D.C. voters have overwhelmingly approved Initiative 82, which phases out the tipped minimum wage. Now, bar and restaurant owners are weighing how to respond.
Local restaurant owners are talking to lawmakers in order to propose ways to support the industry as they phase out the tipped minimum wage.
Tyrone Turner / DCist/WAMU
D.C. voters have overwhelmingly approved Initiative 82, which phases out the tipped minimum wage and will require business owners to pay tipped workers like bartenders and servers the city’s full minimum wage by 2027 without relying on gratuity.
Now, bar and restaurant owners are weighing how to respond, both within their establishments — by raising menu prices or adding service charges to offset increased labor costs, for example — and externally. Some owners and their advocates are already trying to persuade D.C. lawmakers to pass legislation that will ease small businesses’ transition away from the tipped minimum wage.
And there’s an appetite among the D.C. Council and the mayor’s office to hear them out.
“I think that we should hear any suggestions, as long as they’re not intended to undermine the initiative,” Council Chairman Phil Mendelson tells DCist/WAMU. He made clear he is not interested in repealing Initiative 82 — as happened in 2018 — and he does not suspect a majority of councilmembers would support a repeal or a delay either. But a standalone bill that addresses concerns? He’s open to it; after all, he was on the record as being against Initiative 82.
Deputy Mayor for Planning and Economic Development John Falcicchio echoes Mendelson’s comments, and confirmed that, despite some confusion on that point recently, the mayor is not interested in repealing the initiative.
Restaurant Association Metropolitan Washington, the city’s local restaurant trade group, is still evaluating the impact of eliminating the tip credit, says Julie Sproesser, its interim executive director. (The tip credit allowed restaurants to pay tipped workers a subminimum wage of $5.35 per hour but make up the difference if tips didn’t get employees to the standard minimum wage of $16.10.)
But the association is already considering bringing proposals to lawmakers, including a popular idea floating around: excluding service charge from sales tax. Unlike tips, which have to go directly to workers, service charges go directly to the business, and thus counting toward taxable sales.
The initiative goes into effect early next year — exactly when is uncertain because it needs to go through Congressional review before it becomes law. Whenever it does take effect, employers will be on the hook for the first installment of the tipped minimum wage increase, from $5.35 to $6 per hour. The initiative increases that base wage a dollar or two every year until 2027, when it’s supposed to reach the full prevailing minimum wage, which is based on inflation.
Meanwhile, bar and restaurant owners are also making suggestions, as they were predicting Initiative 82 would pass.
John Guggenmos, owner of Trade and Number Nine bars, is advocating for service charges to be exempt from sales tax in order to offset the cost of implementing Initiative 82.Elvert Barnes / Flickr
Pros and cons of taxing service charges
John Guggenmos, the owner of gay bars Trade and Number Nine, didn’t wait for election day to start talking to lawmakers about excluding service charges from sales tax.
He expects to implement a service charge after the implementation of Initiative 82, but he’s also concerned about how patrons will react to a bill that’s costlier because it includes the service charge — which then incrementally increases the tax. “Clearly, they weren’t just anticipating voting in a tax,” Guggenmos says of councilmembers. “Which is what we’ve done.”
Owners of other establishments see the benefit of not taxing service charge. “Those are the sorts of things that would ease a lot of the stress … treating [service charge] in a different way from income,” says Adam Stein, owner of The Eleanor on H Street NE.
Stein points out that the service charge can be exploited by the same types of owners Initiative 82 organizers blamed for the failures of the tip credit. Owners can more easily pocket service charge money than they could tips; ultimately, he says, he doesn’t see how the new system is better for workers — and it’s definitely harder for businesses like his.
“I’m not fighting for the old model. It’s plenty problematic. But people like me and lots of my contemporaries tried to make it as equitable as possible,” says Stein, who worked in restaurant kitchens for more than a decade before becoming an owner.
In terms of tax policy, though, creating an exemption can also create unintended consequences, says Richard C. Auxier, a senior policy associate in the Urban-Brookings Tax Policy Center. If D.C. decided to stop applying the 10% restaurant sales tax to service charges, owners could manipulate that in a way that gets around the consumption tax and cuts into the city’s revenue. An extreme example would be if a restaurant offers patrons free drinks but charges a service charge.
“If you did that, you would be basically opening the door for shenanigans,” says Auxier.
Alternatively, the Council could provide relief by lowering the 10% tax, Auxier says, though he adds that should probably be a larger discussion. “I don’t know if it’s what restaurants actually need,” he says. “Taxes, they’re talked about first because it’s easy to change tax rates or do these things, but it’s typically better to have really long conversations with restaurants and say, ‘But really like, what do you actually need? What is the most effective way?'”
Is the service charge even the way to go?
Amid the chatter of whether to tax service charges, there’s an even greater debate about whether the pivot to service charge is the right call or even necessary.
Guggenmos is adamant that those automatic charges will be necessary because increasing the price of, say, a vodka soda is an unreliable way of responding to increased labor costs. What people don’t buy the item he’s priced up, he asks. Or what if they decide against patronizing altogether because of sticker shock?
When Republic Cantina owner Chris Svetlik opened a second spot, Hill East Burger, on Pennsylvania Ave. SE roughly a month ago, he used a service charge and paid workers a higher base wage than the tipped minimum. He sees these fees as more palatable because patrons are already conditioned to pay a percentage increase to their bill via tip.
“It’s kind of just reconfiguring that 20% at the bottom of the check,” he says.
Shaw bar Ivy and Coney is still trying to decide on a model that ensures their 17 tipped workers continue earning at least as much as they are making now. The bar’s tipped workers currently make more than the standard minimum wage of $16.10, co-owner Chris Power says. So he and his partners are considering adding a service charge and increasing the percentage of workers’ profit sharing in an effort to keep them at or more than their current level.
“The money has to come from somewhere for businesses to remain solvent,” says Power.
But Aparna Raj of the local chapter of the Democratic Socialists of America doesn’t see why service charges would automatically become ubiquitous under the new wage system, especially since owners are only legally on the hook for a 65-cent increase come January. The DSA knocked on thousands of doors to get Initiative 82 passed, and Raj says virtually all tipped workers she’s talked to oppose service charges. Some workers don’t support these fees because it’s hard to track who that money ultimately goes to, Raj says. Others say patrons are less likely to tip on top of a service charge, especially those who are annoyed or confused by the unanticipated upcharge at the end of their meal.
Raj believes patrons will continue to tip even if they think workers are getting a full minimum wage next year. While canvassing, she found that many people didn’t realize tipped workers were still earning a subminimum wage.
“Incrementally increasing the wage, people are still going to tip 20% plus or however much they’ve been tipping before,” she says, citing the strong tipping culture.
Ivy and Coney in Shaw.Ted Eytan / Flickr
Contemplating greater reforms, from rent to insurance
Restaurant and bar owners are also calling for more comprehensive reforms to help address the underlying problems that make the transition away from tipped minimum wage especially challenging.
One thing Songbyrd owner Joe Lapan would like to see is greater incentives for landlords to lease to and maintain small businesses in their spaces. He connects problems with landlords to the turnover of shops in Adams Morgan, for example, where Songbyrd used to be before relocating to Union Market. Commercial tenants struggled in that neighborhood because their landlords either increased rent or let the buildings deteriorate, he says.
“A lot of times places that you don’t even think are at risk are at some kind of risk,” Lapan says.
Commercial tenants have fewer legal protections than residential ones, according to Richard Bianco, an attorney that represents many small businesses in D.C. “The rules of the road are whatever it actually says in the lease, there’s no additional legal protections,” Bianco tells DCist/WAMU.
For example, D.C. law protects residential tenants who decide to withhold rent if housing-code violations they’ve reported to their landlord have not been addressed. But that’s not necessarily true of commercial tenants, Bianco says. Even if they have a leaking roof that impacts business, they have to pay rent unless there’s something in the lease that holds the landlord liable.
Another example is the city’s regulations around liquor liability insurance, says Guggenmos of Trade and Number Nine. He would like to see reforms on that type of insurance, because as is, it’s much easier for plaintiffs to sue establishments here than in neighboring jurisdictions. As a result, premiums are higher. Guggenmos pays $72,000 in liquor liability insurance annually for Trade alone, which is significantly higher than what he would pay in neighboring Maryland and Virginia, he says.
He says he’s already proposed the idea of a working group to tackle reforms to Councilmember Brooke Pinto (Ward 2) and Councilmember-elect Kenyan McDuffie (soon to be At-Large).
Above all, a plea for customers’ understanding
No matter what D.C. lawmakers decide, several restaurant owners have a common request: for understanding from patrons as they pivot once again.
Svetlik of Republica Cantina and Hill East Burger is not as concerned with the increased costs as he is with how patrons will respond to any changes at his restaurant. He knows some patrons see service charge as less transparent than increasing menu prices. “My ask is just that folks kind of take a breath and understand that as restaurants tweak these systems, that it’s not coming from a place of greed or dishonesty, but everyone is just kind of figuring out what will be sustainable.”
Powers also asks for some grace as Ivy and Coney works through this change. “Ideally the customers’ ‘going-out budget’ will remain the same regardless of whether or not it is going to be spent in the form of a tip, or the form of a service charge, or a price increase. The challenge is really kind of like a psychological or social one, right? Like are people going to react differently to a price increase than they would a service charge?” he says.
For now, Powers hopes his patrons continue to tip because implementation of Initiative 82 won’t happen overnight. How restaurants respond will vary, with some owners following the law and incrementally paying their workers more while others immediately pay their workers the full minimum wage, he says. Powers knows it is confusing, and he empathizes with his patrons.
“Your bill looks like an accounting ledger,” he says. “We’re a dive bar. We just want: You give money, you get hot dog. You know, it’s shouldn’t be that complicated.”
This story has been updated correct when Initiative 82 would take effect. It would become law sometime in early 2023, according to an updated interpretation from Restaurant Association Metropolitan Washington.