff members, Meadowsweet is able to maintain happy employees and continue to operate successfully and profitably. High hourly rates and employee bonuses based on performance are in place to ensure employee turnover rates are low.
It’s Not all Bad for Restaurant Owners
According to a 2014 report by the Restaurant Opportunities Center (ROC), states required to pay their front of the house staff members higher than average wages also have higher annual restaurant sales. The report also says this happens because well-paid employees end up staying at their jobs longer while increasing their efficiency and productivity. This means owners will spend less time and money training new FOH workers. In addition to this, low turnover rates mean current staff members will be well-trained and have strong menu knowledge enabling them to provide a better customer experience - and we all know a better customer service equates to higher customer checks and return visits.
Ultimately, New York restaurants are going to have to be creative and smart in their approach to running their businesses successfully as the minimum wage continues to increase over the next five years. For some this might mean increasing food prices, decreasing portion sizes, eliminating tipping or offering raises and bonuses to top performing employees. For others, this might mean closing their doors for good or finding new ways to increase efficiency while decreasing labor costs. Whatever the case may be, the tides of hospitality are changing and some restaurants will sink while others will swim.
About the AuthorMore Content by Antasha Durbin