One Bad Idea

We interviewed Ryan Lotz, President of Massachusetts Restaurants United, about Ballot Question 5. Listen here and read additional perspective and analysis.

Massachusetts Ballot Question 5 is asking voters to determine whether the state should continue to allow restaurants to take a tip credit. Currently, tipped employees can be paid $6.75 an hour provided that their tips bring them at least to the current minimum wage of $15 per hour. To be clear, restaurants are already legally required to pay the state minimum wage to all employees. Question 5, if passed, will phase out the tip credit by 2029.

Many restaurant people, myself included, are against Question 5 for a few reasons.? Taken together, these are bad for restaurant employees and entrepreneurs, guests, communities, and the state on the whole:

The passage of Ballot Question 5 will:

1. Lead to substantial job losses in an industry that employs nearly 270,000 people statewide
2. Cause menu prices to increase significantly to cover higher labor costs
3. Further tip the scales toward corporate chains over local, independent businesses

Before we unpack these, it’s helpful to have some context around restaurant profitability and operating costs. Nationwide, single location independent restaurants have a profit margin of 4.2% with a compound annual growth rate of negative 1.1% since 2018. So for every $100 a restaurant does in sales, it has $4.20 to show for it.? And that number is dropping.

Let’s say a restaurant is doing $50,000 a week in sales and 5% profitability. That’s $2500 in profit per week. A full-service restaurant of this size would likely have between 300-400 hours a week of tip credit wages of $6.75 per hour. If we take the low end of that at 300 hours, the cost of Question 5 fully realized in 2029, would be $2,475. So if nothing else changes (menu prices, hours worked, minimum wage, inflation), which is highly unlikely, that restaurant will go from $2,500 in profit to making $25. It is no longer a viable business.

The restaurant has a couple options. They can cut hours and jobs to reduce their payroll costs.? They can significantly increase prices to cover the additional payroll costs, likely 3-4 times the? amount of additional payroll cost incurred.?

When we did the math for one of our Shy Bird locations we’d have to eliminate 225-250 hours per week just to sustain the business, assuming we do not increase prices. That’s 5-6 people we’d no longer have hours or jobs for. ? We, like all restaurants, have an incredible mix of full and part time people, college students, parents, non-native English speakers, career professionals, etc.? Every role would be impacted whether by lost jobs or additional workload taken on as hours are eliminated.? Every aspect of the employee and guest experience would suffer as servers and cooks are stretched beyond reason.?

Alternatively, we could raise prices.? We calculated those increases would be upwards of 70-75% by 2029 when accounting for historical averages for inflation and wage growth.? A dish that is $15 today would have to be priced at $25.80 in 2029. A $75 dinner for two today would be $129 in 2029.? If you want to see the impact on your favorite restaurant or dish, you can use this calculator.

That is not the affordable, neighborhood restaurant we opened. More importantly, it’s not good for our guests, our staff or our state. Washington D.C. recently eliminated the tip credit and it has led to job losses of around 12% in full service restaurants, over 6 times the losses in limited service restaurants in the same period. A 2021 study out of University of California at Irvine found that the impact of job losses exceeds any potential slim benefit that could be achieved through eliminating tipped minimum wages.? Based on that study's findings, Massachusetts could see a 9.2% decrease in tipped jobs as a result of Question 5 passing.? A couple facts from the Bureau of Labor Statistics to give that number context:

1. Massachusetts employs over 70,000 Servers and Bartenders.? At 9.2% that equals 6,440 jobs lost.
2. The great recession of 2008 is estimated to have seen a 6% loss in jobs.

The most likely scenario for any restaurant would be a combination of price increases and job cuts, sharing the burden between the team and guests.? A recent study from Northeastern and The University of Toronto shows the dire consequences of this approach.? The study found that for every 1% increase in price, a restaurant sees 1.56% decrease in demand. Using online reviews, the study also determined that for every 1% decrease in service quality a restaurant sees 1.85% decrease in demand.? Taken together, if a restaurant raises prices by even 10% and the service quality slips by 5% as a result of short-staffing, the restaurant should expect a 20-25% decrease in demand.? Very few restaurants could survive a drop in demand this severe.

Fast casual chains, publicly traded or private equity backed restaurants, will be the primary beneficiaries of Question 5 passing. They’re better able to absorb or combat the increased costs, as CAVA recently did when California enforced a $20 minimum on large national chains. Deep pocketed chains will also be best positioned to take over spaces vacated by independent operators who could not survive in the new environment.??

Passing Question 5 would lead to job losses, decreased service quality, and significantly higher prices for diners. Passage would disproportionately harm local, independent restaurants while benefiting large chains and corporate entities. This measure threatens the vibrant restaurant scene that helps makes our communities unique.

For the sake of our local restaurants, their employees, and our communities, I urge you to vote NO on Ballot Question 5.

Single Location, Independent Restaurant Profitability IBISworld

With the tip credit falling, full-service D.C. restaurants cut 3,700 jobs

The Employment and Redistributive Effects of Reducing or Eliminating Minimum Wage Tip Credits

The Effect of Minimum Wage Changes on Restaurants and the Service Elasticity of Demand

Tufts Center for State Policy Analysis?