$15 Minimum wage could kill tipping

There has been significant discussion about an increase in the minimum wage to $15/hour.  Seattle has implemented a $15/hour minimum and LA, among others, has committed to moving towards it.  Rachel Notley, Alberta’s new NDP Premier has committed to this standard in Alberta and there is more and more discussion about it across Canada.  The merits and challenges of such an increase have garnered lots  of discussion.  While the discussion is not exclusive to restaurants, this sector does employ more than one million Canadians, many of whom are below the base of $15/hour.  One potential impact of a significant increase in minimum wage is a move away from tipping.

There are clearly many minimum wage employees who are not routinely tipped. This includes the quick service restaurant segment.  In the causal and fine dining segments servers are usually tipped and the majority of restaurants have implemented some sort of tip sharing program that may or may not include back of house workers.  There is a small but growing movement in which restaurants are eliminating tipping and paying all employees a higher wage.  They achieve this by either instituting a service charge or raising prices with service included.  In this model all employees get a higher base wage.  This is, however, a zero sum game.  Back of house employees get higher wages.  Servers get a more predictable paycheque but they pay more tax (its all reported) and usually a lower overall wage – the distribution is changed to give more to the back of house.  This poses a problem for restaurants going it alone.  It can be more difficult to find servers.  It can also be difficult for customers who are used to a tipping convention and are uncomfortable in an unfamiliar and unconventional model.  There is also the issue of payroll taxes which puts an additional burden on restaurants who pay a higher wage as opposed to those in which employees take home all tips or a share of tips through informal redistribution.  This rarely gets discussed and is a significant disadvantage to restaurants going tipless.  As an aside, it truly surprises me that the Canada Revenue Agency has never been more proactive in taxing tips.  It would be relatively easy to do given more than 90% of restaurant transactions are settled with credit or debit cards.

Raising the minimum wage puts the same burden on all restaurants.  Margins are already tight in many restaurants and a significant increase in labour cost and the associated payroll taxes would exacerbate it.  The approximately 15-20% of restaurant payments going directly to servers might provide a way to deal with this margin reduction.  Implementing a service charge (or raising prices and discouraging tipping) would put the revenue in control of managers who are forced to pay higher wages through regulation.  It likely would lead to wages higher than minimum wage.  We’ve seen this happen in some restaurants who have gone to this model.  This approach would also not increase the total cost of dining out and thus not dampen demand for restaurants.  Raising wages while maintaining the  tipping convention would inevitably increase the total cost of eating out and reduce total demand – reducing the number of restaurants and jobs.

An increase in minimum wage would force restaurants to adapt and innovate.  One such adaptation may be an accelerated move away from tipping.  It will be interesting to see.

4 thoughts on “$15 Minimum wage could kill tipping

  1. are there any Ontario guidelines for tipless wage rates? I’m about to open a shop in a rural city (where tips generally aren’t great anyway) and I need to balance what the business volume can afford vs what would be a reasonable wage rate for our local economics. I’d taken a mere guess at prorating the ‘going rate’ wages by 17%, but is that enough? Too much? For example, if you were opening a simple restaurant/pub in Guelph, what would be the spread between dishwasher and chef, busboy and bartender?

    Although we haven’t begun the hiring yet, in just talking to servers I find there is an initial shock at the concept, but once explained, I haven’t had anyone walk away 😉

  2. Ok, let me try this again, only now, having received no feedback from you (or anyone else) I just went ahead and, well, did you hear me on Ontario Morning on CBC this morning? 🙂

    facebook.com/avalonjazz if you want to hear the full clip.

    so … what happens next?

  3. MrG – sorry I was away for a bit and then off sick. I am not aware of anything other than minimum wage as a guideline for non-tipped employees. The reality is it likely differs significantly from location to location. Happy to discuss some time and looking forward to hearing your interview.

    1. the customer response has been overall fantastic, extremely positive, and while we’re just starting out, maybe that is an advantage since no one has any frame of reference about what my business _should_ be doing cost-wise or pay-wise. My scheme was based on the United Way’s “Living Wage” that is aimed at providing a single parent of two a modest but decent lifestyle that includes, for example, internet access. I don’t think that is unreasonable, and since the rest of the world _can_ do it, surely it must be possible here too.

      My strategies to compensate are to have a much smaller spread between lowest and highest wages (including my own, should the restaurant grace me with enough surplus to pay myself 😉 ) and having the best possible product (in food, beverage and entertainment) for the most affordable price in hopes of driving up volume — I don’t believe ‘exclusive’ is a viable strategy here in Owen Sound although there are some who do try that strategy, I aim more for the regular crowd, those who’d stop by daily or at least regular weekend show-goers. That of course means not many “big name” acts, but there again I believe we have plenty of local talent that is absolutely worthy of the attention.

      So the adventure begins!

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