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First Person: Would raising the tipped minimum wage devastate sit-down restaurants?

Thousands of fast-food workers began striking for higher wages on Thursday. But there are actually two minimum wages in America: the one for tipped workers, and the one for everyone else. The National Women’s Law Center also released a report Thursday on how states that don’t allow employees to pay tipped workers less have lower poverty rates and wage gaps between men and women. The restaurant industry, naturally, has pushed back hard. We talked to Bob Garner, who owns the Glory Days Grill chain of 20 sports diners in Florida, Maryland, Virginia and West Virginia, on what he’s done to keep tipped wages low. A transcribed, lightly edited, judiciously annotated interview follows. 

Let me give you the most underreported aspect of this minimum wage debate that’s going on. We argued very strongly in Maryland recently that in businesses like ours, it is the tipped wage that’s also being lumped into the argument. It never used to be, because there was good reason for it not to be. And right now, it just confuses people.

In a business like ours, 70 percent of the hours that we give are paid at the tipped wage, not at the minimum wage. So we end up paying the national tipped wage, which is $2.13, and in Maryland it’s $3.63. Then we start talking about a huge, devastating impact on full-service restaurants. [Editor’s note: Many states have tipped minimum wages above $5, and there are still sit-down restaurants.]

When we talk about the $2.13 wage, that doesn’t mean that anybody anywhere can pay somebody $2.13. The employees report their tips. So whatever they report, plus the $2.13, has to be the minimum wage.

So the typical full-service restaurant will use about 50,000 tipped hours per year, and they’re at $2.13 today, and if they go to even $3.13 an hour, it’s going to cost them $50,000 a year in higher service labor. And in Maryland, they were talking about going to $7, because they really didn’t understand. And we took the opportunity to educate them, make sure they knew what the difference was, and a lot of them had no clue. So they kept the tipped wage frozen and just increased the minimum wage.

Now that does impact us, because in a full-service environment, our kitchen people average $10, $11 an hour, whereas in fast food they make less than that. So the impact on a fast-food restaurant of the minimum wage increase is going to be higher, because they pay $8.50 an hour. [Editor’s note: The federal tipped minimum wage has been frozen for 23 years, with no adjustment for inflation, so restaurants that pay that amount are actually paying tipped workers less now — $2.13 in 1991 dollars has the same buying power as $1.22 today.]

A tipped employee makes from $13 up to $20 an hour. These aren’t the folks that any minimum wage is supposed to target. So if we’re going to take the resources of an employer and put them to good use, why would we take basically 80 percent of all the net dollars that need to be paid out, and pay them to the highest-paid employees, not putting them into the kitchen staff, but into the front of the house?

I think it would be hard for anybody to say that we should have government tell us what we should pay folks. We think we’ve done a pretty good job. We have pretty low turnover as far as management and kitchen employees. All of our turnover is in the higher-paid employees, because it’s a transient group, so they come and go more than the rest. So I wouldn’t say we support any kind of increase in wages. We can certainly absorb them better than the fast food sector can absorb one, because we already pay more.

If it goes to $8.25, $9.25, yes, we would have to make sure that those tipped employees still make that new $8.25 or $9.25, so where anyone would make under that amount, we’d have to make that up for that. So that might be the hostesses and busboys, the 16-year-old people that might be making $10, not $15 an hour.

I don’t know if there’s an industry that has a lower profit margin than the restaurant business. [Editor’s note: According to NYU Stern School of Business professor Aswath Damodaran, the restaurant industry has a net profit margin of 7.73 percent. That’s higher than many industries, including transportation, retail and oil production and exploration.]

So it’s not like we have a lot of room to take anything out of our profit margin, and all costs eventually get passed on eventually to the guest. Is the guest ready for a traumatic, dramatic, complete change in how the industry operates in a full-service environment? Is this the time the guest is willing to pay the kind of prices for a hamburger or for wings? That’s the only way to do it. And what can’t be passed off to the guest, you basically lose money, you go out of business, you just look for alternatives. People use food runners instead of servers, use technology. When you see fast-casual arising, that’s basically just getting rid of those high-paid employees. If you’re making $15 an hour serving guests in full service, you’re making $9 in fast casual. And that’s really the trend.

Yes, we can do self-ordering at tables, so a lot of people in our industry are experimenting, and we have tests in that regard. Chili’s and a lot of other national chains already have those devices on tables, so they’re just getting the technology right. Some states are already thinking about wage increases, so they’re thinking about how to respond to that. But if you have 66 percent of your employees at the front of the house, and the guests aren’t willing to pay increased prices right away, you’re going to have to cut back on staff.

We could just basically be very careful about where we open restaurants. If you have a high cost of doing business, you’re really going to have only the most dynamic, high-volume locations, which means there’s going to be fewer restaurants in the neighborhoods. And there’s going to be a lot of vacant spaces closer to your home.

Full service people are shocked and dismayed that people are trying to misinform people on the tipped wage. This argument I’m making is not being heard, but it’s definitely a part of the legislation these people offer. Even President Obama said it should be 70 percent of the minimum wage, in other words $7 an hour in Maryland. When I told them that a $5 increase in the tipped minimum wage is going to cost all of the cash flow of your average restaurant, they said, “Oh, we’re not understanding this right.” It was a real big education campaign so that everybody up and down the ladder understood the facts.

“Is the guest ready for a traumatic, dramatic, complete change in how the industry operates in a full-service environment?”

Right now we’re seeing it on the national level, but it comes and goes constantly throughout the states. Maryland just did theirs, and it’ll roll in over four years. Maybe Virginia will take it up one day. To us it’s just being used as a political tool leading up to this election, to try to get that message out there, to get some voters into the voting booth.

Let’s talk about Maryland. In Montgomery County, they went with an $11.50 minimum wage and a $5.05 tipped wage. So companies like ours won’t locate in Montgomery County, because the cost to open a restaurant there, as opposed to in Virginia, is over $200,000 a year in higher service labor. Now, if I went there, I’d have to choose the most high-volume, low-rent place I could find, and there’s only a few of those, so you’re just going to see a few players. You’re not going to find them in the suburban areas.

Right now, the full-service restaurant sector isn’t doing that well, because a lot of people have moved into that lower-priced environment of the fast casual. So we’re losing some traffic to them already. So if you impact full service with a tipped wage increase, especially now, it’s just going to exacerbate that wound. You’re going to have to take a look at how many people are employed in full service restaurants across America. There’s a whole hell of a lot of them. Just because you might be down one percent, it’s still tons and tons of people. [Editor’s note: According to the NPD Group, the number of full-service restaurants did decline by one percent last year — but there are still almost 300,000 of them across the country, out of about 633,000 total.]