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Casualties of the Wage War

Ellen Cushing | July 29, 2014 | Story Politics

Duncan Ley would like to be clear about one thing: He’s in favor of a $15 minimum wage in San Francisco. Almost as soon as we sit down to chat at a Russian Hill coffee shop, he declares that he and his business partner, Ben Bleiman, are “extremely progressive in our personal views. The idea of a $15 minimum wage is attractive to us. We think it’s what needs to happen in the United States to help the people who need it the most.”

But recently, the co-owner of the Tonic Nightlife mini-empire has found himself one of the most vocal opponents of a November ballot measure that would bring San Francisco’s minimum wage to $15 by 2018—and that has many of the city’s progressive-minded restaurateurs worried about their livelihoods.

It’s also put people like Ley in the painful position of lobbying against a policy that they fundamentally support. “We are not the kind of business owners who think we’re always being victimized by government,” says Ley. “We’re very pro–big government, pro-regulation, philosophically. I’m not one of those ‘death by a thousand cuts, they’re bleeding us dry’ people. And I like that the discussion about inequality is happening, especially here in San Francisco. But this could be catastrophic.”

It’s not uncommon, or surprising, for small-business owners to oppose minimum wage increases. Even more than for corporate giants like Walmart and McDonald’s, the amount that businesses like Ley and Bleiman’s pay their lowest-level workers can make or break their bottom line. Every increase in pay, however small, narrows the already tight profit margins that constrain them (often as little as 3 to 4 percent in the hospitality trade, according to people familiar with restaurant finances), and leads them to take measures like raising prices or downgrading their product. But the argument of many San Francisco restaurateurs goes beyond the simple rhetoric of owners trying to cap costs. The way they see it, this measure—which was crafted speedily and behind closed doors by a consortium of local interests, including the Mayor’s Office, labor unions, city supervisors, and some business leaders, and which would incrementally increase the minimum wage from its current $10.74 over the next four years—could exacerbate San Francisco’s inequality and diminishing affordability.

“It’s too much, too quickly,” says Bleiman about the proposed law, which he believes will lead to increased wages for segments of the industry that need it the least, namely tip-receiving waiters and bartenders—and stagnant or even lower wages for back-of-the-house workers. "In four months, we would have to be in the position of having to crank up costs, of having to give raises to some of our employees who get $30, $40 in tips an hour. This feels like a steamroll, like it's being rammed through because it's an election year and because a lot of other cities are doing it."

Indeed, at a moment when housing- and affordability-related anxiety in San Francisco is at a fever pitch, the prospect of raising wages for the lowest-paid segment of the populatio is undeniably attractive. For Mayor Ed Lee, who will be running for reelection next year, the wage increase is a political slam dunk, well aligned with progressives' nationwide push for a $15 minimum wage, and following the example of other expensive coastal cities like Seattle, which just passed its own $15 minimum wage (to be implemented incrementally by 2018).

As Lee and his political aides know, raising the minimum wage is a close to a can't-miss issue in progressive San Francisco as it comes. (In fact, at $10.74, San Francisco already has the nation’s highest minimum wage, though Seattle’s is set to surpass it in April.) A January Pew report indicated that nearly three-quarters of the American public—across party lines—favors President Barack Obama’s proposal to raise the federal minimum wage from $7.25 to $10.10 an hour. Barring a truly unexpected turn of events, November’s measure is expected to pass easily at the ballot box.

And that is giving the San Francisco restaurant industry no end of heartburn.

Like many opponents of the minimum wage measure, Gwyneth Borden is fond of using the term “unintended consequences” when she talks about the issue. The executive director of the Golden Gate Restaurant Association, an umbrella group that lobbies for the restaurant industry in San Francisco, Borden tallies a number of ways that restaurants will absorb the inevitable ballooning labor costs. “Some are going to have to make a decision about whether they’re gonna stay open,” she says. “Some will go to a system of flat service charges, which will include gratuity. Quick-serve places will look at automation. Some places might start closing on Mondays and Tuesdays to cut costs.”

While all small businesses that employ low-wage workers will be impacted by the hike, restaurants and bars are a special case, Borden says, “because they’re very labor-intensive. And you can’t cut much on the service side.” The increase in the minimum wage, plus the added costs of payroll taxes and the like, will mean that many of the city’s restaurateurs are looking at a 45 percent or more jump in costs—an increase that some say they'll have no choice but to pass on to consumers. “There’s no way I could absorb that pay raise,” says Jen Piallat, owner of the Cole Valley bistro Zazie. “That’d be what I formerly called the profits.”

Data on the effect of minimum wage increases on prices present a mixed picture, but according to a study of San Francisco’s last minimum wage raise, about three-quarters of the increase was passed on to customers. Given the nearly 40 percent increase outlined in the proposal, diners could see an up to 30 percent rise in prices.

“You can be good-hearted all you want,” says Piallat, “but your burger will be more expensive. There is a direct parallel. You’re gonna pay a premium. If you think you’re just voting for the little guy because you’re a cool, nice person, well, don’t be surprised when your burger is $20 and your glass of wine is $15.”

If the movement toward a living wage in the Bay Area’s hospitality industry has a star, it might be Piallat. Long before the city began requiring restaurants to give their employees health insurance, she was providing hers with full dental and medical care, as well as a 401(k) and a bonus program. In 2010, when much of the local restaurant industry was up in arms over Healthy S.F., she filed an amicus brief with the U.S. Supreme Court in favor of the law. When we talk, she’s just participated in the President’s Conference for Working Families as an invited speaker. But despite her progressive bona fides and a genuine and strongly felt affinity for low-wage workers, she’s ambivalent about San Francisco’s measure. “Will I support it? Yes. Is it imperfect? Yes.”

Unlike many restaurateurs, Piallat actually isn’t too worried that her customers will balk at higher prices. “If you go to a place because they have sustainable seafood,” she says, “why not go to a place because it treats its employees with respect and dignity?” But she is concerned that without an exemption for tipped employees—which would allow employers to pay tip-earning workers less than the standard minimum wage as long as their total compensation was equal to or higher than minimum wage—the measure could increase inequality between the front of the house (the servers, bussers, and bartenders, all of whom make tips) and the back (the dishwashers, line cooks, and sous chefs, who make an hourly wage). “Of course it would be great for McDonald’s workers to be making $15 an hour,” she says. “But my waiters average $40 or $50 an hour. The waitstaff would be getting a huge raise. And let me tell you, they’re not the people who need it.”

According to Jason Elliott, Lee’s legislative and government affairs director, “When Mayor Lee said he wanted to raise the minimum wage, he wanted to raise it for everybody. There were a lot of proposals. Ultimately, it was a balancing act of coming to the right public policy. It was important to us to reach a consensus ballot measure.” But if you ask Borden, there is no consensus. “We asked for three things,” she says. “A slow phase-in, a tipped worker carve-out, and that the provision of benefits like health-care count toward the cash minimum wage. We didn’t get any of those.”

Off the record and in careful language, some of the law’s opponents speculate that unions blocked the tip exemption, hoping to unify all workers under the same wage system. Another theory is that city hall jettisoned the exemption because working out the legal language was too complicated for the compressed time period from idea to proposal to ballot measure. But in the city’s defense, the intricacies of California labor law are not on restaurateurs’ side in this case. The Labor Code forbids mandatory tip-pooling—that is, sharing tips between the front and the back of the house, ostensibly to prevent back-of-the-house managers from taking advantage of employees. It also mandates that tips are the property of the worker—meaning that tips can’t count toward wages and, by extension, that paying tipped employees less than minimum wage is illegal.

While Borden argues that the city could have made a “carve-out” by raising the minimum wage to less than $15 for tipped workers—a system that San Francisco is using for subsidized seniors and some youth—members of the committee that drafted the measure argue that, as one city hall insider says, “we shouldn’t be jury-rigging our local laws to get around state laws. We’ve been doing this for a long time, and we know that the more complex a law is, the harder it is to enforce.”

Unsurprisingly, this excuse doesn’t hold much water with people like Bleiman. “The public is intelligent enough to know that servers and bartenders are well above low-wage-worker status,” he says. “Many of the people who will be getting this $15 are, in our industry, making more than $25 an hour in tips already.” Like Piallat, Bleiman believes that minus a tipped worker exemption, the measure could actually worsen inequality in the city, especially on racial lines. “The front of the house tends to be young, single, college-educated people. And the back of the house have families. They tend to be Latino. Our average kitchen worker makes $15 an hour already, at least. And we can never give them a raise again because our expenses have gone up. They’re getting totally screwed. Meanwhile, we have bartenders who are making $120,000 a year, and they’re about to get a government-mandated raise.”

Of course, not every bartender pulls down $120,000 a year, and, as the city hall insider pointedly tells me, “not everyone works at Gary Danko.” And therein lies the problem for objectors to the measure, and the primary reason that they’ll likely lose their battle this November: It’s hard to argue that a $15 minimum wage wouldn’t make a demonstrable difference in quality of life for the city’s fast-food workers, Chinatown waiters, and cafeĢ baristas, who dramatically outstrip in numbers those lucky enough to work at an upscale restaurant. For businesses that employ the latter, the law’s impact—and the efficacy of a one-size-fits-all solution—is muddier.

“It breaks our heart, what’s happening here,” says Ley. “It does. But there’s just, we’re just having trouble with...” Bleiman breaks in: “Unintended consequences.”

Originally published in the August issue of San Francisco

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