If MI Tip System Falls, 92% of Restaurants Raise Prices, 40% Look to Sell Business

A May food service survey found that, if required to pay waitstaff and other tipped workers $14 hourly, more than 92 percent of Michigan restaurants would need to raise prices, and more than 40 percent of operators would look to sell their business.

The survey was conducted from May 1-6 by the Michigan Restaurant and Lodging Association (MRLA), accepting 209 responses from its food service operator members. The survey comes as the Michigan Supreme Court faces a July 31 deadline to rule on an “adopt-and-amend” action used by the Legislature in 2018.

Six years ago, two ballot question efforts received enough valid signatures to appear on the 2018 general election ballot. One would have asked voters about increasing Michigan’s minimum wage between 60 and 75 cents annually, until reaching $12 in 2022. Afterward, it would have been automatically adjusted to address inflation.

It would throw out the tip credit system used by wait staff and other service workers, providing them with a regular minimum wage instead.

Another one imposed paid sick time mandates for employers, requiring employers with 10 or more workers to provide 72 hours of paid sick time annually.

Instead of not addressing the ballot initiatives, allowing them to go to the November 2018 ballot, the Legislature took them up and amended them. Under the legislation signed by Republican Gov. Rick Snyder, minimum wage would reach $12.05 by 2030, the tip credit system would remain and employers with 50 or more workers would need to make 40 hours of yearly paid sick time available.

Now, the Michigan Supreme Court will decide if the Legislature’s decision to alter the ballot initiatives’ content was constitutional, as legislators are permitted to adopt some ballot initiative efforts without forwarding them to a statewide ballot.

“If ‘adopt-and-amend’ is ruled unconstitutional, and we have to reinstate a 2018 law onto the books, it is going to have catastrophic…impacts to an industry that is already on the edge,” said Justin Winslow, president of the MRLA during a virtual press conference Wednesday morning. “One-in-five full-service restaurants, according to this survey, said they will just close their doors forever…if they are at all profitable right now, if you are going to eliminate the tip credit, that will increase wages for those tipped employees 250 percent overnight.”

If the Michigan Supreme Court rules the Legislature’s 2018 actions unconstitutional, and restaurant owners become automatically obligated to pay tipped employees $14 hourly and provide 72 hours of paid sick time, 65.59 percent of MRLA survey respondents – of 122 – said they would lay off employees.

Additionally, 20.43 percent – or 38 – said they would close their business, and 41.94 percent – or 78 respondents – said they would reduce their operating hours.

For the 179 respondents who would increase menu prices to address the potential changes, more than 21 percent said the anticipated increase rate for the start of 2025 would range from 20.1 percent to 25 percent.

“We would literally be careening off a cliff, heading into the abyss as an industry if we’re going to lose the tip credit immediately because of this ruling,” Winslow said. “Small independent restaurants really make up the backbone of our membership here at the MRLA. (They) are the ones who will be impacted the most, that will see the greatest job loss…the ones who are in that ‘one-in-five’ more than any other segment of the industry right now.”

He said the mom-and-pop restaurants will most likely be the ones to go if an unconstitutional ruling occurs, paired with an automatic new payment structure.

Winslow said there’s nothing precluding the current 2023-24 Legislature from finding a compromise right now to maintain the tip credit system.

“That’s a conversation we’ve been having with a lot of legislators. It’s getting a lot of purchase with those legislators on both sides of the aisle right now, but time is likely short if an adverse ruling comes out,” he said. “The Legislature is well within its (rights) right now to make changes to the existing minimum wage law in a way that can avert this crisis.”

While Winslow focused on the “adopt-and-amend” subject Wednesday morning, the MRLA survey also discovered that among 208 respondents, 59.14 percent of them saw lower customer traffic during the last 12 months in comparison to last year. Less than 18 percent said the customer traffic level was higher than the previous year’s.

In terms of their food service businesses currently operating at a profit, 63.29 percent said it was and 36.71 percent said it wasn’t.

“Fewer people are going into restaurants. Restaurants are a little too expensive for some people, and they’re going less often, so you’re seeing traffic reduced, which is obviously impacting those top line sales numbers as well,” Winslow said. “I think there’s a very, very concerning percentage of restaurants right now in Michigan that simply aren’t profitable. In the best of times, this is an industry that operates on a low profit margin.”

Article courtesy MIRS News for SBAM’s Lansing Watchdog newsletter

Click here for more News & Resources.