Flat-wage, no-tipping experiments flop at city restaurants

Original Article: https://www.crainsnewyork.com/op-ed/flat-wage-no-tipping-experiments-flop-nyc-restaurants

  • Author: Rebekah Paxton

  • Publication Date: August 2022

  • Newspaper: Crain's New York Business

Effective July 1, David Chang’s Momofuku Ko reversed an experiment to eliminate tipping to maintain menu prices and “increase total [employee] compensation.”

What changed? Management found the flat-wage system caused a “complete turnover” of service staff. New York legislators facing calls to pursue a similar policy statewide should take note.

Chang’s restaurant isn’t the first to learn this lesson the hard way. After Danny Meyer’s Union Square Hospitality Group switched to a no-tip model with higher flat wages, 40% of his long-term staff left because of the hit on their income. Tom Colicchio did the same at Flatiron-based Craft, saying servers would have to earn $55 per hour to make up for lost tips.

What inspired such a compensation change in the first place? Blame the controversial Restaurant Opportunities Center and its sister nonprofit, One Fair Wage. ROC has lobbied unsuccessfully in New York and elsewhere to eliminate the separate minimum wage for servers and bartenders. ROC calls the system exploitative, yet tipped restaurant employees themselves have led the charge to keep the current tipping system in place.

ROC’s own city restaurant, Colors, designed to show how employees could be treated better, closed permanently in 2020 following allegations of worker mistreatment and missed paychecks.

The tipped-wage system works: Restaurants can keep prices reasonable, and tipped workers can earn far more than minimum wage. A Cornell University economist found servers and bartenders in states with a robust tipped-minimum-wage system earn better tip percentages than those in states without one.

When operators or legislators upset that balance, the industry and its employees suffer. When minimum wages spike, operators must adjust. If they can’t offset costs through higher menu prices, they may scale back schedules or increase self-service components, resulting in fewer people employed.

Consider New York. Though the state currently retains a modest wage credit for tip income, it doubled the tipped minimum wage from $5 in 2015 to as high as $10 per hour. Bureau of Labor Statistics data shows despite restaurant employment growth nationwide, New York experienced a rapid decline in restaurant employment coinciding with recent tipped-wage increases.

This isn’t isolated: Studying a decade of state tipped-wage increases, including New York’s, UC-Irvine economists found a dollar increase resulted in more than a 6% decrease in full-service restaurant employment. There’s bad news even for those who stay employed: The same dollar increase caused a comparable drop in tipped employees’ overall earnings, likely as shifts were reduced or customers decreased tipping.

Don’t tell that to New York’s left-of-center legislators. Several proposals have been made to raise state minimum—and tipped minimum—wages to as high as $20.45 per hour. These bills are built on a premise of broken promises of higher wages for restaurant workers.

“Fair” wage promises by union-funded activists have not been kept—and many restaurant employees are worse off because of them. New York should steer clear of the flat-wage experiment that many have tried and reversed.