Understanding Minimum Wage & How It Effects The Restaurant Industry

As talks of minimum wage increases on the federal level continue to increase, it's important to consider how this will impact your restaurant or bar. How should you adjust to accommodate higher wages for your staff without seriously impacting your gross profits?

What is Minimum Wage?

In terms of minimum wage for restaurant staff, it depends on the way they’re paid. In most cases, restaurant workers like managers, chefs, and sometimes select senior full-time workers earn a salary that is outside the conversation of minimum wage because it will break down to an hourly rate higher than the federal minimum wage standard.

The conversation around minimum wage becomes a topic when referring to roles like waiters, bussers, hosts, and bartenders. However, within these positions typically they are not all paid the same way or rate. What usually affects this is that some positions fall under tipped minimum wage laws and others fall under the regular state minimum wage law. In all cases, the minimum wage rate will vary by state so it’s important to know the laws in your area.

Why Understanding Minimum Wage Changes Are Important

In a One Fair Wage survey of restaurant workers, 76% said that they’d leave a restaurant they worked at because of low wages and 78% said the most important thing a restaurant employer can do to encourage them to stay is paying a “full, stable, livable” wage.

Minimum wage increases have been happening around the country. Considering the economic pressures of inflation and other factors like a labor shortage, the question of labor costs has never been more urgent for restaurant and bar owners. Historically, many roles within a restaurant were simply paid minimum wage, but now more and more employers are faced with staff seeking higher wages. This directly affects your labor costs which then affects your profit margin.

One Far Wage (OFW) is a great resource to stay up to date with the wage conversation.

Tipped vs. Non-Tipped Restaurant Employees

The Fair Labor Standards Act (FLSA) is the primary law that sets the rules for federal minimum wage, overtime compensation, recordkeeping practices, and other labor-related laws. While the current federal minimum wage is $7.25. But, most states have other minimum wage laws that employers must abide by. It works a little differently for restaurant employees.

First, your hourly-paid staff has to be placed into one of two groups, tipped or non-tipped.

A tipped employee is defined as an employee that makes more than $30 in tips per month, according to the Department of Labor. That means any employee that does not receive tips goes into the non-tipped group and must be paid a least minimum wage.

Tipped staff receive tipped minimum wage which considers the wage paid by the employer and tip credit. This being said the tipped employee is still required to receive at least $2.13 an hour from the employer. Just like with the federal minimum wage, most states also have regulations concerning tipped workers. Most of them can be explained in one of these three categories:

Some states require you to pay tipped employees the full state minimum wage before tips. For example, California’s state minimum wage for all employees regardless of tips is $15.50 per hour.
States that require you to pay tipped employees a base minimum wage above the federal tipped minimum wage. If you’re located in one of these states, like Florida, you’re required to pay an hourly rate greater than the federal standard of $2.13 per hour.
States that just require the federal tipped minimum wage of $2.13 per hour.

Find an updated look at your state's laws on the Department of Labor website.

What Is Tip Credit?

To put it simply, the tip credit allows you to pay tipped employees under the federal minimum wage. The current tip credit is $5.12 which is why the federal tipped minimum wage is $2.13. A few key things to understand when it comes to tip credit:

As an employer, you must inform employees if they’re being paid a tipped minimum wage either verbally or in writing.
Each state has the ability to set its own tip credit according to its state minimum wage. This means it can be higher or lower than the federal minimum wage depending on your location.
Overtime must be calculated based on the full minimum wage, not the tipped minimum wage.
Tip credits can only be applied against an employee’s time while they're performing tip-producing work (like bussing or serving tables). As of December 2021, labor law dictates that tipped employees must be paid the full minimum wage if they spend more than 20% of their time performing non-tipped work. Basically, that means if you ask restaurant workers to spend too much time doing a task like washing dishes or tasks similar you have to pay them a higher hourly wage.

Tip credits are controversial, as some people believe that they allow employers to exploit tipped employees. However, supporters of tip credits argue that they allow restaurants to stay in business and provide jobs for tipped employees.

Here are some things to keep in mind about tip credits in restaurants:

Employers must keep accurate records of tips: Employers must keep accurate records of tips, including the amount of tips each employee received. This is to ensure that employees are paid the full minimum wage if their tips do not make up the difference.
Employees may be required to share tips: Employers may require employees to share tips with other employees, such as bussers and food runners. However, employers cannot require employees to share tips with managers or supervisors.

If you have any questions about tip credits in restaurants, you should contact an attorney.

Tips and Service Fees

Tip Policy

Tip policy is something decided by the restaurant owner. Without a solid tip policy tipping, and more importantly, claiming tips, can quickly become disorganized and chaotic. Most restaurants' policies are either individually claimed tips, tip sharing, or tip pooling.

Individually Claimed Tips (Or Everyone Just Keeps Their Own Tips)

This method is pretty straightforward. Each worker walks away with the amount of tips they received during their shit.

PRO: This system is simple and straightforward.
CON: Only front-of-house employees receive tips. Some back-of-house staff, like the dishwasher or food runner, may not like this idea. Or, you'll have to compensate these positions competitively.

Tip Sharing

For this method, tips are split amongst tipped and non-tipped employees during a shift. The amount the staff that received the tips shares is either their choice or the restaurant or bar can establish a minimum amount and the server is free to give more if they'd like.

PRO: More employees get to walk out with tips regardless of their role.
CON: This policy can make payroll more complicated because you still need to ensure everyone is being paid minimum wage in addition to tips. You also need to make sure you're tracking all the tips and where they're going at the end of each shift since the amounts can vary.

Tip Pooling

Under this method, tips are distributed equally between both front and back-of-house employees. The manager typically handles this distribution.

PRO: This is a more fair and trackable version of tip sharing.
CON: The Fair Labor Standards Act (FLSA) sets federal laws for tip pooling. The FLSA allows employers to require employees to “pool” tips with other eligible employees. The FLSA does not impose a limit on the percentage or amount of the contribution of each employee in valid mandatory tip pools. Additionally, service staff may become upset that their tips are being split if other employees aren’t, in their opinion, pulling their weight.

The FLSA prohibits:

Managers and supervisors may not participate in a tip pool, even if they also perform tipped duties.
Employees who do not customarily and regularly receive tips, such as cooks and dishwashers, may not participate in a tip pool unless the employer pays the full minimum wage and takes no tip credit.
Employers from keeping any portion of employees' tips. This includes tips that are pooled and then redistributed to employees. Employers who violate the FLSA's tip pooling rules may be liable to employees for back wages and damages.

Service Fees

A service fee or service charge is an additional fee that is collected in exchange for service on top of the cost of goods. Some examples outside of a restaurant may include buying a concert ticket from a service like Ticketmaster and being charged a fee on top of the ticket price or when you take money out of the ATM of a bank you don't use and are charged a fee.

Within the restaurant industry, service fees are becoming more and more popular. As a restaurant owner, you may add a service charge to your guest's bills for various purposes including:

An automatic gratuity for large parties. For example, if a party has more than eight guests some stores charge automatic gratuity to ensure the server is being tipped for their efforts.
A bottle service charge if you own a bar or nightclub. This fee can vary greatly based on the location, exclusivity of the club, bottles offered, and overall clientele.
A banquet event fee or catering service charge for large-scale catered events. If you're business offers packages for large events like parties, weddings, and so on, this fee can range from 18-25% depending on the size, nature, and location of the event.
A room service charge. if your restaurant is located inside a hotel you can charge a fee to bring food up as room service to the attached hotel guests.
A delivery fee for online delivery orders. This is usually around $3-$5 and is not the same as a tip as it does not go to the driver.

Tip vs. Service Fee

The biggest difference between a tip and a service fee is that a tip is optional and a service charge is not. Another huge difference is that the tip goes directly to the server while a service fee is up to the restaurant's discretion.

Gratuity is typically treated like a tip, but other service fees don't usually. Therefore, service fees can be used to combat other expenses. For example, larger parties require more staff throughout the restaurant not just more servers, so an event service fee can help offset some of that labor cost.

How To implement a Service Fee at Your Restaurant

If you decide you want to add service fees to your restaurant menu here are some easy ways to do so:

Decide Your Service Charge - Restaurant service charges can range from 3 to 20% of a customer’s bill. However, this amount, along with what the service charges are used for, can vary greatly based on the restaurant.

When you're deciding on a service charge rate for your restaurant don't forget to consider how the newly added service fee may change the tipping behavior of your guests.
Set Expectations - Since service charges are not optional like standard tipping, it can be helpful to clearly state the service charge to the guest at the beginning of service. This requires you to train your state correctly. Some restaurants also add a note on their website explaining the charge and some even explain how they allocate the funds to provide full transparency.
Determine How Funds Will Be Allocated - Since service charges are not tips, they are not required to go to the table's waitstaff. But, some states do have rules on how service charges can be used. Many use service fees to provide things like employee health care, pay credit card fees that are charged to the business not the customer, or just boost the restaurant’s bottom line. You just want to make sure that you’re aware of the laws and regulations in your state before determining how to allocate service charges.

THE MORE YOU KNOW... Service fees are not taxed in all states. The taxation of service fees varies from state to state. In some states, service fees are taxed as part of the sale of goods or services, while in other states, service fees are not taxed at all.