Operators brace for wage hikes after control of Congress shifts: voters extend higher-than-federal pay rates to 24 states

Nation's Restaurant News,  Nov 20, 2006  by Dina Berta

Tags: U.S. Congress

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Foodservice operators are bracing for a challenging year in 2007, not only in the six states where voters this month approved higher minimum wages with automatic annual indexing, but across the nation as leading Democrats promised to make raising the federal minimum wage a top legislative priority.

With the Democrats having swept into power on Capitol Hill and with not a single Democratic incumbent losing a major race for votes nationwide, restaurant operators and industry advocates said they also were concerned about the possibility of new health care mandates and other less-business-friendly actions by the new Congress.

The specter of tax increases on business, particularly oil companies, looms as the potential for resulting spikes in already higher utility and gas prices elevates concern that the consumer economy might recoil further than it has of late, especially in spending at midscale casual-dining chains.

"If that happens again, it will certainly separate the men from the boys," said Ned Lidvall, president and chief executive of Rock Bottom Restaurant Inc., in Louisville, Colo.

Heightening concerns about the end of a six-year teaming of a Republican Congress with the business-friendly Bush administration, voters approved minimum-wage increases in Arizona, Colorado, Missouri, Montana, Nevada and Ohio. In addition to expanding to 24 the number of states with minimum rates exceeding the federal threshold wage, the state increases all provide for upward adjustments annually based on the consumer price index, either national or local.

Rock Bottom already pays higher than the minimum wage, so most of the increase in labor costs will come from raises to tipped employees, Lidvall said.

"It's a pretty big hit to us," he said. "We have significant concentration in four of the six states, including Colorado, which had the biggest increase."

The privately held casual-dining chain operates 97 restaurants, including Rock Bottom Brewery & Restaurant and Old Chicago. Its branches in Colorado will see the hourly minimum cash wage for tipped employees jump 80 percent next year, from $2.13 per hour to $3.83, as the state's overall bottom-tier wage increases 33 percent, from $5.15 to $6.85.

As most restaurants already pay hourly employees above the minimum wage, the greater impact for restaurants will come from the increases in the tipped-wage rates, said investment analyst Robert Derrington of Morgan Keegan & Co. Inc.

All of the state measures included substantial increases in that cash wage, ranging from 19 percent to 80 percent.

Morgan Keegan analyzed the effect on those increases for 15 publicly traded casual-dining chains considered most vulnerable to the new wages because of the number of restaurants they have in the six states that approved increases and indexing.

Among the companies, some of which are clients of the investment bank, are Red Robin Gourmet Burgers, based in Greenwood Village, Colo.; BJ's Restaurants of Huntington Beach, Calif., and P.F. Chang's China Bistro of Scottsdale, Ariz.

Quick-service and limited-service restaurants also may be vulnerable to what Derrington called "minimum-wage push." Even if employees are earning $3 or $4 above the hourly minimum wage when it rises, they will expect a raise to keep themselves at that same level above the minimum, Derrington said.

"If I'm making $7 an hour and the minimum wage gets bumped to $7 an hour, and new people are being brought in at that rate, I'm going to go to my boss and say, 'What's this all about? I want a raise,'" he said.

A minimum-wage push is likely to affect all restaurant owners if Congress succeeds in raising the federal wage, he added.

That prospect seems likely given a declaration by California congresswoman Nancy Pelosi, who is expected to become speaker of the House, to introduce minimum-wage legislation in the first 100 days of the new Congress next year.

Brendan Flanagan, vice president of federal relations for the National Restaurant Association, pointed out that President Bush has stated that he believed he would be able to work with the Democrats on a wage solution.

What is still unclear is how much the federal wage would be increased and what, if any, economic accommodations would be made for small businesses to soften the blow, Flanagan said.

The federal minimum wage has remained $5.15 for almost 10 years.

Other thorny issues also may arise in the Democratic-controlled Congress that could affect operators' bottom lines, Flanagan said.

"At the very least there may be hearings on health care, benefits, and wage and hour issues," he said. "Or restaurant executives may be called to Washington to testify about trans fat or childhood obesity.

"But it is still too early to know right now," he added. "We will know more as the months unfold."

The new Congress and President Bush may be able to come together on meaningful immigration reform, however, noted John Gay, the NRA's senior vice president of government affairs and public policy.