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Is Michigan ready for no tipping?
Grand Rapids will get its first ‘no tipping’ restaurant next year.
(As seen on WZZM TV 13) Grand Rapids made national culinary news in October when local restaurateur Paul Lee announced he would open a no-tipping restaurant in 2016.
Lee’s announcement came on the heels of restaurant industry pioneer Danny Meyer announcing he would try to implement the no-tipping business model in his 13-restaurant Union Square Hospitality Group in New York City.
Meyer, and now Lee, may be ahead of much of the rest of the nation, but the no-tipping business model might not be right for Grand Rapids and Michigan, several industry executives said.
Lee’s restaurant won’t open until next year, and the outcome of Meyer’s experiment won’t be known for at least a year.
“Danny Meyer is seen across the world as an innovator in the restaurant industry, and restaurateurs tend to listen to him,” said Justin Winslow, president and CEO of the Michigan Restaurant Association. “This model’s not proven yet, and we’ll witness in real time if the money matches up.”
Meyer is largely instituting the business model to help create equity among restaurant employees. Front of the house servers in New York City can make in the six figures, while kitchen workers are likely to make closer to $35,000 a year. The massive tips servers can earn also often discourage them from working their way up the ladder within the company.
Meyer also seeks to alleviate the issues stemming from New York raising its “tipped minimum” wage. Currently, most New York servers are paid an hourly wage of $5, with tips bringing it up to the city’s minimum wage of $8.75. That tipped minimum will rise to $7.50 next month. Cooks will see an increase in minimum wage to $9 an hour.
The model will pay workers a starting wage of $9 plus a share of weekly profits.
With the fast-food minimum in New York rising to $15 an hour in the next three years, Meyer wrote that he doesn’t want to lose talent.
“Fine dining has an obligation to lead fast food in everything, whether it’s how we source ingredients, how we hire, how we train, how we design, how we interact with our communities. We can’t have a situation where we are asking someone to pay $40,000 to go to the Culinary Institute of America to then work for $12.50 per hour, when they could work in fast food for $15.”
Those financials work for a top-tier city like New York or Chicago, but it gets tricky for a third-tier city like Grand Rapids, said James Berg, managing partner of Essence Restaurant Group, whose family of restaurants includes Bistro Bella Vita, The Green Well and Grove.
Currently in Michigan, the tipped minimum is $3.10 — it rises to $3.23 in 2016 — with tips expected to match and surpass the state’s minimum wage of $8.15. Because of the state’s tip tax credit, businesses can take up to $5.05 per hour in tax credits. That’s big money in an industry that generally makes only about a 4 percent profit.
Servers don’t make nearly as much in Michigan as in larger cities, Berg said, explaining the discrepancy between servers and kitchen staff isn’t as large in smaller markets.
“There are career servers in Manhattan and Chicago who can make over $100K, and hourly cooks making $30,000 and working three times as much,” Berg said. “We just don’t have that here.”
Winslow said there is a kitchen worker shortage in Michigan, so qualified workers already can demand a higher wage, shrinking the discrepancy between the kitchen and front of the house workers.
Berg said the switch could eventually make sense, as the cooks generally are the ones going to school to make it a career, with servers often being transient. He said the migration won’t, or shouldn’t, occur until a minimum wage hike is nigh, and restaurants will have difficulty making the adjustment.
Until markets have their minimum wage requirements raised, the no-tipping model doesn’t work because menu prices will go up by approximately 25 percent to cover the additional costs, Berg said.
“If you get rid of the tip-tax credit, you’d have 500 to 1,000 ma-and-pa joints close their doors because they can’t afford the overhead and can’t increase their prices because of their locations,” he said, adding it would be a culture shock for many Americans to see prices hiked that much. “Every community is different.”
Winslow agreed, saying in a no-tip environment, only high-end and fast-casual restaurants would survive — a negative when the Michigan restaurant industry provides more than 400,000 people with jobs.
“Restaurants provide the first step for so many people. One in three people got their start in restaurants,” Winslow said. “We can take this seriously, but it is a risk.”
The risk can be on Meyer for now, Winslow said.
“He has a group and model that’s not really replicable,” he said. “If he can make it work, there will be increasing interest in it. If he can, then we’ll know if it’s real or if it’s a blip on the radar.
“If it’s real, that’s a dramatic shift in the industry, and there’d be wide-scale effects we’re not fully thinking about yet.”