Human Resources | August 2016 | By Mary Avant

Can Higher Wages Work?

With minimum wages on the rise and new overtime legislation soon going into effect, restaurants are searching for ways to pay more—and still make a profit.
Fast food chain operators pay employees higher wages to invest in brand culture.
Amid looming changes to overtime and minimum wage, operators like Boloco are getting ahead of the curve. Boloco

On the news, in the papers, and on the streets of cities like New York and Detroit, there’s been no shortage of attention paid to fast-food workers’ protests and demands for everything from higher pay to better benefits. Rapidly shifting laws are showing that several cities and states are prepared to give them what they want—or at least make employers do so.

Though the national minimum wage still stands at the 2009 level of $7.25 an hour, more than 30 states offer a higher amount, while 14 states began 2016 with higher minimum wages than those of last year. Two states in particular made drastic and well-publicized changes to their minimum-wage laws in April: New York and California plan to bump it to $15 an hour by the end of 2018 and 2023, respectively. 

While minimum wage battles continue to rage at the state level, the federal government is also getting involved in the conversation over compensation, extending overtime pay to anyone making less than $47,476 annually (or $913 weekly). The law will go into effect December 1, and the Department of Labor says more than 4 million workers will be affected by the legislation within its first year of implementation. But the wage changes are also leaving an overwhelming number of operators in the limited-service sector feeling just that: overwhelmed by the idea of skyrocketing labor costs and the tightening profit margins they’ll likely bring.

Todd Wulffson, a partner at labor and employment law firm Carothers DiSante & Freudenberger LLP, says many of his clients are facing three options in markets where minimum wages are on the rise: increase menu prices, decrease labor costs, or move out of the areas in which they’re being impacted.

In fact, a 2016 survey by the restaurant workforce experts at TDn2K showed that more than 80 percent of quick serves surveyed plan to raise menu prices to offset higher wages. Nearly half (48 percent) say they’ll cut employee hours or adjust staffing levels, and 38 percent plan to implement labor-saving technology.

Wulffson says minimum wage increases can cause both labor costs for restaurants and menu prices for consumers to rise, especially for smaller operators and those who only operate units in the affected markets. “It’s massively increasing the cost on a few employers that were already struggling with the 5 or 6 percent profit margin,” he says.

He is also seeing his restaurant clients making moves to shift more—if not the majority of—employees to part-time status to avoid offering benefits.

“If you have to pay more in minimum wage, the only way to offset that is to pay less in benefits,” he says. “It’s actually causing more harm to the people it was intended to help.”

While Wulffson doesn’t expect many states to follow New York and California’s lead to a $15 minimum wage, employers must prepare for new overtime laws beginning in December.

“With overtime, it’s not necessarily that the cost of doing business is going to go up as much as you’re going to change the structure of the restaurant,” says Angelo Amador, senior vice president of labor and workforce policy at the National Restaurant Association. 

Those structural changes could include cutting the number of managers, having managers oversee more than one unit, and pushing salaried employees back into part-time positions, Amador says.

“You have positions that were salaried—which were viewed as the first step into management—disappearing,” he says. “As much as the [Obama] administration may want to say that this is a protection or something they’re doing for the employees, most employees that are now salaried do not view it as a promotion when they’re made hourly employees.”

Though it may seem doom and gloom, there are some in foodservice who plan to make wages and overtime pay work for the employees and their bottom line. 

Burrito brand Boloco is one of those concepts dedicated to offering “livable wages” to its more than 300 employees in 16 locations across the U.S. The brand first raised its minimum wage to $8 in 2002, when the national minimum wage was between $5.25 and $6. CEO John Pepper says it was at the time the most profitable year for the brand.

The entry-level wage now sits at $11 an hour, with the average employee making $13.75 an hour. But, despite the fact that the brand’s core values necessitate above-average wages, Pepper acknowledges that higher pay often equates to lower profit—a sacrifice the brand is willing to make.

“We need to start thinking about not maximizing profit, but optimizing or creating the responsible amount of profit,” he says. “We’re spending approximately $45,000–$55,000 every two weeks that we wouldn’t spend otherwise. And we’re not sure if we get a real benefit from it other than knowing we’re doing the right thing.”

&pizza—a Washington, D.C.–based fast-casual pizza concept with 15 shops in Virginia and Maryland—not only offers a healthy living wage, but also encourages its “tribe members” to work more hours. This allows employees to take advantage of the many benefits &pizza offers, including health insurance, subsidized childcare, bridge loans for those in need, and—perhaps most uniquely—a subsidy for employees who want to get a tattoo of the brand’s logo. “We’re happy to give people the benefits they need and the benefits they deserve,” says cofounder, CEO, and president Michael Lastoria. “The more comfortable and safe our tribe members feel, the more committed and connected they become to the company.” 

The entry wage for &pizza employees in D.C. is $11.75, and the brand is $2 above minimum wage in both Virginia and Maryland. Lastoria says brands like &pizza—including fellow Fast Casual 2.0 concepts like Shake Shack and sweetgreen—can offer higher wages because they’re primarily company-owned and operated. Conversely, franchisees who aren’t planning for much growth are earning their salaries from their restaurant profits. For them, Lastoria says, wage increases directly affect their paycheck.

Lastoria and Pepper both acknowledge that higher wages—especially those not mandated by state legislation—may be hard for many concepts to offer, but it is something that can be implemented with a thoughtful approach and a willingness to sacrifice. 

“In the short term, it might feel like there’s less money going into their wallet, but in the long term, they may be able to craft a strategy around how that’s going to be beneficial to the company and to the company’s people by thinking differently about how to operate a restaurant,” Lastoria says.

Whatever approaches they decide to experiment with, brands are quickly being forced to re-examine the ways in which they can protect profit margins with higher minimum wages and other labor legislation on the horizon.

“This is just one change, and it’s coming,” Lastoria says. “Whether it’s tomorrow or five years from now or 10 years from now, we all know there’s going to be a paradigm shift, so prepare yourself for it and innovate through it.”

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