Customers and workers will pay the price for lower wages for tipped workers, Michigan restaurant owners say

GRAND RAPIDS, MI – Michigan restaurant owners are warning that recent changes to the state’s tipping law will have a “devastating” impact on local businesses.

These changes, they say, will result in higher prices for customers and threaten the jobs of workers.

This week, the Michigan Supreme Court ruled that Michigan’s minimum wage will be raised and phased out over the next few years, in favor of a regular minimum wage for servers and bartenders, who typically earn most of their wages on tips.

The regulations are expected to come into force on February 21, 2025.

Under the new rules, the lower wage for tipped workers would increase from $3.93 to about $6 next year and eventually be eliminated entirely by 2029. Supporters of the changes say eliminating tipped wages would provide more stable earnings for Michigan’s 125,000 tipped workers in the hospitality industry.

However, many restaurant owners have expressed concerns that having to pay higher wages will force restaurants to raise menu prices, reduce employee hours, lay off staff or even close their premises altogether.

Jon O’Connor, co-owner of Long Road Distillers, said the elimination of tips would drastically change the cost of labor at a restaurant, and he’s still trying to understand what the implications will be for the restaurant and its employees.

The Grand Rapids distillery was one of several companies in 2021 to raise its minimum wage to $15 and introduce a tip credit to ensure tipped workers leave work with at least $15 in hourly pay, even if business is down.

O’Connor said the company’s tip system has proven effective, with tipped workers typically going home with “significantly more than $15 an hour” on an hourly wage plus tips.

However, if the base rate for labor is forced to rise, O’Connor says that will become a higher fixed cost that employers will have to offset by changing their pricing models – meaning customers will see higher prices on the menu.

“If the fixed cost of labor goes up significantly, that means prices will probably have to go up to cover the base,” O’Connor explained. “And that will affect the cost of a cocktail or a food product.”

O’Connor worries that raising prices for customers will threaten a restaurant industry that has already been vulnerable to inflation and the pandemic over the past few years.

“If the cost of a meal goes up by 20% or 30% to go out to a restaurant, I’m probably less likely as a customer to go out and spend money,” he said. “I’m certainly not going out to eat and drink as much as I used to because the costs have gone up, so that’s going to put further pressure on an already fragile hospitality economy.”

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Some restaurants may be forced to use technology such as QR codes and ordering kiosks due to higher labor costs, which would translate into a more automated customer service environment, said Jeff Lobdell, owner of a restaurant group that operates 22 restaurants across Michigan.

Lobdell is president and founder of Restaurant Partners Management, a company with more than 800 employees that owns and operates 16 restaurants in Grand Rapids, six in the Traverse City area and two hotels in Traverse City. He is also chairman of the National Restaurant Association and has 35 years of experience in the restaurant industry.

Ultimately, Lobdell said, it’s restaurant workers who will suffer the most from the new wage rules. Smaller, neighborhood restaurants won’t be able to significantly raise menu prices to cover higher labor costs, which means they’ll unfortunately have to lay off workers, he said.

“If you’re a small local burger joint that has $12 burgers, you can’t raise the price from $15 to $20 or raise the price of an omelet from $10 to $25,” he said. “Consumers just won’t do it. So I think the biggest pain will be felt by the workers in the industry. And that’s devastating to me because I love all the workers in the industry and I want to see a healthy hospitality industry, not just for the businesses and not just for our amazing guests and tourists, but for our staff.”

A recent study by the Michigan Restaurant and Lodging Association found that two-thirds of restaurant owners would lay off workers and an estimated 40,000 to 60,000 restaurant jobs would be lost if Michigan eliminated the tipped employee tax credit.

The survey also found that 94% of operators would increase menu prices by an average of 25%, and about 20% of full-service restaurants would close permanently as a result of these changes.

Restaurant association president Justin Winslow said in a statement that Wednesday’s decision is “likely an existential blow to Michigan’s restaurant industry and the nearly 500,000 workers it employs.”

“We urgently urge Michigan officials to act quickly and implement a compromise solution that will prevent this impending disaster before it is implemented,” Winslow said.

In addition to the wage changes, the state Supreme Court on Wednesday moved to reinstate new paid sick leave rules that require businesses to provide their employees with a certain amount of paid sick leave, based on the size of their workforce.

The new sick leave rules have also been met with criticism from business owners who say the new regulations will force employers to control and track leave requests submitted by employees in order to comply with the obligation.

RELATED: Michigan small business owners call new sick leave law ‘anti-employee, intrusive’

The Supreme Court ruling concerned the case of two referendum initiatives passed by the state legislature in 2018 and then watered down.

In 2018, two petitions titled the Michigan Paid Sick Leave Initiative and the Michigan Minimum Wage Increase Initiative were launched to raise the minimum wage to $12 an hour, drastically increase wages for tipped workers, and expand paid sick leave.

But the Republican-led state legislature chose to pass a watered-down version of the proposal in 2018 rather than let voters decide the issue, setting off a legal battle that has been playing out in the courts since 2021.

In a ruling issued on Wednesday by a majority of 4 to 3, the court ordered the restoration of both referendum initiatives in their originally adopted form.

RELATED:Michigan’s minimum wage will top $12 next year as Supreme Court reinstates 2018 referendum initiatives