As the Chicago City Council considers an ordinance to eliminate the tipped minimum wage for workers, Michael Roper, the owner of Hopleaf in Andersonville, knows his business model, which includes tipped servers and bartenders, could be on the verge of some serious changes.
The council met on Thursday and will now schedule hearings to debate the topic. Still, the city appears poised to approve a measure at its second October meeting that would abolish the law allowing restaurant owners to count tips toward the difference between a $9 hourly wage and Chicago’s standard minimum wage of $15.80 per hour with tips.
While Roper and the rest of Chicago don’t know how the ordinance would impact restaurants, they can look for guidance in other parts of the country, like California and Washington, D.C., where elected officials have abolished a tipped minimum wage. Chicago’s ordinance, which would go into effect in two years, would be a big win for the progressives who backed Mayor Brandon Johnson’s win in April.
“We’re not sure what we’re going to do until it really happens,” Roper says. He predicts that the change will spark a whole lot of staff meetings. “There’s going to be a manager meeting and full staff meetings, in which we’re going to start new protocols — where tip money goes and how we’re going to staff.”
For example, Toast, a point-of-sale and payment-processing company focused on the restaurant industry, released data in September showing tips at full-service restaurants were down in the second quarter of 2023 to an average of 19.4 percent from 19.7 percent in the first quarter. The company said that was the lowest tip average since the start of the pandemic.
It theorized that a number of factors could be behind the downturn, including so-called “tipping fatigue” and inflation, but also the addition of service fees by many restaurants.
The impact of such a change has been hotly debated among restaurant industry lobbyists, labor advocates, and others, with some contending the change would benefit workers and others saying it would handcuff the restaurant industry.
Sam Toia, president of the Illinois Restaurant Association, says the quality of service in restaurants will go down as he believes servers will make less money and restaurant owners will hire fewer of them, preferring instead to depend on technology such as mobile-ordering apps — a point of contention in Chicago, which is currently suing third-party companies DoorDash and Grubhub.
David Cooper, director of the Economic Analysis and Research Network at the Economic Policy Institute, a left-leaning economic think tank, is in favor of the change, arguing that the policy has “significant racial and gender parity implications” because it would raise pay for a workforce that has been historically disadvantaged.
Meanwhile, some who study the hospitality industry say the impacts of removing the tipped minimum wage would be real, but not necessarily devastating. Michael Lynn, a professor at Cornell University’s School of Hotel Administration who studies the food and beverage industry, says that while restaurants may raise prices to cover added labor costs, owners could be overestimating the damage that will do to their businesses. “All their competitors will have to do the same,” says Lynn. “It’s not like they’re unilaterally raising prices.” And while increased prices may come as an initial shock to customers, “they’ll get over it over time,” he says.
He pointed out that in states where there has either never been a tipped minimum wage or it was eliminated decades ago, such as California, Minnesota, and Washington state, the restaurant industry hasn’t crumbled in those markets.
Diners Will Pay More
Roper says price increases would likely be in the cards for Hopleaf if the measure is passed.
“Prices will probably rise and I do think that we will probably be a little more careful about how many people we have on the floor,” says Roper, adding that he will likely also hire fewer people in the front of the house.
And he worries about whether customer responses to higher prices will decrease demand for businesses like his — a full-service restaurant and bar.
Food prices in Chicago have already risen sharply since the beginning of the pandemic, according to the Bureau of Labor Statistics, reaching an 8 percent rise from the previous year by the end of 2022.
Cooper says that the data the Economic Policy Institute compiled pre-pandemic in places where there is no separation between tipped and standard minimum wage showed overall take-home pay for servers and bartenders is higher per hour, roughly 18 percent more per hour than tipped workers receiving the $2.13 federal minimum wage.
Meanwhile, Lynn’s research shows that in those states without a tipped minimum wage, tipped workers do get a little bit less from customers after their bill is paid, but the difference is only a few percentage points.
Service charges at more restaurants
Although some restaurants will simply increase menu prices, others may introduce new service charges to the bottom of bills, a practice that became increasingly common since the height of the COVID-19 pandemic.
Roper says he objects to adding service charges at Hopleaf and doesn’t plan to in the future. “You figure out what you need to be a viable business and make it worthwhile for the owner or investors,” says Roper. “And you alter your prices to meet that standard.” He adds: “You don’t need to give customers an ultra-detailed list of where that money is going. I don’t think the customer wants that. I think that’s annoying,” he says.
Roper also says he thinks there is a problem with transparency when a customer sees one price on a menu and then doesn’t encounter a service charge until they get their bill.
For other owners, however, the issue feels less settled. Bill Jacobs, owner of Piece Brewery and Pizzeria, says he was still considering whether he should increase the restaurant’s current 3.5 percent service charge — introduced to cover employee healthcare premiums — if the new ordinance is passed.
Toia says that for servers, adding service fees means the effort they put into service won’t result in higher tips, and restaurant owners can theoretically do whatever they want with the fees, such as paying the back-of-house workers. From the server’s perspective, Toia says, the thought process would be: “Why don’t I just go get a job in retail, then?”
Lynn says research has been done on the impact of price partitioning, or separating out the different components of a total price. That research, according to Lynn, shows that the more prices are partitioned, the more hostile a reaction customers have — a tension that has anecdotally surfaced online in recent months in Reddit forums in LA and Chicago.
Over the long term, Lynn says, it’s possible that fewer restaurants will continue operating on a full-service model, instead, pivoting to counter or limited service, where customers pay at a register before eating, as it requires fewer staff members. Another option would be to employ digital kiosks to take orders. Already, Chicago restaurants like Honey Butter Fried Chicken, Salt Burger, and Wow Bao have already adopted touchscreen ordering.
In Toast’s report, the company noted that counter-service restaurants had seen a slight uptick in average tip amounts from the first to second quarters of 2023, from 16 percent to 16.1 percent, after gradually dropping since 2018.
More kitchen versus server drama
Elimination of the tip credit might also have other cultural impacts on the service industry.
Historically, there has been resentment of servers, who are sometimes able to command high tips, by workers including cooks and dishwashers, who receive a flat rate for work that is often perceived as less pleasant.
But the elimination of a tip credit can allow greater legal tip sharing, Lynn says. For example, when restaurant owners use tip credits, tips can only be shared with the traditional tip pool, a group that includes bartenders and coat-check personnel. Per federal law, when restaurant owners claim tip credits, tips earned by front-of-house employees can be shared with kitchen staff and others in the back of the house.
“That’s actually good from the perspective of restaurateurs and being able to equalize pay a little bit more across the different divisions of the restaurant,” says Lynn.
However, more equality isn’t guaranteed if the tip credit vanishes, Lynn says. If tip pooling is not instituted, unfairly or not, servers could quickly become the highest-paid employees in the restaurant.
Meanwhile in D.C.
One place that’s in the process of eliminating the tipped wage credit is Washington, D.C.
In November 2022, D.C. residents voted overwhelmingly in favor of Initiative 82, eliminating the tipped minimum wage in the city, which was then set at $5.35 an hour, and raising it to the standard minimum wage there, currently $17 per hour.
The change is being implemented gradually, with a complete transition set for 2027.
And as the change progresses, Shawn Townsend, the president of the Restaurant Association of Metropolitan Washington, says local establishments are already experimenting with changes that include price hikes, menu, and staffing changes.
While service fees and additional gratuities for larger parties were legal in DC and on the rise before Initiative 82 (many large restaurant groups deployed them regularly), more restaurants added them afterward and some even labeled them as an “Initiative 82 Fee.”
Townsend predicts that “as long as the tip credit system is eliminated, you will continue to see service charges pop up at many different restaurants, and some will choose not to.”
Because of that, Townsend says, the association supports a new law backed by D.C. Councilmember Kenyan McDuffie that could be taken up by the city’s council when it reconvenes in September, setting parameters around how service charges are implemented and how restaurants inform customers of them.
Some of the restrictions set forth in the law include capping service charges at 22 percent, setting limits on what the charges can be used for, and making sure diners are told ahead of time that there will be a service charge.
It calls for a citywide public information campaign from Mayor Muriel Bowser’s office explaining the change in the tipped minimum wage law to residents, workers, and restaurants, Townsend says, as well as an accelerated timeline that would “rip the Band-Aid off” with the new policy by 2025.
But for now, he says that as in Chicago, there’s still little certainty over how businesses will decide to adapt.
“There’s no guide to the implementation of it,” he says of the new policy. But, he says, restaurants and diners will adjust to the “new normal” as it goes into effect.
Clarification: September 25, 2023, 3 p.m. This article has been updated in regard to comments from Shawn Townsend, president of the Restaurant Association of Metropolitan Washington, surrounding service fees, specifically how D.C. restaurants regularly charged gratuities for larger parties before the passage of Initiative 82.