Metro Weekly

The Impact of I-82: “They’re Not Going to Get Happy Hour Specials Anymore”

D.C.'s restaurant and bar owners grapple with how to offset the coming labor costs associated with eliminating the sub-minimum wage.

Danaichidsin / Dreamstime.com

As the results of November’s midterm elections trickled in, D.C.’s restaurant and bar owners watched with resignation as the margins of the District’s sole ballot initiative grew.

Initiative 82, a measure to eliminate the subminimum wage for the city’s tipped workers and require all employers to pay all employees the standard per-hour minimum wage, didn’t just win by a 10-point margin, as a similar initiative, later overturned by the Council, did in 2018. Rather, the margin ballooned to a nearly 48-point spread, passing 74%-26%, earning some of its largest margins of victory in D.C.’s working-class and majority Black neighborhoods.

For many restaurant and bar owners, and their managers, the initiative was viewed as practically a fait accompli, even before a single ballot had been cast or the results tabulated. 

“I’m part of a business group, and we were told that it’s going to go through no matter what,” recounts Dave Perruzza, owner of the Adams Morgan LGBTQ sports bars Pitchers and A League of Her Own.

“The attitude was basically, ‘Don’t waste your money on fighting it, because it’s going to pass no matter what.’ And the Council overturned it, and got shit for overturning it the last time, so this time they were going to say, ‘It’s the will of the people,’” says Perruzza, who still takes issue with what he sees as Initiative 82’s wording as it appeared on the ballot.

“You have people that don’t have a clue, who don’t work in the service industry at all, looking at something on a ballot called the ‘Fair Wage Initiative,’ saying, ‘Oh yeah, everyone deserves a fair wage,’” Perruzza says. “They don’t know that everyone’s already making at least a  fair wage, if not more. So of course it was going to pass.”

David Winer, the owner of EatWell DC LLC, which operates several popular restaurants including Logan Tavern, The Pig, and Commissary, says that, besides the successful messaging by groups like One Fair Wage, which advocated for the ballot initiative, he believes the COVID-19 pandemic may have played a significant role in the difference between the margins that the nearly identical Initiative 77 passed with in 2018 versus the margins that Initiative 82 passed with on Nov. 8.

“I think COVID changed people,” he says. “I think COVID made people more aware of service staff and what they go through, and the perils that were attached to being in the service industry over the last few years and being frontline workers.

“And I believe that the people who voted for this believe that somehow this is going to be a positive for these workers. And I think that was the most significant change: that we had more empathy for these workers. A lot of people felt like somehow this was helping those workers, more so than they had in the past.”

Unlike 2018, there is little appetite on the Council to repeal yet another voter-approved initiative, meaning the change in how restaurants pay their employees is unlikely to change. While Mayor Muriel Bowser was an opponent of Initiative 82, she does not seem eager to expend further political capital fighting its implementation.

Going forward, the wage, currently $5.35 per hour for tipped workers, will be slowly increased over time, rising to $6 per hour in January 2023, $8 per hour in July 2023, and $2 more each subsequent year until 2027, when tipped employees will be expected to earn the same hourly rate as their counterparts outside the restaurant industry.

Currently, the minimum wage in the District is $16.10 per hour, but that, too, will likely increase in the next four-and-a-half years — though not as drastically as the tipped wage — because the District’s minimum wage is indexed to rise automatically with the cost of living, as measured by the consumer price index.

But even with the gradual phase-out of the tipped wage, many business owners have been left scratching their heads over how to rework their costs to account for what, in a few years, will be much heftier labor costs.

In an industry that typically operates on thin profit margins, even a small increase can wreak havoc, leaving some restaurant owners to look at some accounting tricks, reducing the number of staff or the hours that each employee works, or passing the cost onto their consumers in some manner.

Jamie Leeds, the chef and owner of Hank’s Oyster Bar, told The Washingtonian that she would never open another restaurant in the District following Initiative 82’s passage. 

Leeds said she’s considered a wealth of possible options when it comes to operations, including implementing an online ordering system without a server for the lunch crowd, tacking a 20% or 22% service charge onto each bill to help cover the cost of phasing out the tipped wage, and possibly instituting a smaller service charge that would encourage patrons to tip their server — albeit not as much as they used to prior to the introduction of a service charge.

While she hasn’t settled on a permanent solution, Leeds expects to try out some of these actions over the course of the next year until she finds the one that will allow her restaurant to remain profitable.

Perruzza, of Pitchers and A League of Her Own, says that customers simply will have to get used to paying more at dining and drinking establishments throughout the District.

“As a restaurant owner, if people want cheap drinks, I can’t give them cheap drinks,” he says. “If people want happy hour specials, they’re not going to get happy hour specials anymore. Because now we’ll be paying the people who are working a ‘living wage,’ even though everybody that works for me makes that anyway with tips. No one makes less than 30 bucks an hour at my place.”

Perruzza also believes that some higher-end restaurants may reduce the number of staff in order to shoulder the higher cost of payroll associated with implementing Initiative 82.

“When you go to a fancy restaurant, you go there because you like the ambience, you like the service. Your water cup is never empty. Your bread basket is never empty. The table is constantly clean. That’s because they have a person who just delivers bread all night. They have a person who goes around and cleans all night. They’ll probably get rid of those people so they don’t have to pay them anymore. And the waitstaff will be overworked, because they won’t hire as many waiters. And then your quality of service is going to go down.

“And all the people who voted for 82 are going to complain,” he continues. “And I want to say, ‘Shut the fuck up. You voted for it. What did you think was going to happen?’ It’s not just about a ‘living wage’ for servers. It’s the overall picture that people fail to see. I get shit, with people saying, ‘Oh well, you’re just mad because you’re an owner,’ and I’m like, ‘No, actually, I’m a consumer.’ 

“I’m mad because when I go to a nice place, if I go to any restaurant, there’s going to be a service charge on the bill. So lunch will now cost $60 for two people. It’s ridiculous,” he adds. “And if people don’t think that is going to happen, they’re in a fucking bubble.”

Perruzza also predicts that people will eat out less often and go out less during the week in order to save money.

“On weekends, bars and restaurants will be busy,” he says. “What’s going to suffer is happy hours and weekdays, because people aren’t going to be inclined to go out when they know they have to pay extra money. Ubers are going to go up. The cost of everything is going to go up. So people will say, ‘Okay, if I’m going out on Tuesday or Wednesday, I can’t really go out on Friday’ or ‘I’ve got to go out on Saturday, so I can’t go out on this day.’”

Keaton Fedak, who owns Kiki Bar, which has been operating for about a year, says that, as a new business, he hasn’t had time to amass a significant amount of savings, particularly given the rise in the cost of goods needed to keep his shelves stocked. He estimates that 60% of his employees’ take-home pay currently comes from tips.

“As a new business, the dramatic change in payroll would probably financially crush us,” he says. “The service industry has always been based on tips. There’s good nights where bartenders could be making as much as a decent lawyer. With the dramatic change, bartenders are going to actually lose money over this.

“For example, this past Sunday, we had a very, very great day, as usual,” Fedak says, noting that Kiki pools all tips and splits it between employees, which not all bars do. “But my bartenders were making about $45 an hour over a ten-hour shift. So right there is an example of how their pay is going to plummet from making $45 an hour to making $16 per hour. With tips — assuming people do continue to tip — maybe they’d make $25 to $30 an hour. So they’re still losing $15 per hour on a Sunday, one of our busiest days.”

Fedak foresees potentially instituting a service charge or automatic gratuity to cover the coming increase in the hourly wage rate. And while proponents of Initiative 82 promised that bar and restaurant employees would continue to get “tips on top” of a higher hourly minimum wage, Fedak fears that customers, to save some money, will stop tipping if they see a service charge on their bill, even though that service charge is going toward covering the additional $10 or more per hour in hourly wages.

“I think it’ll probably be about 50/50,” he says. “Our regular customers who understand how the industry works or talk to service industry members will continue to tip. But the other 50%, who never understood the situation, or the cheap tippers who already only leave 15% or 10%, they’ll stop immediately [after seeing a service charge].”

Fedak wonders whether some service industry employees will seek employment elsewhere if they are only guaranteed to make the current minimum wage and customers stop being as generous with their tips.

“Part of the reason why some people want to work in the service industry is because you can make several hundred dollars a night, or can work three days a week and make $1,000 extra on a part-time basis to help pay your rent or earn extra spending money,” he says. “But if you can make the same amount of money as a driver for DoorDash or working at CVS or being a clerk, why would you want to work at a bar until four in the morning and deal with people who have been drinking all day and issues like that, when you could work at any other establishment for $16 an hour, during the day, with a set schedule, and probably have a less stressful life?”

Fedak is also looking at potentially having to rescind one of the generous benefits he’s given his employees, which not all bar workers receive: health insurance. 

“At this point, I offer my full-time employees health insurance, dental, and life insurance through the bar, and that’s $3,500 a month,” he says. “As a brand-new business that’s not even a year old, that was a very big expense. But I do believe that everybody should have the opportunity to have health insurance at a decent cost. But depending on the math, that is probably going to get taken away when these changes take effect, because it’s just not financially feasible. I worry it’s going to come down to either: do you want to get paid or do you want to get health insurance?

“It’s unfortunate, but that is one of the first expenses that I will have to look at if this all plays out,” Fedak says of his fear that customers will stop tipping. “Yes, you can cut hours and stuff like that, but then you’re just hurting your servers because you don’t have enough people on staff or you’re pissing off the employees who are busting their chops for $15 an hour instead of the $45 or whatever per hour they used to be making.”

Winer, of EatWell DC, says the elimination of the tipped wage poses significant cost implications for restaurants.

“We’re talking about going from $5.25 an hour for some of our staff to $16, and then, eventually, as this is implemented over the course of several years, $17, $18, $19 an hour,” he says, offering various hypothetical scenarios based on the number of employees, the number of hours they work, and the resulting increase in the per-hour wage.

“I don’t have such a fat bottom line that if I take, say, $20,000 in the profit column and move it into the server’s column, that somehow everything’s copacetic,” says Winer. “Everyone seems to think restaurants can just print money, but many of us operate at very finite points of profitability, particularly in this day and age, with so many other cost implications out there. It’s a complicated formula, but if it costs me $400 more a week, I’ve got to charge my guests $400 more a week. It’s just that simple.”

Winer says that the District’s service industry, which has relied on tourism, may suffer if potential patrons experience “sticker shock” from the higher prices of menu items or the imposition of service charges on top of their bill.

“Ultimately, whether it’s a service charge or raising the price of a burger from $16, which was already fairly high, to $22 dollars over the course of time to pay for this, guests will sit down and be faced with higher menu prices,” Winer says. 

“We have a lot of tourists that come to D.C. from the Midwest, where the minimum wage is still the federal minimum wage, and they’re sitting there looking at a $22 burger, when a year or two before it was a $16 burger, and you have to state to them, ‘Your burger costs $22 because our staff all make $16 an hour. And tipping is an option for you. You don’t have to feel compelled to tip,’ or something along those lines,” he says. “And I’m not trying to hurt our servers by any stretch, but we’ve got to explain it to these out-of-town guests who aren’t used to these very, very high prices.”

Winer recalls how on a visit to San Francisco — which proponents of Initiative 82 held up, during the campaign, as an example of where eliminating the subminimum wage has been successful — and being surprised at how expensive it was to eat out.

“It’s not just the wage increase we’re dealing with. We’ve had our own internal wage increases, with a slightly elevated rate for longer-term employees that make $10 an hour,” he says. “It’s hard to tell because of COVID and the lack of conventions in the city, and fewer tourists, but we’ve already been experiencing less business. 

“I would say that every time you raise a price, you lose some percentage of guests. And so every time we take a price increase to cover wages, to cover the higher price of beef, of potatoes, of fry oil, and so on, we lose I don’t know how many guests.

“So more people will pack their own sandwiches when they come to Washington for the day, or will get an Airbnb and cook in the kitchen, particularly people who aren’t used to these sort of extravagant prices at home. There’s no doubt in my mind that people will eat out less and go to less expensive chain restaurants to try and save money, because it’s going to become breathtakingly expensive.”

Winer also points out that most restaurants in the city have percentage rent deals, meaning if they make over a certain amount, they have to pay their landlords a percentage of their sales. While tips didn’t count toward that figure, instituting service charges, which are the property of the house and not any individual server, or increasing the prices of menu items, mean that those restaurants then have to pay more out of pocket to their landlords.

He says the D.C. Council has talked about a program in which service charges can be exempt from percentage rent lease deals, in an effort to lessen the financial squeeze that many restaurant owners are feeling, in addition to the rise in wholesales food price increases, staff shortages, and reduced tourism, which has led to less foot traffic for restaurants compared to pre-COVID times.

“We were already in crisis before COVID,” he says. “There were not enough human beings to work in the industry. There is no real level of legal immigration that allows us to fill positions that historically were filled with a lot of immigrants. And it’s not just recently with the Trump administration. We’ve had 20 years of choking off legal immigration before COVID. We’ve lost 20 or 30% of the service industry due to COVID. Kids, high school, college students can stay at home in their underwear and make $25 an hour doing whatever they do. The whole industry is collapsing. We are fighting over a limited pool of people. I operate five restaurants, and not one is operating at full capacity because we do not have the staff.”

John Guggenmos, the co-owner of Number Nine and Trade, says he’s been in conversations with some D.C. councilmembers about steps the Council can take to help ease the financial burdens that owners will have to shoulder.

“The idea of getting a sales tax holiday from the Council, that’s not going to happen,” he says. “But if we have to impose a service charge, we should make sure that service charges are excluded from sales tax. They’re not at the moment. If we can get that done, at least that will save the consumer money so that they can afford to come in those extra few times for the same dollars that they’re spending.”

Echoing a complaint raised by Perruzza, Winer, and Fedak, Guggenmos also notes that liquor liability insurance rates are astronomically high in the District.

“We have some of the highest rates in the country, higher than New York,” he says. “And it’s not because there are any claims, there just haven’t been. It’s because of judicial rulings and the way the code is written. So insurance companies which underwrite based on perceived risk, just don’t want to underwrite in this market.

“And we only have two, down from three insurance providers, so there is effectively no competition. So insurance rates are astronomical, and they’re going up. So for little Trade, you’re looking at the $50,000 mark for liability insurance, where if we were across the street in Maryland or Virginia, they have the lowest rates in the nation, so it would be a fraction of the cost. So that’s millions of dollars that leave the District needlessly to pay premiums to insurance companies.”

Guggenmos has also had discussions with members of the Restaurant Association of Metropolitan Washington, trying to develop a list of things that restaurant and bar owners could take to the Council that they could take action on to make businesses in the District more competitive with their counterparts in the suburbs, to offset the potential loss of business that could come from raising prices of menu items or introducing service charges — either or both of which may be inevitable for most small and independent businesses.

“There is no magic answer to this,” he says. “We’re going to have to start looking at liability reform, not taxing service charges, how to deal with credit card fees. Picking up trash in the District on the weekend, because of the dumping requirements put on waste management companies, is very expensive. So how can the District alleviate that?

“There were also a lot of things that were enacted after Initiative 77 [was repealed] that were related to tip reporting. They just make our payroll processors increase fees because of the additional reporting that isn’t going to be necessary now,” Guggenmos adds. “So all of those requirements were enacted after 77 need to go away. And will it save a couple hundred dollars a month? Sure. But none of this is going to offset the really massive labor expense that’s coming. We’re going to have to nickel and dime our way through this to try to get to something that overall helps the industry.”

Guggenmos points to a recent survey by FOX 5 DC that asked viewers whether they would continue to tip if they knew their server was making minimum wage. While the poll is not scientific, a majority of respondents said they would stop tipping, which would mean servers are taking less money overall home, even if their hourly rate is higher. 

He also says he believes there needs to be an educational campaign to educate consumers on how the service industry works, including how service charges are different from tips.

Consumers will have to become used to spending more to go out, Guggenmos says, whether in the form of higher prices or service charges, the latter of which some restaurants have already begun instituting to prepare for the coming increase in labor costs associated with raising the hourly wage.

“It’s just going to cost more, and we’re going to have to get used to paying more here in the District.”

Guggenmos and Winer both speculate that smaller, independent restaurants that aren’t part of national chains will be less well-equipped to deal with the elimination of the tipped wage, so, in the long term, customers may see some of their favorite unique restaurants replaced by “cookie cutter” restaurants that are part of a national chain. 

“I think you’re absolutely going to see more of the fast-casual diner where you put your flag up at the table if you want someone to bring you ketchup,” says Guggenmos. “The other option that restaurants have is changing the quality of food. Instead of a fresh cut of meat, it could be frozen. Instead of fresh, local ingredients, you resort to canned or frozen vegetables. It’s just the reality that you’re going to have to find things to offset your labor costs.”

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