As of today’s date, and assuming the Michigan Supreme Court does not change it, a new law called the Improved Workforce Opportunity Act (IWOWA) and the Earned Sick Time Act (ESTA) will go into effect February 20, 2023.

 It is certain these two new laws will cause chaos in the restaurant industry.

 The two laws raise the minimum wage to approximately $12.00 per hour, Raise the tipped minimum to approximately $10.80 per hour and expand the employer’s liability to pay sick pay to employees.

 If you currently pay a tipped employee $3.75 an hour, you will have to start paying $10.80 per hour.  This is an increase of $7.05 per hour. 

 As I write this, there is a lot of pushback from the restaurant industry, lobbyists and even restaurant employees to change this legislatively before the new Congress starts January 1 so there is a slim hope that it will be delayed or changed.  

 In this article, I would like to explore your options if the law is implemented as is.

 You could do one of these or a combination of all the following: 

1. Pay the increase labor costs out of profits.  No increase in menu prices.  This will work only for the most profitable restaurants.
2. Lay people off. Most owners I have talked to don’t have enough help as it is.
3. Put more servers on part-time and go to runners or self-serve. Only a partial solution.
4. Moving to new technology. Not sure what exists that would help in the short term.
5. Push more carryout and 3rd-party delivery and reduce table service. For most this is a partial solution.
6. Increase menu prices to cover the increased labor cost. This will alienate the most customers.
7. Charge a service fee and eliminate tipping. Servers will hate this.
8. Tip to Wage Methodology. This is a no cost to you compromise which we are recommending.  See below.

The Tip to Wage Methodology will cost you nothing, is perfectly legal, will still allow tipping, will not increase payroll taxes, and the tipped employee will theoretically make the same as they do now (less any administration fee you charge.

To implement Tip to Wage Methodology will require a change to how you charge a customer and how your employees report tips.

Here is how it works:

1. You will add a “Service Fee” to your guest checks. Kallas can calculate the amount.

2. You should make it apparent (via the menu and signage) that guests can “tip” over and above the Service Fee.

3. You should also make it apparent (via the menu and signage) that the service fee goes directly to their server.

4. You should inform your tipped staff that they will be receiving the Service Fee as part of their new wage increase.

5. The amount of the Service Fee will need to be calculated based on the increased costs you will experience because of this new law. Each restaurant is different.  Kallas can do this calculation for you.

6. The Service Fee is taxable income to you and you will pay sales tax on it but you can use some of the Service Fee for any administrative costs you deem necessary.

7. Preliminary calculations with existing restaurants peg the service fee at between 8-12% so there should be room for a customer to still tip.

8. The 8-12% should also be enough to cover your sales tax, credit card and administrative costs and you could actually make some money off this.

9. It is all perfectly legal, there is no increase to the customer and the employee’s tips cover the wage increase.

10. You will need to post these new rules in your handbook and on a bulletin board.

The beauty of this Tip to Wage Methodology is that you are complying with the law and the employee’s tips are covering it.  The customer pays no more than they would if they were tipping normally.  The employee makes the same amount (less your administrative fee) as they would if they were receiving the tip directly.  The only change is that the normal tip is going to you and you are paying it as a wage.

For more information or to have Kallas Calculate your optimal service fee, call 313-962-6000 extension 113 and leave a message on our voice mail.