Schafer: Small raise for workers means a big cut for owners

  • Article by: LEE SCHAFER , Star Tribune
  • Updated: August 16, 2014 - 8:21 PM
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A Stillwater cafe has added a "minimum wage fee" to all tabs to account for the higher minimum wage.

Photo: Kelly Smith, Star Tribune

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The 35-cent-per-ticket fee that a cafe in Stillwater charges to make up for a minimum-wage increase erupted into a big national story, as many folks seemed to think it was some sort of political protest.

To me, this little fee looks like pure small-business improvisation in the face of a very big challenge.

It might have been the least bad option, rather than imposing price increases that could cost regular customer visits or cutting staff hours — and risking service so poor that customers don’t return.

“There is no good strategy,” said Al Landgraff, a partner who leads the restaurant practice for accountants Abdo, Eick & Meyers from the firm’s office in Mankato.

A lot of people appear to think the minimum-wage increase has only a minimal impact on a restaurant owner, just a 75-cent-per-hour bump for employees.

The reality is a double-digit percentage cut into the owner’s compensation — not exactly minimal. It’s not a stretch to suspect that for some owners it could even mean the doors get locked and the lights go out.

One example of a real owner’s situation comes from John Hamburger, a longtime restaurant industry analyst and president of the trade journal publisher Franchise Times Corp. He shared an income statement summary from an unnamed Twin Cities full-service restaurant.

This restaurant had about $2 million in annual sales. The cost of sales, mostly food and beverage, came to just under $600,000. Occupancy, insurance, utilities and other operating expenses together were a little more than $500,000. But the biggest operating expense category by far was payroll, at over $800,000.

This restaurant has nearly 17,000 annual hours of minimum-wage server and bartender labor. The increase to Minnesota’s required wage took the total payroll expense from about 40.3 percent of sales to about 41 percent of sales.

The difference on the pretax income line amounted to about $14,000, and what business truly can’t afford that? Well, it takes the owner’s income from more than $73,000 to less than $60,000.

That’s a 19 percent pay cut.

Landgraff provided an example from his roster of clients, describing one as a “great operator” of a restaurant that does about $4.5 million per year in sales.

The increase to $8 an hour, including withholding taxes and other payroll costs, amounted to $115 a day or about $42,000 per year.

Landgraff pointed out that it’s important to understand what kind of employees we’re talking about. In the full-service restaurant industry, it’s folks getting minimum-wage salaries who also generally share in tips.

The way it works is that the servers essentially self-report their tips so the restaurant can file for payroll taxes.

At the minimum wage, the gross income for a two-week payroll period is now $640. Sure, Landgraff said, it would be difficult to stretch that over the next two weeks’ of household bills. But the employees have all been reporting more than $1,000 in tips for that two-week period as well, enough that the actual hourly wage isn’t $8 but more than $20.50 per hour.

For a full-time schedule, that $20.50 wage equates to an annual income of more than $40,000. It’s common for clients to see servers, Landgraff said, not getting around to picking up their paychecks until several had piled up in the backroom. They had been living off their tips.

Joining a country club might be out of the question at $40,000 in annual income, but so too should have been an intervention by the state for a mandatory raise.

But that’s the law, and Landgraff said he teased his client that the solution seemed obvious: Find one good employee capable of doing the jobs of two people. His client wasn’t that amused.

Landgraff said any restaurant operator still in business in 2014 is pretty savvy about minimizing labor hours, so cutting staff hours further would be very tricky.

Cutting hours doesn’t mean shortening the hours open for business. It means instead of six servers coming in at 10:30 a.m. for lunch, three would come then and the rest later. The minute the manager sees the lunch traffic slow down, she starts sending servers home.

The risk, of course, is that five minutes after sending two servers home, nine tables of guests show up and service then slips enough to have some think twice about ever coming back.

A price increase is also challenging to implement, with lots of other meal and entertainment options available to customers.

So it’s easy to see why one owner, of the Oasis Cafe in Stillwater, decided to try a small fee. It was a price increase, but signaled to the customer that more money wasn’t going to the house.

It was something less than completely successful, considering the storm that later blew up on social media. Even Gov. Mark Dayton described the move as “tacky” and all but called for a boycott.

That kind of criticism of a small-business owner by the state’s governor certainly seems, well, a bit tacky.

The increase that just took effect is not, of course, a one-time event. The minimum-wage steps up an additional $1 per hour next year and 50 cents in August 2016.

Without even looking at a spreadsheet, you know the lost income for Landgraff’s client over the 12 months after next year’s increase will be close to $55,000. Unless other costs are cut, after the second raise gets implemented his income may have been nearly cut in half.

Founder Luke Shimp of the popular Red Cow restaurants, with locations in Minneapolis and St. Paul, is already looking ahead. He just increased prices for some main menu items, an increase he called “minimally invasive” to his customers, to make up for this year’s wage increase. He knows he won’t be raising prices again next year.

There is, he said, only so much he can charge for even the best mushroom-swiss burger.

“I hate to say it,” Shimp said, looking ahead to the wage increase next August, “but I don’t have a plan.”

lee.schafer@startribune.com • 612-673-4302

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