Will the San Francisco Minimum-Wage Hike Kill Our Restaurants?

By Zagat Staff  |  July 31, 2014
Credit: Flickr/gazeronly

Everyday, the chorus of discontent about the soaring costs of living and doing business in San Francisco grows louder. Just as Woody Guthrie sang back during the Dust Bowl migration, it takes a lot of “do-re-mi” to subsist here. And come this fall, things are about to get even more expensive — for both restaurants and consumers — if a proposed ballot measure instituting a 40% minimum-wage hike gets approved by voters.

San Francisco is already one of the most expensive cities to operate a restaurant. “Basic costs like rent, construction and fees are higher than most places in the nation, second only to New York," says Gwyneth Borden, executive director of the Golden Gate Restaurant Association, a lobbying group for the local restaurant industry. "San Francisco restaurants also have a commitment to sustainable, local food, and food prices are at an all-time high. When you layer on that the highest minimum wage in the nation, a required hourly healthcare expenditure rate and required paid sick leave — an increase in minimum wage will have an enormous impact.”  

But last week, Mayor Ed Lee and the Board of Supervisors did just that. They unanimously approved to put on the November ballot a measure to raise the city’s minimum wage from $10.24 to $15 an hour by 2018. The Mayor is hailing the plan as a “consensus measure” between the city, labor and small businesses, but restaurant leaders insist their concerns weren’t taken into account in the deliberations. 

San Francisco isn’t the first city to try to raise the minimum wage to address growing income equality. In June, Seattle’s City Council unanimously voted to raise its minimum wage to $15 an hour, and Chicago, New York and Oakland are also considering similar measures.

So what’s wrong with providing restaurant workers a livable wage? On the face of it, nothing. Most restaurateurs support the concept philosophically. “It’s undeniable we need to do something to address the needs of minimum-wage workers so they can afford to thrive and live here” attests Traci des Jardins, chef-owner of five restaurants in San Francisco including Jardinière, The Commissary and Mijita. “Unfortunately a minimum wage of anything in the mid-teens is not going to do this.”

It’s worth noting Mayor Lee’s plan lacks two key components: the Seattle measure includes carve-outs for tipped employees and credits for businesses that already provide additional benefits such as healthcare for their employees. Had the Mayor’s measure included those carve-outs, which would count tips and healthcare benefits toward part of employee wages at least until the end of the phased-out period, “the restaurant community would have been fine with it,” insists Borden. 

At the core of the debate is how the proposed measure affects tipped workers. Without a tip credit — some sort of recognition of income from gratuities calculated into an employee’s total compensation—des Jardins and others point out, the law simply “widens the gap between front-of-the-house and back-of-the- house income” without providing business owners a way to get more money to the people in the restaurant industry who really need it—the dishwashers, line cooks and prep cooks.

Chris Pastena, proprietor of the Oakland-based restaurants Chop Bar, Tribune Tavern and Lungomare, agrees. “Tipped employees make their money off tips. They can make $40-$50 an hour. I have some waiters that don’t deposit their paychecks for two weeks. By contrast, my kitchen staff is waiting at the front door on payday.” 

Pastena used to manage Bruno’s and remembers all too well what happened in 2004, the last time the city increased minimum wage. “We cut the shifts of the floor staff because we couldn’t afford to pay them. But it’s hard to keep up service standards with fewer bodies. That negatively affected the customer experience, and, in turn, the server. Sure they may get $11 more a shift, but ultimately it mean lost tips, lost shifts, lost revenue.” 

Currently, most restaurants address income disparity by having a higher pay scale in the kitchen. At Mission Pie, co-owner Karen Heisler pays her kitchen staff $15 to $20 to maintain a sense of fairness. “With a $15 minimum and no tip credit, we will need to set the kitchen wages $20 to $30 an hour. That will require us to generate an additional $150,000 per year.”

How do restaurateurs plan to offset what amounts to a 40% increase of their primary costs (i.e. labor)?  Some are considering increasing existing surcharges or pivoting to an all-inclusive model where service is included in the cost of the meal. But for the most part, it means price hikes. “As soon as the minimum wage goes up, so will prices, at least for all small businesses,” predicts Nat Cutler, co-owner of The Monk’s Kettle and Abbot’s Cellar.

“Larger businesses will instantly be at a competitive advantage because they can absorb the wage increase slowly over time without having to raise prices. Restaurants in this city already have razor-thin margins. If people go out less or are less willing to try new places due to higher prices, many places will go out of business, and the jobs they provided would be lost. I don’t think that's what the folks behind this measure were hoping for.” 

There will also be another unintended consequence — reducing hiring prospects for disadvantaged workers. At Mission Pie, owner Karen Heisler estimates that for nearly 90% of her employees, this has been their first kitchen job. “All were hired at a wage between the minimum and $15, and most were successful and rose from their hiring wage to $15 or more over a two-year period. A $15 minimum wage means we will surrender the practice of hiring young, inexperienced people and providing them training and access to a living wage (and health insurance, paid vacation and a 401k plan). We’ll be financially obliged to hire only experienced candidates.” 

Also at stake is the very core value of Heisler’s business. “We founded Mission Pie with a dedication to providing delicious, high-quality food at affordable prices. We’re so proud of the diversity of our clientele, and that will decline as we raise prices. Mission Pie, like other businesses unique to SF, will close or be fundamentally transformed on purpose. This will happen not all at once, like an earthquake, but over a few years, like cracks in the walls from many small shocks.” 

Now that the Mayor has acted, San Francisco restaurant owners are bracing themselves for what’s next; most recognize that in this liberal-leaning town, the measure is almost sure to pass in the fall. But they want the dining public to be educated about what’s happening, so when the prices rise or customer service declines, they’ll know why. In other words, as a big-name restaurant owner who wished to remain anonymous warns, “Get ready for the $25 burger.”

-Meesha Halm