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How Restaurants Can Respond to Minimum Wage Increases

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April 18, 2022

At the beginning of 2022, restaurants in twenty-one states saw new minimum wage increases. As a result, owners had to plan for added labor costs. While increasing restaurant wages is nothing new, planning and rolling out payroll changes takes time. As more and more restaurant operators expect higher labor costs in the coming years, it’s vital to have a plan to cover these payroll needs.

How Will New Minimum Wage Laws Affect Your Restaurant?

In many states across the U.S., minimum-wage workers saw an automatic increase in their paychecks on January 1, 2022. This first round is part of a larger, five-year plan to bring the federal minimum wage up to $15, known as the Raise the Wage Act. While it remains to be seen if the $15 per hour will be a definite part of our future nationwide, many establishments are anticipating a continuing rise in wages. 

In order to manage these shifts in payroll, restaurant owners are developing creative ways to prepare for and streamline costs. 

1. Keeping the Tip Based Model

This is perhaps the most common model currently. In essence, restaurants keep tipping as a standard practice and increase their staff wages to meet the federal minimums. While it sounds simple, there are a few legalities to consider. 

Based on the Fair Labor Standards Act (FLSA), tips are owned outright by the employees receiving them. This means that establishments cannot consider tipped money a part of their revenue. However, restaurants can consider employee tips as a credit towards minimum wage requirements, as long as the tip average brings the employee up to current minimum wage rates.

Pros and Cons: This model is a common practice that doesn’t take any additional explanation to guests or staff. However, if an establishment has employees, like hosts or kitchen staff, who are primarily paid an hourly wage and not a tip-wage, owners will need to adjust those rates to meet new federal requirements.

2. Mandatory Service Charge Model

Some restaurants are removing tip lines on their checks and are instituting a service charge on all items sold to help offset labor costs. In this model, owners charge on average 15 to 22 percent on a table’s final bill and can then utilize the extra income to pay their employees elevated wages.

Pros and Cons: While this model gives the restaurant owner complete control over money coming in, the IRS considers all service charges as sales, which means establishments aren’t eligible for the Federal Insurance Contributions Act (FICA) tax credit

3. All-Inclusive Menu Pricing Model

All-inclusive pricing ultimately eliminates tipping and service charges and instead bases the menu price on all operational costs, including labor. While this system is used widely worldwide, it’s relatively new to American restaurants and consumers. This model is appealing because it can easily be used with a variety of establishments like fast food restaurants, cafes, and family-friendly restaurants. 

Pros and Cons: All-inclusive pricing allows operators to streamline accounting, pay living wages, and have better revenue control. However, since this model is atypical, customers might have sticker shock at the bottom-line pricing. Educating your guests, as well as your staff, is key to employing this method of pricing. Also, since gratuity no longer applies to diners’ checks, establishments cannot claim the FICA tax credit.

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