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Published in Small Business
JW’s Food & Spirits in Grand Haven. JW’s Food & Spirits in Grand Haven. COURTESY PHOTO

Court ruling could upend business model for some restaurants and bars 

BY Wednesday, July 20, 2022 06:08pm

Chris Weavers is “terrified” by a court ruling handed down Tuesday that immediately raises wages for workers who rely on tips to offset their hourly wage.

Weaver, the owner of JW’s Food & Spirits in Grand Haven, is among restaurant owners across Michigan grappling with a significant Court of Claims ruling Tuesday that raises the minimum wage to $12 an hour and potentially cuts into their already thin profit margins. 

For workers — often in restaurants and bars — who rely on tips, the hourly wage is now 80 percent of the minimum wage, which gradually increases to the full minimum wage in 2024.

The ruling, which took effect immediately and also increases employer requirements for paid sick leave, comes as restaurants and bars are recovering from the COVID-19 pandemic, widespread labor shortages and inflation.

“I will have to raise prices even more than I’ve already had to with inflation and interest rates and supply chain issues and all of that,” Weavers told MiBiz. “I don’t know how much higher I can raise prices and still stay in business.”

Robert Dubault, executive partner at Warner Norcross + Judd LLP who specializes in labor and employment law, called the ruling a “game-changer” that will force businesses to re-examine their paid sick leave policies and — particularly for restaurants and bars — how they compensate workers. 

“Primarily for restaurants who do have tipped employees, they’re going to have to take a hard look at their business model and ask: ‘Will we have to go to a minimum wage and no tip policy?’ I’m pretty confident that many of them are paying less than (minimum wage) and are just making up the difference in tips,” Dubault said.

Court of Claims Judge Douglas Shapiro on Tuesday ruled that the Republican-led Legislature’s unprecedented maneuver in 2018 to adopt and then significantly weaken two ballot initiatives increasing the minimum wage and strengthening paid sick leave requirements was unconstitutional. The initiatives — and now current law — require businesses to offer up to 72 hours of paid sick leave, raise the minimum wage to $12 an hour and significantly increase tipped wages. Legal experts expect an appeal or at least a stay on the order.

Prior to Tuesday’s ruling, Michigan’s minimum wage was $9.87 an hour and $3.75 an hour for tipped workers. Weavers and other restaurant owners say their employees regularly make more than $12 an hour with tips, and the new rules could have negative effects on their business.

“It’s hard to see the wisdom behind a blanket decision,” said The Mitten Brewing Co. co-owner Chris Andrus. “For us, this targets the wrong problem. Right now this is occurring in the midst of a historic labor challenge and it’s pouring gasoline on the problem for everyone. Not that everyone doesn’t deserve a living wage, but this will mean a drastically reduced amount of front-of-the-house staff.”

The Mitten’s front-of-the-house staff — fewer than half of the brewpub’s total employees — operates on a tipped wage system, Andrus said. 

The Mitten has adopted a de facto $15 an hour minimum wage for its tipped workers. The company covers the difference if its tipped employees make less than $15 an hour with their base pay and tips, although that has never happened, Andrus said.

“What matters is the end result (of what someone gets paid),” Andrus said. “This will put restaurants that are on the bubble out of business.”

The Michigan Restaurant & Lodging Association said Tuesday night that Shapiro’s ruling would cause restaurant operators a 156 percent labor cost inflation, layoffs and “instantaneous” menu price increases. 

Weavers pays her tipped employees $5 an hour, adding that they regularly make more than $12 an hour with tips. She is worried that having a higher base pay for tipped employees will remove incentives for employees to work in the restaurant industry.

“I think $12 an hour minimum wage is a lose-lose for everyone involved,” she said.

Already adapting

However, some bar owners who have already adapted their business model to include higher wages welcomed Shapiro’s ruling to reinstate a law that was initially set to go before Michigan voters in 2018.

Tami VandenBerg, who owns The Meanwhile and Pyramid Scheme bars in Grand Rapids, said all of her employees are compensated above the amount for tipped workers under the new law. VandenBerg said some changes may come to comply with the new paid sick leave rules, which requires up to 72 hours of paid sick leave a year for all employees. 

“Frankly, this year and the last couple years, it was extremely difficult to find folks without paying those amounts, so we have been working on changing our model for a while,” VandenBerg said. “I want to pay people as much as I possibly can to get good people and because I want to share as much of my resources as possible. I’m grateful we’re in a position where we’re pretty much already doing this. It gets challenging to compete with everybody else not doing this.”

The Meanwhile and Pyramid Scheme do not serve food, which VandenBerg recognized could be particularly challenging for some businesses. 

“I definitely feel particularly for restaurants,” VandenBerg said. “One of the reasons we decided not to serve food was because it adds a substantial cost and the margins are incredibly thin. I want them to succeed and pay fair, living wages.”

Managing Editor Andy Balaskovitz contributed reporting to this story.

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