LA Chef Issues- pay equity, surcharges and healthcare

(Originally published February 26, 2014 on

With so many cooking shows and celebrity chefs on television, interest in food and the restaurant industry has never been greater. In many ways this has been a good thing pushing culinary boundaries and attracting people into the profession. But in other ways, with its editing and high quality productions, culinary TV has created many mis-perceptions especially many romanticized ones.

Many customers believe restaurants are very lucrative and chefs are highly compensated rock stars. Though this well may be the case for a few, the reality in this heavily regulated industry is that many restaurants have high start-up, food, labor, interest, fixed and operating costs but very slim profit margins. A restaurant that makes seven or eight cents profit on every dollar of gross receipts is doing very well. Furthermore in order to become a chef, years are spent being a prep and then line cook working long hours often doing repetitive and menial tasks for low wages without any benefits.

Today too, it seems, with food blogs and yelpers, every patron also is a critic who is eager to share his or her opinions. Often these opinions are informed more by emotions and agendas rather than facts since many patrons really don’t fully understand how difficult the restaurant business is. The latest case in point is the recent brouhaha over the restaurant Republique‘s implementation of a 3% surcharge to cover health-care costs for all of its employees. FOX “News” quickly seized upon this debate to further it’s own agenda- it’s crusade against Obamacare. Not only did Republique‘s owners appear on the O’Reilly factor, but they were asked to appear on Greta Van Sustren and Megan Kelly’s show too.

Though as Chait quickly replied to O’Reilly to not further FOX’s agenda, Republique’s decision to implement a 3% surcharge wasn’t contingent upon theAffordable Care Act [ACA], especially since this law’s mandates requiring employers to provide health-care insurance have been delayed until 2016. Other factors for Chait were in play like dealing with the disparity of pay between front of house (waitstaff) and back of house (cooks & dishwashers) employees, and not just accepting the status quo. Tipping laws, and California’s lack of a tip credit provision exacerbate this inequity.

Tipping laws exclude the back of house from participating in the tip pool, since tips can only go to employees (excluding managers) who directly interact with the guests at their table. These direct contact laws make more sense in states that allow tip credits. Tip credits allow employers to offset required minimum wages with tips, thus servers are more dependent upon tips for their income. In the other 43 states that allow tip credits, minimum wage may be as low as $2.13 per hour with the balance of the non adjusted higher rate being made up or exceeded by tips. Since California is one of only seven states that doesn’t allow for tip credits, servers get at least minimum wage plus tips while cooks/dishwashers get only minimum wage or slightly more than minimum wage. So adding in tips, servers may make $40 or $50 an hour at a popular restaurant while cooks make only $9 to $15 an hour. A tip credit allows some of that difference to be shifted so the back of house may make more money. Thus the difference between front and back of house pay is a real one. Many cooks also have a lot of debt from culinary school to repay.

Surcharges, no matter what they’re applied to, are different from tips. Employers may distribute surcharges how they feel best serves their restaurants. Chait acknowledges that it was a mistake not to call the surcharge a back of house appreciation fee rather than a health-care one, since health-care is such a political hot potato.

Chait’s intentions don’t mean though that as 2016 approaches, other restaurants of over 50 employees won’t have to react to the ACA mandates. They will. The restaurant industry will be greatly impacted by these mandates since so few restaurants currently offer employees, aside from maybe management, any health-care coverage. Now if staff get sick, they end up at free clinics or in emergency rooms plus some times make worker comp claims for injuries that didn’t occur while on the job. Considering that restaurant workers prepare and handle other people’s food, with all the concerns and headlines about food safety, it’s somewhat ironic that restaurant employees currently and typically don’t have health-care insurance. Having healthy employees handling food is certainly more important than having those employees wear rubber gloves.

Regardless, and again for emphasis, restaurant have slim margins. There is no large pool of cash sitting in reserve or in an owner’s bank account to pay for health care so many restaurants don’t. Simply raising menu prices or cutting other costs to find the funds to pay for healthcare also isn’t as simple as it may appear. However these additional health care costs are accounted for, they are paid for by the consumer, the restaurant patron, either via a surcharge or via higher menu prices. Customer outrage expressed on yelp and elsewhere about having to pay for what the business should provide its employees is pretty silly considering customers pay for everything that any restaurant provides its employees (as well as its patrons). Any restaurant’s costs are covered by receipts received from customers.

But why single out this cost versus any other cost? This is a more legitimate question. Why not just factor this new additional cost into menu prices? Why make a “political statement”? Looking at what occurred in San Francisco after “Healthy San Francisco” was implemented in 2007 helps, in part, to answer these questions. “Healthy San Francisco” included a requirement that employers with more than 20 workers spend at least a minimum amount towards employee health coverage. The current minimum payment for 2014 ranges from $1.63 to $2.44 per hour per employee depending on company size. Larger companies pay more.

Due to percentage rent lease agreements as well as other costs (including taxes and insurance) contigent on sales, many restaurants in San Francisco chose to implement a 3% surcharge to offset these “Healthy San Francisco” payments. A percentage rent lease deal is a lease where the rent has contigencies based upon gross sales. Rent isn’t solely based upon square footage. If a certain amount of sales, “the break point”, is exceeded, rents may go up considerably. Surcharges, unlike menu price increases, aren’t included in gross sales numbers. Thus using a surcharge to offset this specific (and deductible) item, makes more sense from an accounting perspective. To offset additional costs triggered by higher gross receipts to get the same net amount as would be received from the 3% surcharge via menu price increases would require customers to pay even more money than the service charge amount. Though percentage lease deals aren’t as common in Los Angeles, Republique has a percentage based rent lease deal. So Republique’s surcharge like those implemented in San Francisco, in many ways, is more about accounting than politics.

Worth noting, San Francisco audited 3600+ restaurants to determined how much was raised, and how much was spent by these locations all of which used a surcharge to offset the costs imposed by the city’s “Healthy San Francisco” program. The audit initially found 93 restaurants with large disparities between receipts and expenses. Of these 93, they went after 38 for any improprieties, so that is just a little bit over 1% of all the restaurants audited. The city also chose to publicly identify these accused restaurants before contacting any of them, so a number hadn’t misallocated any of the receipts at all, they just hadn’t spent the extra receipts and instead just kept the collected money in a fund for future health care expenses.

Just like back then, all the headlines now are a lot of grandstanding to serve agendas. Though the nomenclature could have been different, and thus less controversial, with its surcharge, Republique is simply attempting to provide its employees with benefits to create a better and more equitable working environment. Spending an additional sixty cents on a twenty dollar bill, that can even be used to offset other gratuities, to help the hard working crew both front and back of house serving you have healthcare isn’t going to undermine one’s world whatever your principals are.

So chill people, plus have a bomboloni.

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