Web Exclusive | April 2016 | By Bruce Horovitz

Fallout Over $15

Industry experts say new minimum wage hikes in California and New York will hurt restaurants, employees, and customers.
New minimum wage laws could hurt restaurant business with higher labor costs.
Demonstrators have rallied around the country arguing for a $15 minimum wage. flickr: The All-Nite Images
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For restaurants in California and New York—and, ultimately, across the country—the recently approved $15 minimum wage bills represent a new reality for an industry that’s historically been dependent on lower-wage workers.

With the so-called “Fight for $15” movement gaining traction in other states—from Illinois to New Jersey to Michigan—the impact of higher wages will be felt particularly hard in the restaurant industry, from employees to owners and customers. In California, the minimum wage will reach $15 in 2022. The $15 minimum reaches full effect in New York City by December 2018.

As employee wages rise to all-time highs, those who own or run restaurants will ultimately face three choices: increase prices, trim payroll, or add automation, says Jeff Bobrosky, hospitality industry partner at the accounting specialty firm CohnReznick. More likely, operators will pursue some combination of the three, he says.

“No business can absorb such an increase in expenses without a corresponding revenue increase,” Bobrosky says. “If you take a restaurant and hold revenue and operating expenses flat—but increase the minimum wage—that goes straight to the bottom line.”

The movement is undeniable. Some 29 states and the District of Columbia have minimum wage levels that are above the federal level of $7.25. With the new law, there will be a 90 percent increase in the minimum wage in California over the next nine years.

“This is a game changer,” says Jot Condie, president of the California Restaurant Association. “I don’t think anyone knows the full impact here.”

“This is the ultimate stress test for small business.”

Condie says he’s disappointed in Gov. Jerry Brown for signing the bill last week. “This is the ultimate stress test for small business,” says Condie, who notes that about 25 percent of the minimum wage workers in California are restaurant workers. “You’ll see the business model start to change.”

For one thing, he says, the restaurant industry will no longer be the point of entry for many younger workers. That’s because, with wages of $15 per hour, the industry will be far more reluctant to hire unskilled high schoolers looking for a first job. “The first to be priced out will be teens without work experience,” Condie says. Because the restaurant industry has such a low profit margin, he adds, there is little room for error.

Condie says he doesn’t know what most restaurants will ultimately do, though he also suspects they’ll employ some combination of job cutting, price increases, and using more automation to replace hourly workers.

He adds that entry-level workers used to pay increases based on hard work won’t see that kind of reward for the next decade. “It’s good for workers to learn that hard work has a payoff,” he says. “But now, the pay raises have been set on autopilot for the next decade.”

Condie says owners of some restaurants have already told him that, at $15 hourly wages, they may eliminate lunch service to cut back on labor costs.

But Bobrosky says the biggest impact will be in the automation arena. Many restaurants already are testing various phases of automation, and this will only ramp up the speed with which restaurants replace employees with things like kiosks and table tablets.

In order to remain profitable, Bobrosky says, “restaurant owners will need to do some things that hurt their employees in the long run.”

Some restaurant owners also have told him that they are considering a future “surcharge” on checks specifically because of the $15 minimum wage. “But they will have to be careful from a legal standpoint,” he says, because they may also have to pay taxes on the additional revenue. “But it’s all simple math,” he says. “If costs go up, profits go down.”

Freelance writer Bruce Horovitz is a former USA Today marketing reporter and Los Angeles Times marketing columnist. He can be reached at [email protected].