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Time for a raise?

by Michael Busch

When do you decide to give an employee a raise? “When an employee performs beyond expectations” or “when an employee takes on new responsibilities” would both be good answers. Do you think it is fair to be told by an outsider when to give an employee a raise? When the minimum wage goes up, that is exactly what happens. But does an increase in the minimum wage rate help low income employees? I’m not convinced that it does. To offset the increased operating costs caused by an increase in labor costs, restaurateurs can either reduce their number of total employees or reduce the amount of total hours worked. Either of these reactions will offset any overall benefit to employees. Another alternative is to absorb the increase to labor costs and offset it with an increase in prices. Servers in New York State earning the minimum wage will be getting a raise on January 1, 2007 thanks to your elected government officials. This will be the third raise in the last three years. The current minimum wage in New York for a tipped employee in the food service industry, earning at least $2.40 in tips per hour, is $4.35. It was $3.85 prior to January 1, 2006 and $3.50 prior to January 1, 2005. (In case you haven’t noticed, your labor costs have increased substantially!) If you had 30 servers working 20 hours per week at minimum wage on December 31, 2004 your direct labor cost was $2,100 per week. Those same servers working after January 1, 2007, when the hourly rate goes to $4.60, are going to cost you $2,760 or $34,320 more annually! These individuals I am referring to, in some establishments, are making upwards of $30 per hour in tips over and above their wages. It is true that the minimum wage for non-tipped employees has also gone up. However, this has had little or no impact because the marketplace has set a standard wage which is higher then the minimum. As of January 1, 2007, the minimum wage for non-tipped employees is increasing to $7.15. Starting wages for non-tipped employees in New York, for the most part, exceed that.

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There is a glimmer of hope for restaurants. At the time this article was written, there was a court case pending trying to block the proposed minimum wage increase for tipped employees. However, assuming the increase goes into effect as scheduled, it should be implemented based on when an employee works as opposed to when he is paid. This will create a strange situation if you pay your employee in 2007 for hours worked in 2006. Your employee will have wages reported on his 2007 W2 which are paid at the lower 2006 rate.

Restaurants in New York’s neighboring states have similar issues with minimum wage. New Jersey increased their minimum on October 1, 2006 to $4.29 for tipped employees and $7.15 for non-tipped employees. However, New Jersey takes the position that their minimum wage for tipped employees is merely a guideline as long as tips declared per hour plus wages equal at least $7.15. This means that as long as an employee declares at least $5.02 per hour in tips, the federal minimum wage for tipped employees, $2.13, can be used. Connecticut is increasing its minimum on January 1, 2007 to $5.41 and $7.03 for tipped servers and bartenders respectively, and $7.65 for non-tipped employees.

I’ve spoken about available credits in previous articles and there is one which is tied into the minimum wage in New York. As minimum wage goes up the credit you can take for offering a meal to your employees goes up also. As of January 1, 2007, the meal credit for a tipped employee goes up to $2.10 per meal. Based on the example used above, you could save over $13,000 (or rather get back some of the added cost). If you have not been taking meal credits in the past, this may be the time to start.

Michael Busch is President of Payroll Computing Services. PCS is a payroll service provider and consultant that specializes in the restaurant industry.

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