$15 Minimum wage could kill tipping
Posted: May 26, 2015 | Author: Mike VonMassow

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. There has been significant discussion about an increase in the minimum wage to $15/hour. 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.

The article was posted on University of Guelph Sustainable Restaurant Project blog

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