Wage Wars

Why New York’s Restaurants Are About to Get a Lot More Expensive

Ai Fiori's parent company will have to spend an additional $1.2 million next year on staff wages.
Ai Fiori’s parent company will have to spend an additional $1.2 million next year on staff wages. Photo: Danny Kim

Restaurant prices constantly creep upward to keep pace with growing expenses, but lately it seems like things have accelerated dramatically: Franny’s recently raised the price of its pizzas from $18 to $22 (they also floated the idea of a so-called Obamacare surcharge of 3 percent on every check, before customers balked). Danny Meyer’s restaurant group is famously ditching tips and raising menu prices accordingly. Eleven Madison Park’s diners will soon see the price of a tasting menu rise from $225 before tip to $295 with gratuity included. These places are hardly alone as owners all over town are being forced to rethink their costs.

The higher prices aren’t simply the result of rising rents and increased food costs — things restaurateurs have been dealing with for ages. Instead, these moves are preparation for the New Year. That’s when New York restaurateurs will have to give their waiters, bussers, and other tipped employees a mandatory 50 percent raise, as the minimum wage will jump from $5 an hour to $7.50. Many line cooks and other non-tipped employees will also see a raise as their minimum wage jumps to $9 an hour. Next year also marks the first year that restaurant groups with at least 50 employees have to offer insurance to full-time staffers. Restaurateurs also cite additional costs triggered by the wage increase, such as higher payroll taxes and overtime. And, if menu prices rise, credit-card fees also go up. Even rent can rise because many leases tie it to restaurant sales.

It’s all going to add up quickly for owners, who already deal with razor-thin profit margins. Jay Holland, a rep for the New York State Restaurant Association, says owners are “scrambling to survive.” In talking to his group’s members, he estimates that, depending on the size of their company, owners will have to pony up between $30,000 and $2.5 million just to cover the wage increase to tipped employees.

Take, for example, Altamarea Group, which currently operates seven restaurants in New York City. Arthur Li, the company’s chief financial officer, says the tipped-employee wage hike will increase his costs by $1.2 million next year. To cope with that, he says he’s taking a “maniacal and methodical” approach to shaving costs. He’s asking floor managers and chefs to see how staff hours can be cut down. The group will also look at reducing the number of menu items and could eliminate the ones that are the most labor-intensive. The company also plans to focus on attracting, retaining, and developing cooks. “Limiting the turnover to a healthy amount is the key,” Li says. “It costs so much and takes so many resources to train people.” He says he has no choice but to make it work: “What keeps me going is that there’s going to be some operator out there who can figure out the business of it.”

The funny thing is, nobody’s exactly sure how they’re going to cover these additional costs without simply jacking up prices — a move that owners are understandably reluctant to embrace — and it’s what’s led many people to rethink their business models entirely, which is why you’ve no doubt noticed the uptick in restaurants that will eliminate tips.

“There’s something bubbling as people think about how to move forward,” says Sabato Sagaria, the chief restaurant officer at Meyer’s Union Square Hospitality Group, which calls its tip-elimination initiative Hospitality Included, a program that also includes higher menu pricing. “As a business we are looking to take an initial hit,” Sagaria says. His goal: “We’re going to learn about this, and we’re going to minimize that hit.” However, he says raising prices simply isn’t enough to make the model work, not least because doing so too quickly will scare diners off. He needs his restaurants’ dining rooms to be full.

Of course, he’s not the only one who thinks the no-tipping model is the best way forward. As Sagaria points out, “If you just look at changes in terms of how many restaurants have gone non-tipping in the last six months compared to how many changes before that, it’s just a sign of restaurants starting to think differently.” Additionally, he says 2016 will be the beginning of “one of the largest shifts that we’ve seen in the restaurant industry in the past 30 years,” contending that there will be a historically steep rise in wages in the next three years.

The no-tipping model is favorable because it allows restaurant owners to raise prices, but also to decide how to distribute the extra cash flow. That might be increasing pay to cooks (who make an average of just $35,000 a year in New York City), buying new chairs, paying investors, whatever. They can also choose to compensate waitstaff differently depending on experience or ability, which is part of the plan at USHG.

Still, the decision to go tip-free is not one that owners can simply make overnight. Nicola Marzovilla, the owner of I Trulli, spent months with his lawyers examining how to eliminate gratuities at the restaurant. Every detail must be considered, including careful wording. Marzovilla first considered calling the necessary 20 percent surcharge a “service fee,” then realized that was against government rules. Marzovilla explains that restaurants can’t use any verbiage that leads the customer to believe the money is going directly to service staff, so he and his lawyers decided to call it an “administrative fee,” which is the term Manhattan-based Dirt Candy has used since reopening with a no-tipping model earlier this year.

Even that could theoretically run afoul of regulations, though: New York City restaurants are subject to three regulatory agencies, and one of them, the city’s Department of Consumer Affairs, technically does not allow any surcharges, though the State Restaurant Association says the department doesn’t enforce that rule.

To illustrate the confusion that owners may face, Marzovilla didn’t know about the surcharge rule until we asked about it. “Maybe there’s some arcane regulation on the books,” he says. “We’ll deal with any ramifications as they come up.” Whatever happens, he says his new no-tipping system “can’t be worse than dealing with the Department of Labor on tip rules. We were screwed.”

Even one of the city’s most successful and experienced operators, Drew Nieporent, isn’t really sure what to expect when 2016 arrives, though he has an air of confidence that he’ll figure it out. The owner of restaurants like Nobu, Bâtard, and the Tribeca Grill says of the industry’s already-tight profit margins, “You’re lucky if you can make 10 percent,” before asking, “Is it fair to say that we’re allowed to make one dollar on ten?”

Nieporent agrees that simply hiking prices will result in fewer diners, so he’s sticking with a model that allows diners to tip their waiters. As a result, he says the wage hike at just one of his restaurants will cost him an additional $100,000 in 2016. His plan: “take it in stages” and use a day-by-day approach. “All I know is when the time comes, we’ll run the numbers, and we’ll realize that if we have to charge a little more here and there, that’s what we’re going to do.” And, he adds, “Sometimes you have to tuck your belt a little more and reduce your expenses.”

Li, of the Altamarea Group, sounds less optimistic about operators who can’t adapt to the new climate: “I don’t want to make a bold prediction … but there may be some restaurants that will find it hard to continue.”

Why Restaurants Will Soon Be More Expensive