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Let’s Talk Living Wage

empty restaurant

Raising the minimum wage to $15 could result in a lot of empty restaurants.

First, if you want feel good vague assertions that all will be well with a $15 an hour minimum wage, you’ve come to the wrong place. All will not be well.

What we are going to do is set up an average restaurant, as it operates now, and then see the impact of increasing wages to $15 an hour as a minimum. This post will use real world numbers and real world math instead of fantasy figures that make social justice types swoon with delight.

First things first, how much profit does an average restaurant make? I am using a restaurant where the average cost per person runs between $15 and $25 since that gives the highest profit margin. According to the National Restaurant Association, a restaurant with offerings in this price range (think Appleby’s, Cheddar’s and the like) will have a profit margin of 3.5% That means for every dollar in revenue they bring in, they will have $0.035 left over after they meet expenses. The expenses break down like this:

  • Labor 33%
  • Cost of food and beverages 32%
  • Cost of occupancy 8%
  • Operating costs 24%

Labor is wages, salaries, vacation, overtime, insurance, etc. Cost of food and beverages includes theft and spoilage. Cost of occupancy covers rent/lease, property insurance, liability insurance, utilities, etc. Operating costs include equipment purchase/repair/replacement/maintenance, dishes, flatware, table linens, advertising, promotional materials, marketing, etc.

So how do these percentages work out in numbers. According to the National Restaurant Association, the median annual revenue from table service restaurants ran about $60,000 per full time equivalent employee. Assuming roughly 25 full time equivalent employees, that works out to a weekly revenue of $29,000.

  • Labor=29,000*0.33=$9570
  • Cost of food=29000*0.32= $9280
  • Occupancy=29000*0.08=$2320
  • Operating costs=29000*0.24=$6960

This leaves a weekly profit of, wait for it, $870.

That’s the margin we have to work with, $870 dollars. If our costs increase by more than that, we must either cut costs, or raise revenue.

So now, let’s look at labor costs and see where the money goes.

  • (1)Restaurant manager       $40k annual     $770/wk         $770
  • (2)Assistant Manager          $37k annual     $711 /wk       $1422
  • (1)Kitchen Manager             $37k annual     $711/wk          $711
  • (5)Cooks                                 $9 hour             $360/wk      $1800
  • (4)Hosts                                 $9 hour             $360/wk      $1440
  • (3)Dishwashers                    $8 hour             $320/wk      $920
  • (7)Server                                $2.13 hour        $85/wk         $596
  • (3)Food runner/Busser      $8 hour             $320/wk       $960
  • Subtotal                                                                                     $8,619
  • payroll taxes FICA etc (est 10%)                                            $862
  • TOTAL                                                                                      $9481

So our payroll cost is $9481, which is pretty close to the estimate of $9570.

Now let’s see what happens if we raise the minimum wage to $15/hr.

  • (1)Restaurant manager       $40k annual     $770/wk         $770
  • (2)Assistant Manager          $37k annual     $711 /wk       $1422
  • (1)Kitchen Manager             $37k annual     $711/wk          $711
  • (5)Cooks                                 $15 hour             $600/wk      $3000
  • (4)Hosts                                 $15 hour             $600/wk      $2400
  • (3)Dishwashers                    $15 hour             $600/wk      $1800
  • (7)Server                                $4.25 hour        $170/wk        $1190
  • (2)Food runner/Busser      $15 hour             $600/wk      $1200
  • Subtotal                                                                                     $12,493
  • payroll taxes FICA etc (est 10%)                                            $1249
  • TOTAL                                                                                      $13,742

And we substitute our new labor cost for our old:

  • Labor                  $13,742
  • Cost of food         $9280
  • Occupancy           $2320
  • Operating costs   $6960
  • TOTAL expenses $32,302

Net Profit (Revenue minus expenses)

  • Revenue       $29,000
  • Expenses     $32,302
  • Total              -$3,302

The average table service restaurant will go from a slight profit to a major loss. The only way to remain in business will be to cut expenses (read fire employees) or raise prices roughly 10%-20%.  The problem here is that increasing prices can decrease sales volume, which will result in a reduction is employee hours.

The most common counter argument comes from folks targeting the fast food franchises. They look at franchise executives making 6 figure salaries and conclude that they are making too much money and can afford to give the workers a large raise. The math just doesn’t work. Anybody making 6 figures is doing so from the profits of multiple units and a raise in labor costs will make each unit unprofitable. Sure, the executive will not make any money, but it will be because the restaurants are all closed down. Franchise fees vary widely but typically run about 5-6% of volume. On our example restaurant, if it were a franchise, it might be paying $1600 as a monthly franchise fee. which is about half what is needed to make up the revenue shortfall. Even if the franchise fee was totally eliminated, the restaurant would still be in the red.

Let’s talk server wages. One thing people don’t think about is that while restaurants are allowed to calculate tips as part of server’s wages, if the servers do not make enough in tips to meet the minimum wage, restaurants must make up the difference. In the current system, servers have to make about $6 an hour in tips to meet the minimum wage. A four table section, each with a couple spending $30 per person will, over the course of a shift, generate about $100 in tips, which means the server is making about $12 per hour in tips. This puts them well above the current minimum wage and explains why so many people are willing to work this extremely demanding job. However, if the minimum wage jumps to $15, and menu prices are raised 15% to compensate, and business decreases 10%, and tipping decreases 10%, then the server will make roughly $93 in tips, or $11.64 per hour. Add that to their $4.25 base, and they are basically making the same wage as a host/hostess.

How many servers will work that hard for the same amount of money the host makes? If you’ve worked in a restaurant, you know the answer to that question.

Let’s look at management. Right now, the restaurant manager is making $40,000 per year while a cook is making $18,000 per year. Raising the minimum wage would mean the cook now makes $31,000 annually. Shouldn’t the manager get a raise as well? Isn’t he going to want one? After all, if his work has been valued at 2 times the cooks, isn’t it still worth that much on a relative basis? We also need to remember that most restaurant managers work 50 hour weeks if not more. At 50 hours a week, figuring the new minimum wage plus overtime, their salary should be $42,900. The restaurant is in the hole for another few hundred dollars a week just to pay management at minimum wage levels.

So that’s the math. An increase in the minimum wage to $15 per hour will not work. It can’t work. The business model of a restaurant will not support it.

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