What is total compensation and why should we implement it? Total compensation is a policy that includes taxable tips, commissions and wages in calculating a tipped employee’s taxable income. It’s a win-win – it allows employers to allocate limited labor dollars to non-tipped employees without decreasing the earnings of their servers and bartenders and improves income equality between highly compensated front-of-house staff and non-tipped heart-of-house staff, who are 70% Latino.
How does total compensation create income equality for heart-of-house workers? Like most businesses, restaurants have a job ladder where wages are increased as employees gain skills and progress from an entry-level position. Restaurants have a finite number of labor dollars. If you increase the wage for entry-level positions at the bottom of that ladder then there will be fewer rungs on the wage ladder for workers as they gain experience. Total compensation avoids this issue by freeing up limited labor dollars for heart-of-house employees while guaranteeing significantly higher than the minimum wage for tipped workers.
Can’t restaurants just raise their prices to account for higher labor costs? Labor costs account for 40 percent of a restaurant’s operating costs. A minimum wage increase to $13 per hour would represent a 60 percent increase in labor costs for restaurant owners who operate on razor thin margins – many of whom are women and minorities. It has a ripple effect for business owners, effectively doubling the cost of a wage hike by increasing related costs including taxes and workers compensation.
Isn’t this just a sub-minimum wage? No. The total compensation model is anything but a sub-minimum wage. It creates a guaranteed super wage for tipped workers while improving income equality for non-tipped workers. It does not reduce the pay of any worker.
Do employers have a choice whether they use the total compensation model? How would that work? Employers are required to opt into this model. Restaurants where tipped employees are below or close to the threshold aren’t likely to elect this option because it requires the owner to ensure tipped workers make the higher wage. We strongly support enforcement of these provisions, and California’s robust laws to protect workers.
What about local minimum wages that are higher than the state minimum wage. Does a total compensation policy undo the will of local voters? A total compensation policy empowers communities by giving them local control over the minimum wage. It does not mandate a specific local minimum wage, or preempt in their entirety existing local minimum wage laws. A local jurisdiction that disagrees with this rule may “opt out” by passing an ordinance or resolution that rejects the state’s total compensation rule for tipped servers.
Is of a total compensation model logistically possible? 90 percent of restaurant payments are made by credit or debit card, so tip data is already captured. Employers are responsible for reporting and paying taxes on employees’ tips, so employers already provide a report to the IRS on those numbers. Additional employer payments to any employees that do not meet their threshold are paid out on their paycheck as they normally would each pay period, typically on a two-week cycle.
What about non-restaurant workers? Why does one industry require special treatment? While the language in this model is not exclusive to restaurants, the concept and exceptions are the same. Only workers that are highly compensated with tips will qualify for the total compensation model. Employers that do not opt into this model are required to pay employees the local minimum wage.
Is total compensation the same as wage theft? CRA has zero tolerance for wage theft. We do not condone this behavior and have many resources and policies to ensure our members do not engage in these activities. Bad actors should be forced to comply with the law no matter the wage.
What does a service charge model mean for restaurant workers? As we have seen in the Bay Area and in some other regions, when the minimum wage increases without any mitigating measures such as total compensation, owners opt to replace tipping altogether, with a service charge that is redistributed to all staff. Tipped workers, who make $20-$30 per hour under the current model will see a drastic decrease in hourly wages with a service charge model and customer service suffers.
“The California Food Service Workforce” prepared by Decisions Demographics for the California Restaurant Association. (November 2013)
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