Some of the top restaurant owners in Long Beach said they can live with a city law that would raise the minimum wage only if it involves using a controversial model called “total compensation” that would essentially exempt businesses from paying tipped workers any more than the state’s minimum wage.
How this would be done is by allowing businesses to pay the state’s minimum wage in hourly pay but also count tips that employees receive from customers for performance of services as part of wages from the employer. If an employee doesn’t receive the city’s mandated minimum wage after tips are counted, then the employer would make up the difference.
The only problem is that, so far, no city has passed such a law and the state has recently presented a legal objection, stating that such a provision would violate the state’s labor code. The California Restaurant Association’s (CRA) attorneys, however, disagree with the state’s opinion and have presented briefs supporting the argument that such a model would be legal.
The reason restaurant owners are calling on Long Beach city officials to consider such a model is because tipped employees currently make the state’s minimum wage and also take home tips, which aren’t counted by the state as part of wages from their employers.
In California and a half dozen other states in the country, employers are not allowed to use a worker’s tips as credit toward obligation to pay the state minimum wage, known as a “tip credit.” In other states, employers are allowed to do this. In Texas, for instance, the minimum “tipped wage” is currently $2.13 an hour.
Since California is a non-tip-credit state, raising the minimum wage in Long Beach to $15 an hour, as union-sponsored groups have proposed, would essentially allow tipped employees at restaurants, in some cases, to make upwards of $30 an hour once tips are factored in. This would create a large disparity between the front-end staff, such as waiters and bartenders, who receive tips, and back-end staff, such as cooks and dishwashers, who don’t receive tips, restaurant owners said.
Restaurant owners add that carving out tipped employees from a city mandated minimum wage law through the total compensation model would narrow the gap between the pay differential among staff and would also help restaurant owners from having to raise prices to cover the cost of the city’s higher minimum wage.
“I think it would play out in the sense that we wouldn’t have to raise our prices as much and, therefore, be more competitive with the surrounding cities, such as Lakewood, Los Alamitos and Seal Beach that won’t have this,” said Craig Hofman, president of Signal Hill-based Hofman Hospitality Group (HHG), which owns and operates Hof’s Hut Restaurant & Bakery chain in Long Beach, Los Alamitos and Torrance.
If the minimum wage were increased in Long Beach without exempting tipped workers, then HHG, which also owns Lucille’s Smokehouse Bar-B-Que and the recently opened Saint & Second in Belmont Shore, would likely have to create different menus with different prices for locations in different cities, explained Hofman, who adds that the minimum wage should be increased at the state level to maintain a level playing field.
Another reaction to the movement to increase the minimum wage at the city level, already seen in the Bay Area, is that restaurant owners may decide to prohibit tipping altogether to remain price competitive with competing restaurants in cities without minimum wage laws.
“I think tipping as we know it will go away,” said Sam King, co-owner of King’s Seafood Company, which operates a chain of restaurants in Southern California, Arizona and Nevada, including King’s Fish House and 555 East in Downtown Long Beach.
In addition, some restaurants may not choose to move to Long Beach if the city council passes a minimum wage law without exemptions, he said.
In fact, King, who supports a total compensation model, said he decided to pass on adding new locations in Seattle, where its city council mandated that its minimum wage be increased to $15 an hour in increments by 2017. Studies have already come out claiming that restaurant jobs there have decreased in Seattle and have increased in surrounding cities without minimum wage policies.
“We looked at restaurant locations in Seattle and we actually decided we were not going to do a restaurant there because of [the] minimum wage,” King said. “We actually have three terrific opportunities there, and we decided not to pursue that market because they have a minimum wage increase.”
Long Beach, however, would essentially become a test case for a total compensation minimum wage policy if proposed since currently no other city in the state has passed such a law.
Most recently, after the City of Sacramento initially proposed the model as part of a law to raise its minimum wage to $12.50 an hour by 2020, the California Legislative Counsel’s office shot the idea down by issuing a written legal opinion in October, stating that such a proposal would be “preempted by state law” and that tips are the “sole property” of employees.
Still, the CRA’s lawyers have presented legal briefings challenging the state’s legal objection.
Long Beach City Attorney Charlie Parkin told the Business Journal that the Long Beach City Council has yet to request that his office opine on whether a total compensation model would be legal. Although courts have yet to officially rule on whether such a model is preempted by state law, such a proposal may likely open the city up to litigation, he said.
Parkin added that it’s also important to specify the definition of total compensation, which may also include allowing businesses to count benefits, commissions and tips as wages, adding that it’s unclear how employers would make such a calculation.