How the House’s Proposed $15 Minimum Wage and Tip Credit Elimination Will Affect Restaurants

House Speaker Nancy Pelosi reported on February 11, 2021, that the $15 federal minimum wage hike will be heading to the Senate, nestled in the next coronavirus aid package. During the weekly briefing, Pelosi told reporters, “We’re very proud of that. As I’ve said, 27 million people will get a raise, 70% of them women.”

Its inclusion in the aid package is said to be due to its importance to the nation’s economic recovery. While the original Raise the Wage Act was dropped from a Senate bill the first week of February, the House Education and Labor Committee included the provision in a reconciliation bill. Democrats are attempting to use a process called budget reconciliation to pass the bill, which will more than double the current federal minimum wage, without Republican support.

Most Americans seem to be behind the bill. The Pew Research Center found that two-thirds are in favor of raising the minimum wage to $15 an hour. Several states and cities have preceded the potential federal wage hike. Moving towards this minimum wage include California, New York, New Jersey, Illinois, Connecticut, Maryland, New Jersey, Florida, and Washington, D.C.

Cities already enacting a minimum wage of $15 or higher include Seattle, San Francisco, San Jose, and New York.

The Basics of the FY21 Budget Reconciliation Bill

The reconciliation bill is said to fulfill the promise of President Biden’s American Rescue Plan. When the law passes, an immediate $9.50 an hour minimum wage goes into effect. Annual increases occur until $15 an hour is reached by 2025. Additionally, the current $2.13 an hour minimum wage for those receiving tips as part of their pay will face gradual elimination. The tip credit, currently implemented in all but 7 states, will be abolished.

The Effects on Restaurants and Their Employees

We are in the midst of a pandemic, a viral scourge that has laid to waste the restaurant industry. The Bureau of Labor Statistics reports that food services and drinking places lost 372,000 jobs just in December. The end of 2020 saw 2.5 million jobs gone from the industry, and one in six restaurants closed for good.

And yet now, it seems, is a good time to raise the minimum wage and end the tipped credit. The results, according to industry experts, will be devastating.

On January 26, 2021, Sean Kennedy, executive vice president of public affairs for the National Restaurant Association, released a statement regarding the Raise the Wage Act. He said, in part, “The Raise the Wage Act imposes an impossible challenge for the restaurant industry. While other businesses on Main Street are starting to see a recovery, restaurants across the country are struggling to stay open amidst indoor dining bans or limits that have been in place for 10 months.”

His final point is especially telling. “Our industry runs on a 3-5% pre-tax profit margin in a good year—during a pandemic is not the time to impose a triple-digit increase in labor costs.”

Kennedy believes this legislation will result in more workers losing their jobs and additional restaurant closures. He also noted that tipped wage earners typically bring home between $19 to $25 an hour, and do not support the elimination of the tipped minimum wage.

Both Peter Saleh of BTIG and Michael Halen of Bloomberg note the disparity among states. Businesses in states with a rising minimum wage will not feel the effects as much as those in states that will be significantly impacted by the increase. Halen mentioned brands with high visibility in the South could experience significant pressures, such as Cracker Barrel, Chili’s, Texas Roadhouse, and Outback.

Both believe the wage increase will result in fewer jobs, more automation, and accelerate the trend toward smaller footprints and ghost kitchens.

Most restaurant brands agree. Ray Blanchette, CEO of TGI Fridays, said that ending the tipped minimum wage will lead to fewer hours for their waitstaff and higher prices for their customers.

The Effects on Other Small Businesses

The recent CNBC/SurveyMonkey Small Business Survey found that one-third of small business owners will probably lay off workers if the federal minimum wage is raised to $15 an hour.

Molly Day, vice president of public affairs at the National Small Business Association, shared this with CNBC, “We certainly appreciate the sentiment of bringing people out of poverty, but I think you need to look at the unintended consequences which is they’re going to be a lot of people laid off from their job altogether.”

While it’s clear that the financial inequalities and economic difficulties faced by those near the poverty line need to be addressed, it’s also clear that there may be a better way to do it than this federal legislation. This country is vast and divergent, and the living wage markedly different for the various regions. There is a balanced approach to address wage levels and discrepancies. Now, we need to find it.

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