Minimum wage hikes not helping workers
By Bob Miller, Owner
Bear Claw Bar and Grill, McAllister
I started to evaluate the impact of Constitutional Initiative 151 on the restaurant businesses back in 2006 when it was placed on the Montana ballot.
What I wanted to analyze was how minimum wage, tips and taxes would be affected by the increase of the first $1.10 in hourly wages to my wait staff, and further how the increase to
Bob Miller
$7.25 would affect restaurant profitability looking ahead to July of 2009.
What I saw back in 2006 indicated that the health of the food service business in Montana through the coming three years was very much in doubt.
At my busines I have 8008 wait hours across the 364 days that we are open. The total wage increase, with the first boost of $1.10 per hour, amounted to $8,808.80 per year.
Montana has a higher minimum wage for tipped employees than 43 other states. Therefore the increase to $6.25, then $6.55, $6.90 and soon to be $7.25 an hour is a very serious increase in labor cost that weighs heavy against the bottom line.
I looked at ways to try to mitigate the impact of these increases, things like cutting the time I bring my wait staff to work, reducing my total service staff per customer, increasing my per plate price and so on.
Without having to make a major change in my business model, I found my options were quite limited and most of the $8,808.80 in new wages would have to come off the bottom line. That was just the first increase to $6.25. I had not even projected out to 2009 yet.
My total wage increase by July 2009, to the $7.25 an hour mandated by CI 151 for tipped employees, will be $16,816.80 per year, even before the requisite increases in tax liability for both workmans compensation and unemployment that are linked to the wage, as well as federal Medicare and Social Security taxes.
Tips in Montana are taxable to the employer. That is the employer pays workmans compensation and unemployment taxes on all "declared tips."
I won't bore you with all the math; trust me, it pencils out.
My wait staff earns around $60,000 in tips. Divide that by 8008 wait hours and tips would amount to $7.49 per hour. So looking on to July 2009, the average hourly income at my establishment for wait staff, with the $7.25 minimum wage, will be $14.74 per hour.
In 2006, at $5.15 an hour the average wait person made $10.14 an hour with tips.
The employer pays social security and medicare just on the hourly wages, not on the tips. But in addition, the employer pays all work comp and unemployment taxes on the total amount, including on tips.
The increase in social security will amount to $1,286; the increase on work comp and unemployment amounts to another $1,345 on average. This is just on the increase of the minimum wage and not considering any increase in the total amount of tips.
In addition, the employer pays a credit card fee, on average, of 3 percent on the credit card tips. It costs my restaurant another $1,200 a year in credit card fees to process the approximately $40,000 of tips charged to credit card.
Regarding the profit structures of the average causal dining restaurant, the national average is a pre-tax bottom-line profit of between 5 percent and 10 percent.
As of July 2009, looking at all the tax liabilities and hourly increases, if I maintained the same wait hours labor expenses will increase by $19,447. Assuming that we can maintain that theoretical 10 percent profit margin, which is doubtful, my business will have to increase its total gross sales by $194,470, just to account for the wage increase. That would amount to around a 40 percent increase in sales, over three years!
The discussion above was all considered in 2006. The economy was buzzing along and casual dinning was doing fine.
Since that time we have witnessed the largest economic downturn since the 1930's. We, as an industry, are mandated, in the midst of a large decline in business, to continue to give employees pay raises. The health of our businesses are declining rapidly and layoffs and closures are occurring every day.
Keep in mind all this is based on only the pay raise that has occurred for wait staff: no raises to cooks, dishwashers or bus people, all of which mostly make less than the wait staff and have a fully taxed paycheck. Is this fair? The forced and increasing wage disparities in these businesses is troublesome to employers and employees.
Raising prices enough to cover increases in wait staff cost overhead is impossible; the market won't bear it.
This is the reality of 2009. Look forward to 2011 and beyond and what do we see? At some point the economy will begin to recover. Most economists believe that when the recovery occurs inflation will follow. The 2006 minimum wage initiative included an automatic cost-of-living increase on the minimum wage based on the Consumer Price Index (CPI). Once inflation sets in minimum wage could climb exponentially. At 7 percent inflation per year, a $7.25 wage will rise to $7.76; the following year to $8.31... Well you get the idea.
For some of us $6.25 was too much and we have already begun to change our operations; in my case, closing the dining room Monday through Thursday, and maybe having to close it completely until the tourists show back up in June.
Others were on the edge at $6.55 and trying to hold it together. At $6.90 (January 1) others will begin to contract, even the large corporate operations. Then at $7.25 (July 1) and beyond with the current economic downturn... The outcome is terribly clear.
The unfortunate thing is the very people this was designed to help now have limited hours or no hours at all. Keep in mind Montana has the highest minimum wage in the United States for tipped employees, well above required federal wage for tipped employees.
An untipped minimum wage employee is paid for the hours worked and if there is no work they make nothing. A tipped employee only has an opportunity to earn additional money if there are diners. Unfortunately those opportunities have now been significantly diminished.
Without a tip credit and/or tax relief, the economic health of the foodservice business in Montana and their thousands of workers is very much in question.
Editor's note: Bob Miller owns and operates the Bear Claw Bar and Grill in McAllister. To contact Miller on this issue, phone 406-581-8438. [i]Source: The Montana Tavern Times, January, 2009, published monthly by Continental Communications, 125 W. Granite St., Suite 102, Butte, MT 59701.[/i]