Alberta’s minimum wage increase forcing operators hands to ‘rethink tipping’

I have just come back from Calgary where I spoke at a Restaurant Canada forum on the pending Alberta Minimum wage increase.  One of the major initiatives of the new NDP government in Alberta has been to increase minimum wage for all employees to $15.00 by Oct 1, 2018.

Currently, general minimum wage in Alberta is $11.20 with the liquor server minimum wage is $10.70.  In one week’s time on October 1, 2016 the general minimum wage will increase to $12.20 and the separate liquor server minimum wage will be abolished. That means servers will see an increase of $1.50 an hour and will be paid at the general minimum wage of $12.20.  More imposing to restaurant operators will be two further increases which will see the minimum wage increase to $13.60 in 2017 and eventually $15.00 in 2018. This means by 2018 servers will be making a $15/hr wage.

In conversations with close to a dozen operators the past few days I found the climate in the provinces restaurant community to be angry, worried and unsure of what to do.  The feeling is that the government has moved forward with this legislation without thinking it through.  I have to agree with the Alberta operators in this case. Although I advocate for higher wages for all restaurant workers I think this is another example of governments not understanding the unique compensation model that exists in restaurants. This is not only happening in Alberta but closer to my home in Ontario where the Liberal government continues to increase server minimum wages.  All research (including our own) points to servers making approximately $18/hr in tips plus their approximately $10 liquor server minimum wage yet the government continues to raise the liquor server minimum wage creating huge challenges for operators.

At the forum in Alberta various ideas on how to deal with this increase were presented and discussed.  Because restaurants in Alberta follow the standard practice of servers receiving tips they are in a very precarious position.  Servers making $15/hour, or even $12.20/hr plus their current 15%-20% tip from a customer cannot continue or we will see restaurants going out of business left, right and center.  I truly believe operators when they say they cannot absorb this new increase unless they raise prices and that is something that would be almost suicidal for full-service restaurants in the province.  The government’s first increase was actually last year and operators had to work hard cutting costs and raising prices to meet that increase. The full-service restaurant segment has been struggling in recent years because of the increased popularity of counter service restaurant. http://www.eater.com/2016/8/31/12718480/best-new-restaurants-openings-fall-2016  On top of this grocery retail has been taking a piece of the pie away from full-service as well with improved home replacement meal offerings.

With a consensus that they can’t raise prices operators are asking themselves what they should do.  One option is to do what Earl’s 67 have recently done in Calgary. They have eliminated tipping and have added a 16% ‘Hospitality Charge’ to the bill. A presentation by Earl’s at the symposium gave me the sense that although not without its challenges this switch is showing promising signs in the early going. I enjoyed a meal at the restaurant and the service was to notch and all staff members I spoke to seemed for the most part to be embracing the system.  The result of the 16% charge is that Earl’s now has full control of all revenue that the customer is willing to pay for a restaurant meal. No longer is the server allowed to walk away with an inflated piece of the wage pie.  According to Earl’s, front of house employees are now making between $18-$22 an hour and back of house $16 – $20.  The overall financial results of the restaurant are proving to be at least equal to what they would be with the old tipping system and they have been able to hold on to their pricing.  Perhaps most importantly, come October 1 Earls 67 will not have to worry about the increase in minimum wage as they are already far exceeding this.

Unfortunately they are the only ones in the province that are in this envious position.  Other operators are looking at options including a 4% service charge to off-set the increase to raising prices and eliminating tipping.  As an outside observer I have a fear that these operators will implement different solutions to this issue producing various models that will confuse and anger the full-service restaurant consumer, something the industry cannot afford to do.  Although I have always believed that ‘price inclusive’ (raising prices 15%-20% and eliminating tipping) is the best model I am leaning towards the idea that the adoption of a model that the French use may be the least risky model for Alberta at this time.

In France it is the law that all full-service restaurants apply a 15% service charge. Although this was done in France to ensure taxes were being paid on tips it may make sense in Alberta to help create an equal playing field and a limit confusion from a consumer point of view.  Whatever the solution I fear that unless there is a clear and consistent approach operators are going to struggle and make an already turbulent sector more so.

At the end of the day a need for a long-term approach in Alberta is a must. Operators worried only about making up for this October 1 increase need to put this thinking aside and decide on what will be the best long-term approach.  In another year they will face the same question and again so in 2018.  They cannot change 3 times in three years for fear of alienating the consumer. Operators need to address these upcoming increases in one step and do it now.

It is the opinion of this author that the only way forward is to decrease the hourly income that servers currently make which means altering the restaurant compensation model to eliminate tipping. Our recent research paper in the Journal of Food-Service and Business Research shows that eliminating tipping can also produce many other positives for operators including; better revenue control, more equality in wages, less rivalry and better relationships amongst staff, stronger team work, less discrimination, and better career and performance and career management.

Restaurant operators outside of the province of Alberta should be watching what is going on in that province very closely.  While operators across the country are starting to discuss and even experiment with other compensation models their colleagues in Alberta are facing no choice, they have to move to a different model and they have to do it now.  All things south of the border and now in our country are leading to this idea of a higher living minimum wage with $15/hour being the supported figure.  If this can happen in Alberta it can happen and most likely will happen in all provinces. Smart operators need to read the tea leaves and start thinking about the future, now is the time to change.

Bruce McAdams

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