Local small businesses prepare for minimum wage increase

Local businesses want to provide the best services and products for their customers, and with recent news of a minimum wage increase being put into law, many small and medium businesses are trying to prepare for the added expense.

On April 4, California Governor Brown signed Senate Bill 3 into law, which determined that the minimum wage would be increased in small increments until it hits $15 an hour in 2022. According to recent news reports, minimum wage would jump from the current $10 an hour to $10.50 in 2017, then $11 in 2018. Every year following, minimum wage would increase a dollar until it reaches $15 in 2022. Businesses that have 25 or fewer employees have until 2023 to reach the minimum wage requirement.

This change would impact 2.2 million people who, according to the governor's office, are currently paid minimum wage throughout California. This will be the highest wage statewide minimum wage in the country, with Massachusetts' minimum wage set at $10 hourly, set to increase to $11 in 2017, and Washington D.C.'s minimum wage, $10.50, set to increase a dollar in July.

California legislature reached an agreement with labor unions, allowing for pauses in the annual minimum wage increase if there were negative economic conditions, such as negative job growth or low retail sales. In addition, Governor Brown can act by September 1 of each year to pause the next year's wage increase if there is a forecasted deficit in annual revenue of over one percent.

While the pay increase is spread out over several years, small and medium businesses still have to begin preparations in order to make sure they can make that transition. For some, it may be more

difficult than for others.

Ray Falkner of Falkner Winery believes that businesses that have a large amount of employees garnering income from tips will see a larger amount of overhead costs.

"Speculatively, probably two-thirds of wait staff income comes from tips, as opposed to wage income," said Falkner. "When the wage portion of that income is increased from $10 to $15 an hour, the only real thing a restaurant owner can increase is the prices. Product will increase; it doesn't matter if customers go to a fast food restaurant or a five star establishment."

Falkner believes that some restaurants will be forced to try and pass some of their costs along to customers.

"Customers are willing to pay a certain amount for products provided, but the end result is that if the price is jacked up too high, customers will not frequent those places anymore," said Falkner, who has 20 to 25 employees at Pinnacle Restaurant and approximately 50 employees at the winery. "In addition, business owners will find ourselves asking more of our retained employees − they will have to handle more customers, deal with more situations, and work longer hours. For some workers, it might mean that the restaurants they work at will go out of business."

Other business owners believe the state was simply giving itself a tax increase. “This minimum wage increase is no more than a tax increase for the state," said Duke Maples, who owns Rainbow Oaks restaurant in Rainbow. "There’s no other way they could get something passed. If they put on the ballot anything that is a tax increase, it fails, so this way they can get it through, but it looks like they are doing something good for the minimum wage people."

"The state gets a percentage of our paychecks, so if we’re making more money, the state is making more money at the cost of the business owner," said Maples. "For instance, the wait staff makes $30 to $40 an hour with their tips. This won’t be a pay raise for them, it will be a decrease. People won’t tip as much or at all when we have to raise our prices to cover the minimum wage. Product pricing, restaurants, and retail pricing will have to be set. They tax us a percentage of our sales, so if our sales increase because of the increase, [the state gets] a percentage of that too. The state is getting a double whammy on the tax increase, both with the product sold and the labor."

Because California is the first state in the country to have such a high minimum wage increase, there is no statewide comparison for business owners to reference. However, some feel that they have been in the industry long enough to know what might happen.

Carol Jo Stevens, the owner of Fallbrook's Village Home Care, believes the cost increase will negatively impact her customers.

"I employ local, work local," said Stevens. "The only way to meet the wage requirements is to pass along the cost to our clients, who are the elderly. While the restaurant industry will be hit hard, it's also many, many others. The barbershop will raise cost of haircuts to compensate. The small independent gift shop will raise costs, <and> the businesses that don't have international contracts, and have a low profit margin as it is, those will also suffer. I've always paid employees more than minimum wage, but when the payroll is going to exceed profit margin, who suffers?"

In 2008, the state of California raised its minimum wage from $8 an hour, and in 2014, the minimum wage was raised to $9 an hour. This January, the minimum wage was once again raised to $10 an hour.

Jon Large, whose family owns El Jardin and Garden Center in Fallbrook, believes that the recent increase is simply another step in an already established process.

"We have had to do increases already, but people are barely becoming aware now," said Large, who has nearly 50 employees between both restaurants. "I am absolutely for fair wages from the bottom up. The argument sounds very sound to start with, but there is going to be a trickle down effect. People are going to make more money to spend more money, but [those in minimum wage jobs] are never going to be able to gain any ground. They will spend their money on more expensive shoes, clothes, and food. They will not have more money in the bank, not be saving more for college, and not putting more money in an investment portfolio. They will just be treading water at a little higher cost."

Jenny Schiebert, a Fallbrook resident who owns Shadowridge Veterinary Hospital in Vista and San Marcos, said that as the rate increases, so does the amount of payroll taxes and cost of workers' compensation and unemployment insurance she has to pay, as it is a percentage of the payroll. She believes that small businesses will begin to increase costs to help absorb that cost, or will hire fewer people on the payroll.

"I just had to cut my healthcare contribution from 80 percent to 75 percent because I could not absorb the cost of increased wages and increased healthcare costs," said Schiebert, who has approximately 20 employees between her two business locations. "By law I only have to pay 50 percent of healthcare costs for my employees but I pay more."

As a veterinarian, Schiebert believes she can only raise prices so much.

"In a few years, if the people making $10 now at after school jobs working in my boarding kennel walking dogs are now making $15, then the people making $15 to $22 now as techs will be making $20 to $27 an hour, in reality. So the $5 an hour wage increase equates to $10,250 more per employee per year," said Schiebert. "If I have 20 employees, that means $200,000 more in expenses per year, not counting the extra in payroll taxes and insurance costs."

Large believes that larger restaurants with higher ticket prices will not be as significantly impacted by the price increase.

"When people go out for fine dining at a Cohen Group restaurant and buy a $35 to $40 steak, it will not effect customers to pay $40 to $45 a steak," said Large. "It hurts the little guy, like myself and Dominick's, which has a very small ticket average. There is only so much a patron will pay for a sandwich or a carne asada burrito."

Dominick Grossi, Jr., who owns two sandwich shops in Fallbrook, has only recently increased the costs at his restaurants due to increasing supplies.

"My prices have increased and they will increase every time the minimum wage increases," said Grossi, who has 14 to 16 employees in both locations. "I still make the same amount of money for each sandwich I sell. The problem is I love my employees and want them to make a living wage, so I am in favor of the minimum wage as long as everyone understands that prices will go up. They will not go up so high that you can't afford a hamburger, but they will be more expensive probably up to a dollar per sandwich. I feel I'm on the razor's edge. I want my customers to be happy and I want my employees to have a good life."

Another way to adjust to the new expense is to completely change the restaurant structure altogether, said Large.

"[Restaurant owners] can do away with tips altogether," said Large. "You put on the menu that tips are not accepted, and people are more likely to be comfortable spending a higher amount. It's something we are looking at, in addition to a concept change that would be a complete remodel from what we know about restaurants. Some believe that if we want to stay in the industry, we will need to have no front house staff and eliminate those employees."

"The full effect won't happen until we reach $12 to $15 minimum wage," said Jonathan Arbel, owner of Oink & Moo, a barbecue restaurant in Fallbrook that has 18 employees. "The restaurant industry will say goodbye to waiters, hostesses and all other nonessential service personnel. Get ready to say goodbye to service as we know it. Get ready for more paper eating utensils and plates and less china and glasses. Who can afford a $15 an hour dishwasher? The only way around this is to pass a tip credit in California. Prices are increasing already up and down the supply chain. We are forced to raise prices with every wage hike. All of the restaurant owners I know are struggling with this and to make ends meet."

Part two of this story will run in next week's Village News