In April 2016, the California State Legislature voted to pass SB 3 (Leno): a minimum wage increase to $15 per hour by 2022 (2023 for businesses with 25 employees or less). This drastic increase came only three months after the state had already increased the minimum wage from $9.50 per hour to $10 per hour. Ever since SB 3 was signed into law, various cities throughout California have been pushing to raise their local minimum wages to $15 even sooner than the state’s timeline of 2022. These pushes to increase the minimum wage so quickly could wreak havoc on California’s economic state, and restaurants’ slim profit margin makes them particularly vulnerable.

Restaurant Industry’s Unique Position

Minimum wage increases often have a perverse effect on the restaurant industry, as the wage increase typically benefits those who are already the top-paid individuals in the restaurant: the tipped servers. Minimum wage increases rarely affect the hardworking non-tipped employees who are already often paid greater than minimum wage, but are still on the lower end of the pay scale. Also, the added cost from a mandatory wage increase for employees earning the most reduces, or eliminates entirely, an operator’s ability to also provide a wage increase to other hourly workers.

Indexing’s Devastating Consequences

SB 3 (Leno) linked the minimum wage to indexing beginning in 2024 and will put the wage rate on auto-pilot for annual increases using the U.S. Bureau of Labor Statistics CPI for Urban Wage Earners and Clerical Workers. This will be disastrous for California because by tying increases in the minimum wage to a single economic factor (in this case inflation) and ignoring other factors such as the strength of the job market, indexing will inevitably result in increases in the minimum wage at times when the economy is ill-suited to absorb new cost pressures.

Background

• California’s minimum wage was increased to $10.50 per hour in 2017 and $11 per hour in 2018 for employers with 26 employees or more and $10.00 per hour in 2017 and $10.50 per hour in 2018 for employers with 25 employees or less.
• California is undergoing a very large and untested series of minimum wage hikes. Starting in 2018, the minimum wage will be on auto-pilot forcing increases of $1 per year for the next 5-year period.
• The added cost pressure from the mandatory annual wage increases for the employees already earning the most (tipped employees) takes the finite labor dollars an operator may have and reduces, if not eliminates, the ability to provide the non-tipped employees with wage increases, benefits, bonuses and other forms of compensation.
• In jurisdictions where the minimum wage has already increased beyond the state minimum wage and the results are in, such as San Diego and San Francisco, restaurants are employing a variety of tactics to mitigate the impact of this wage shock: restaurants have reduced hours, cut staff, and employed new technology (tablets and kiosks).
• Some restaurants have experimented with new pricing models, employing service charges in lieu of tips, or eliminated tipping entirely.
• Data has also shown that in regions with the highest minimum wages in California, we have seen a drop-in teen and youth employment in the restaurant community, as entry level wages shoot up, many restaurants simply cannot offer first-time employment opportunities to relatively untrained youth at such a high cost.