Chicago Tipping Fight Brings Tough Choices for Restaurants
Chicago lawmakers could advance a new law requiring restaurants to pay waitstaff the city’s standard minimum wage, regardless of how much they earn in gratuities.
The battle over tipping is accelerating in Chicago, where lawmakers could advance a new law as soon as Wednesday requiring restaurants to pay waitstaff the city’s standard minimum wage, regardless of how much they earn in gratuities.
The proposal, which Mayor Brandon Johnson is expected to sign, would require many of Chicago’s approximately 7,000 restaurants to drop a longstanding system allowing tips to make up part of servers’ hourly wages.
Chicago restaurateur T.J. Callahan ran a similar experiment in April when he opened his newest restaurant in a neighboring suburb: In place of tipping, he added a 20% service charge to all checks to boost employees’ hourly pay.
It didn’t go well, he said. Servers’ overall pay declined and sales fell. Some diners blasted the move as “socialist.” He switched back to relying on customers to tip his servers after five months.
“Americans are used to this tipping model. They’ve been doing things this way for a long time,” Callahan said.
Chicago, an American culinary capital, has become one of the biggest battlegrounds in a nationwide debate over tipping. A widening array of businesses are asking for gratuities in recent years as tablet credit-card readers spread, often automatically prompting customers for tips. Some consumers are complaining of tip fatigue as they try to determine what merits a tip, and how much.
The tipping fight is also pitting workers against restaurant companies. Labor activists and some workers say restaurants use tips to subsidize low wages for waitstaff, who they say should make the same minimum wage as other workers. In Illinois and other states, restaurants and other businesses are allowed to pay tipped employees below the minimum wage if their earnings in tips make up the difference.
Restaurateurs and industry groups say changing that system would upend their businesses, prompting them to raise menu prices for diners and reduce staff. Under the proposed change, Callahan said pay for service employees at his Chicago restaurant would eventually grow by around 65%, and he said menu prices will likely rise as a result.
Callahan said he has increased his restaurants’ prices around 10 times since the pandemic hit. His sales are down 4% from last year, when diners were flocking back to restaurants. Grass-fed beef burgers with fries at his Midwestern-influenced Farm Bar restaurant currently sell for $16, and he said the higher wage requirement could eventually lead him to charge $20.
“It has to come from somewhere,” said Callahan. Before opening his first restaurant in 2011, he spent four years at a consulting firm leading corporate restructuring of restaurants and helping eateries exit bankruptcy.
Chicago is poised to become the second-biggest U.S. city to eliminate the tipped-wage system. Currently restaurant owners in the city can pay tipped workers $9.48 an hour, if gratuities earned lift their hourly pay to the $15.80 minimum wage for most workers. Los Angeles, along with the rest of California, ended the tipped-wage practice in 1976.
Worker advocates have pushed for years to eliminate the tipped wage in places like Chicago, and found a receptive audience in Mayor Johnson, elected earlier this year. In a compromise struck with the local restaurant association in September, the city would phase out the so-called tip credit over five years. The legislation is expected to clear the full City Council on Oct. 4 and Johnson, a Democrat, has said he would sign it. Chicago restaurants would begin bumping up servers’ pay next July.
During a September hearing on the issue, some City Council members said Chicago was scrapping the tip credit without fully assessing whether diners wanted the change, or if it was needed. Advocates of the change argued that tipping is outdated, depends too much on diners’ goodwill, and that operators could afford to pay workers more.
“What you are hearing is that workers in my community can’t get a raise because some restaurants can’t figure out how to make money,” said Jesse Iñiguez, co-founder of Back of the Yards Coffee in Chicago, during the September hearing.
The restaurant industry says that the reality is different. Full-service restaurants before the pandemic averaged a profit before taxes of 6% on their sales, according to a survey of 550 operators commissioned by the National Restaurant Association trade group.
Profit margins for many independent, sit-down restaurants have eroded since the pandemic as price hikes haven’t fully accounted for increases in labor, food and other costs, restaurant owners said.
At his Farm Bar restaurant about a mile from Wrigley Field, Callahan’s 11 servers, bartenders and runners made an average of $39.90 an hour including tips last year, according to restaurant records. The restaurant did $2.1 million in sales last year, and Callahan paid $696,567 for wages, benefits and other labor costs. If Callahan had paid the full minimum wage, his labor costs would have been $795,689, the records show.
Farm Bar earned a 3.3% profit last year without factoring in one-time federal aid for restaurants operating during the pandemic, according to the records. The restaurant would have operated at a 1.3% loss if Callahan paid his servers the $15.80 minimum wage, the records show.
An August survey of 315 owners by the Illinois Restaurant Association trade group found that 80% intended to raise menu prices if the city scrapped the tipped wage system. More than 40% said they would introduce new fees on checks, or an automatic service charge.
Few consumers would rather pay higher menu prices instead of the usual tipping option, polls show. Only 16% of 1,201 Chicago diners polled by the National Restaurant Association in August said they preferred higher menu prices over paying a tip or service charge.
Farm Bar serves dishes like roast chicken or salmon to a mostly local clientele, and Callahan said he may begin increasing his prices by 50 cents or a dollar if the wage rules change next year. He could also eliminate server positions and have more customers order through QR codes on menus.
Write to Heather Haddon at heather.haddon@wsj.com
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Business NewsNewsChicago Tipping Fight Brings Tough Choices for Restaurants
First Published:3 Oct 2023, 10:43 PM IST
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