Back in July, 2010, during the last gubernatorial primary season, Republican candidate Tom Emmer set off a firestorm by suggesting that Minnesota revise its labor laws regarding tipped employees. There were more than a few things wrong with Mr. Emmer's approach. First and foremost, his proposal was not part of a discussion to increase the minimum wage. It was simply a proposal to roll back compensation for a significant number of hardworking Minnesotans. Second, he chose to make some claims about tipped employees that, while true in extreme circumstances, were by and large misinformed. Paramount among them was the claim that Minnesota servers could expect to enjoy six figure incomes while working part time. While that might be true for a very select few, it is certainly not the case for the vast majority. It was sort of akin to saying that all CEO's make hundreds of millions of dollars a year. I am the CEO of our corporation, and I can tell you that the five figure salary I pay myself is generally less than the earnings of the majority of our servers and, based upon an hourly wage extension, is roughly equivalent to what we pay our dishwashers.
Countering the Republican claims, the DFL rolled out their own message during a press conference featuring a woman who claimed to be a server at an establishment in the airport. She was bemoaning the fact that she was making only half as much money as the Republican candidate had claimed. I guess we were supposed to feel sorry for her because she was earning $50,000.
For those of us running restaurants, the whole episode seemed liked theater of the absurd. Here we have a bunch of politicians and wonks attempting to propose labor policy for an industry about which they have little or no pertinent knowledge. Certainly, they couldn't have any firsthand experience running a fine dining restaurant such as ours, or neither side would have been so blatantly wrong in the way they approached the issue.
At any rate, when Mr. Emmer got done extricating his foot from his mouth, it became apparent that any sort of relief for our industry via the oft maligned phrase "tip credit" would not be forthcoming, and those two words would no longer be spoken side by side by those of us seeking to achieve that goal.
By way of full disclosure, I am a member of the St. Paul Area Chamber of Commerce Board of Directors proudly representing the left wing. In discussions with both the SPACC and the Minnesota Chamber of Commerce, it was suggested that I petition to testify before the State Legislature concerning the proposed amendment to H.F. No. 92 which establishes the state minimum wage. However, prior commitments requiring my presence at the restaurant made that impossible for me. Consequently, I am laying out my opinion on the bill in this blog in hope that it might help inform the discussion.
The current state minimum wage is $5.25 per hour for small businesses which are defined as those businesses generating revenue of no more than $625,000 per year exclusive of excise taxes at the retail level that are separately stated. Large businesses, which are everyone else, are subject to a rate of $6.15 per hour. Keep in mind that that $6.15 per hour rate is moot since the federal rate is $7.25, and we are bound by law to meet that.
Here's where I usually make a statement that gets me into trouble with my more conservative, free market friends. The fact of the matter is that the federal minimum wage is a joke. The only thing it's good for is to establish a base rate for tipped employees or to serve as a defacto training wage for paid student interns. No one I know in my industry pays minimum wage to their hourly employees. It is impossible to attract quality labor and stay competitive in that regard or to retain those people once they are fully trained and have established some sort of seniority. Why would any smart employer engage in constantly turning over staff that would need to be retrained time and again instead of just retaining their best employees? It makes no economic sense, and it is operationally unsound.
At Heartland, our low end of the hourly wage scale is $13 per hour while the high end is $16 per hour. It makes no difference what the job description is, but it is instead based upon the value that the individual brings to his or her job. Consequently, there are times when the dishwashers are making more money than some of the cooks. The bottom of the salaried employee scale is right around $40,000 while the top is right around $50,000. Salaried staff work an average of 50 hours per week, which pretty much sets their compensation in a range that is equivalent to what the hourly folks are getting paid. In addition, we hand out end of year gifts and bonuses to everyone, the amounts of which are determined by pay rate. It's not what you think. The people making the least amount of money receive the largest bonuses. It is as egalitarian approach as we were able to achieve based upon our available resources.
While you will never see a Heartland ad campaign that trumpets our policies of paying living wage and practicing fair trade with small Minnesota farm families that employ sustainable agricultural practices, we do so because we feel those are the right things to do. As a result, we have to leave some money on the table every day. The reward has been a business that has remained successful and even grown for over ten years while putting most of the revenue it generates right back into the Minnesota and regional economies. Also, while we are not subject to the Affordable Care Act by virtue of the fact that we do not have enough full time employees to qualify, we are in the process of determining how we can offer health care to all of our staff instead of just those who are working the most hours.
Contained within the proposed amendment to H.F. No. 92, is a graduated scale that increases the minimum wage $1.10 every year beginning on August 1, 2013, and continuing through August 1, 2015, until the rate is $10.55 for the aforementioned large employers. However, that is not the whole picture. There is also an escalator that is pegged to the rate of inflation as measured by the Consumer Price Index for all urban consumers.
Quite frankly, I don't have a problem with any of this even though the escalator is an unknown variable that makes it harder to project a yearly labor budget. As I stated earlier, we believe in a living wage, and we feel that $13 an hour in 2013 is about as low as it should go. In fact, we think $14 per hour is probably more reasonable when speaking of living wages. We would like to be able to pay that.
So what, may you ask, is holding us back? It's pretty simple when you do the math. Based upon the legislation being proposed, we will be required to give our highest compensated employees an approximately $6,000 graduated raise by August 1, 2015. Based on twenty tipped employees, that would result in an increase in labor cost of $120,000 or about 5.5% of our net 2012 revenue. That number does not include payroll taxes or the CPI graduated escalator. A number such as that would put us upside down. We would be generating negative earnings. In simpler terms, we would be losing money as a result of increasing the wages of our highest paid employees while our lowest paid employees would have to forgo raises as a result. It would also jeopardize the long term viability of our business.
The National Restaurant Association has determined that the average profit margin of a fine dining restaurant is 4%. How can we afford to increase labor costs by what would effectively be almost 6% and still survive? Believe me when I tell you that if I have a choice of whom on our team will be better compensated, it won't be the group that stands to benefit most from this legislation.
Some people have posed a simple solution. We should just raise our prices. Well that might be fine for McDonald's and Burger King, but we cannot push our prices any higher than we already have in response to the increases we have seen in food costs due to the drought, shipping costs due to energy prices and rent due to increased property taxes and still stay within reach of the average consumer. Operating costs have skyrocketed over the last few years, and there doesn't appear to be any relief in sight. The two most frequent comments I hear about our industry related to these topics are these: "Restaurant employees should be paid more money." "You should charge less; restaurants are too expensive." In other words, we should increase spending while decreasing revenue. If only we could; I would do it tomorrow. However, there is no successful business plan in existence that proposes selling stuff for less money than it costs to make it.
Those in the State Legislature who are supporting this bill are trying to do the right thing, and they are in essential agreement with me when we begin discussing supply side economics. Let's make sure those on the bottom of the economic ladder are better compensated as opposed to those on the top. The working class poor are putting that money right back into the economy, an economy primarily fueled by consumer spending, rather than burying it in offshore accounts or hiding it elsewhere. For the most part, they are spending that money on the basic necessities of life, and they are undervalued and under paid. If my industry or any other industry tries to argue that income inequality is not an issue, they will lose that argument every time. The gap is huge, and it is growing larger. Our Legislature is admirably trying to address that problem, but they are attempting to do so with a one-size-fits-all approach. This sort of approach will only serve to exacerbate a problem that already exists within our industry and which is seldom recognized and has never been addressed.
Furthermore, this approach that makes distinctions between small and large businesses based on revenue as opposed to net income is badly flawed. For example, a business generating $625,000 in revenue with a 20% margin will return $125,000 to the bottom line. This is very likely achieved with a work force far smaller than the labor intensive fine dining restaurant generating $2.5 million dollars in revenue. That business will return only $100,000 to the bottom line based upon the aforementioned NRA average profit margin for fine dining restaurants. Yet, what is being proposed would contain an exemption for the more profitable business while leaving the less profitable business to adhere to the full wage increase. This makes no sense.
In view of all this, the Minnesota Restaurant Association is proposing something similar to what I proposed many years ago. That is, let's not roll back wages on tipped employees. That is wrong, and it is rightly unpopular. No one should legislate a decrease in wages, particularly for the working and middle classes. Instead it seems reasonable to freeze the minimum wage for tipped employees at the current level of $7.25 an hour. The MRA would like to see some sort of waiver in place for employers who have employees who are compensated primarily through gratuities. They are proposing $12 an hour as the trigger for when that waiver kicks in. I am more inclined to see that waiver occur at a rate of $20 per hour. That is roughly the equivalent of $40,000 per year. If anyone feels that the person scooping change off the counter at the local diner is being over compensated then that person needs to spend a day in those shoes. On the other hand, someone working less than 40 hours a week and making $40,000 is being fairly well compensated.
I believe there is room for compromise that will allow us to embrace an increase in the minimum wage. As for Heartland, should the bill pass in its current form and be signed into law by the Governor, then our folks on the bottom of the wage scale will be hurt the most. In addition, our policies of paying living wages and fair trade will have to be reexamined. Keeping our money in Minnesota for Minnesotans might no longer be possible if our business is to survive. Our plans to expand health care coverage will most certainly be put in jeopardy. Dictating by statute a $6000 mandatory wage increase for the highest paid members of our team will not succeed in closing the gap in wages and benefits within our industry. Quite the contrary is true.
I encourage our lawmakers on both sides of the aisle to think outside of their comfort zones and ideological prejudices in examining this issue. An increase in the state minimum wage should be a good thing that will fuel consumer spending while helping to close the wage gap. This is a laudable goal. It is also a hot potato issue that will require courage and level headed thinking. If the goal is to help create some semblance of equity by increasing the wages of the working poor, then it seems essential that the final form of this legislation take into account as many variables as possible so that it doesn't end in results that achieve the opposite of its intent.