Increased Minimum Wage’s Effect on Business

The campaign to raise the minimum wage isn’t just affecting employees, it’s affecting their employers as well; especially restaurateurs. Currently, they spend about 30% on food costs, 36% for labor costs, and 30% on administrative and other costs; which only leaves them with a 4% profit margin. When this new wage increase goes into effect, not only are they hit with higher labor costs, but there’s also plenty of collateral damage as well.

To compensate for this loss, some restaurateurs are making drastic changes (i.e. cutting food costs by selling smaller portions for higher prices) that will impact the guest experience in a huge way. For example, Seattle culinary icon Tom Douglas instituted a two percent “Wage Equity Surcharge” at his restaurants on April 1.

He explained his actions on his blog: “With the new regulations, companies with over 501 employees have to increase to $15 minimum wage over the next three years unless you offer a ‘silver-level’ health plan or above in which case you can spread it out over four years,” Douglas said. “Companies under 500 employees have up to seven years to pay the $15 minimum using a mix of wages, tips, and healthcare benefits. This is a multi-million dollar discrepancy between large and small employers and completely tilts the playing field in a very competitive industry.”

Douglas, who’d been a strong supporter of higher wages for restaurant workers for years, raised his menu prices by 4% instead.

Another iconic Seattle restaurant, Ivar’s Salmon House, also increased their menu prices to adjust to the rise in minimum wage. The message that appears on their menu now states: “Tipping is no longer necessary. The City of Seattle’s new minimum wage law went into effect on April 1, and we have changed the way we pay our employees.”

Abraham Lincoln once said that, in order to take care of employees, we must protect their employers. So, if these large scale operators, like Douglas and Ivar’s, are challenged by the new law, how are the little guys faring?

To get to the bottom of this question, let’s take the case of pizza franchise owner Ritu Shah Burnhamm. Based on the way that the new Seattle law is written, her restaurant is categorized as having over 500 employees, although her individual store only has 12. This hiccup puts her on par with the big restauranteurs who have to pay $15 per hour for minimum wage. As a result, she has decided to shut down her operation.

“If you have to pay $15 an hour in 20 months, and that is the largest part of your expenses, it’s a little difficult to do a business plan that makes that work,” Burnhamm said. “I tried. Before I made my decision I tried, and I didn’t see it happening.”

Watch my interview on Fox News with Varney & Co regarding the minimum wage hike