Exempt restaurants from wage hike if no leeway for tips

By Joshua Wood and Kevin Ferreira

Special to The Bee

October 14, 2015 05:00 PM

Increasing costs and reducing sales will hurt sit-down restaurants and their hardest-working employees. That’s why as members of the mayor’s Income Inequality Task Force representing business and labor organizations, we supported the “total compensation” provision as part of the recommendation on raising Sacramento’s minimum wage.

Our aim is to increase workers’ standard of living without forcing small businesses, especially local sit-down restaurants, to lay off workers or even close their doors. We sought to protect sit-down restaurants because the research presented to the task force made it crystal clear that a minimum-wage hike would have a significantly more adverse impact on them than on other industries.

Unfortunately, that goal is in jeopardy as the Legislature’s chief lawyer wrote a letter last week stating that total compensation is illegal.

Thus we believe the responsible next step is to exempt sit-down restaurants from the minimum-wage increase entirely.

Over the years, Sacramento’s midtown and downtown have been transformed into a vibrant dining destination, creating jobs and tax revenue. But a minimum-wage increase without the total compensation provision would threaten this uniquely Sacramento experience.

Under the proposal, restaurants and other employers would be exempt from paying the higher wage to employees who make more than $15 an hour in salary and tips or commissions – $2.50 above the eventual minimum wage.

There are quantifiable reasons to exempt sit-down restaurants if total compensation fails in court or at the City Council. They require significant investments up front, and because of foot traffic they require more improvements to maintain their appearance and competitiveness. Because 80 percent fail within five years of opening, they depend more than other industries on private equity, which is taxed at a higher rate than federal small-business loans common in other businesses. This means higher loan rates and less revenue.

In addition, the increase in minimum wage would raise employee and food costs, requiring price increases and lowering profits. Since a common practice within the restaurant industry is to pay rent of about 6 percent of gross proceeds – nearly double that of average retail businesses – the result would be higher lease prices despite the lower profit margin.

We are concerned that the wage increase will leave Sacramento sit-down restaurants with an unfair and destructive competitive disadvantage to those outside the city limits. And many restaurants would serve fewer organic, farm-to-fork foods, which are more expensive than processed foods.

The task force understood the unique financial model of sit-down restaurants. This is why we included the total compensation provision in the measure. Compromise is still within reach. It is our hope that when the process is done, we can raise our glasses and toast an outcome that ensures a prosperous future for small-business owners and their valued employees.

But with the threat to total compensation, it is only prudent to have a backup provision to protect sit-down restaurants from the wage hike. That is what’s best for Sacramento.

Joshua Wood is CEO of Region Business. Kevin Ferreira is executive director of the Sacramento Building Trades Council.