How Much Should Restaurants Pay Employees?

By: Amanda McNamara

11 Minute Read

Jun 04, 2019

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How much should you pay employees

According to The National Restaurant Association, restaurants are expected to add 1.6 million new jobs by 2027. Though job growth is almost always a good thing, The United States happens to be experiencing a 3.6% unemployment rate, yet the restaurant industry is currently growing at 2x the rate of the population, leaving us with a too many kitchens, not enough cooks scenario. 

Now, more than ever, retaining employees has become a top concern for restaurant owners and operators from coast to coast; finding the right talent – and keeping them on your team – is a battle of margins and manpower.

So, how can you give your restaurant a competitive edge? You need to provide a best in class workplace environment by cultivating a supportive, enticing culture, providing career advancement opportunities and benefits to your employees, and offering a competitive compensation structure – whether it's hourly, hourly plus tips, or a salary.

Though the majority of American restaurants use a gratuity based employment model, more and more have begun testing and successfully adopting gratuity-free employment models like a hospitality included model – made famous by Danny Meyer and his Union Square Hospitality Group – or an open book management and profit sharing model.  

Regardless of how you do payroll, deciding how much to pay your restaurant employees will be unique to your business, your margins, your legal wage obligations, and your philosophy on gratuities. 

Let's dive into some of the most common questions owners and operators ask when deciding how much to pay restaurant employees. 

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Top Questions Restaurateurs Ask About Payroll and Wages 

Who Gets Paid Hourly and Who Gets Paid a Salary?

Traditionally, whether an employee is paid hourly or given a salary has been determined by their role: Restaurant managers and chefs are often salaried while most other front and back of house employees are hourly, however this is not true of every single restaurant. 

Front of house restaurant employees are often considered tipped wage workers – meaning they are paid a smaller, legally mandated base wage since the majority of their paycheck is comprised of earned gratuities (unless your restaurant has decided to employ a gratuity free model), whereas back of house employees are considered non-tipped wage hourly employees – they are paid a flat hourly rate with no chance to supplement their paycheck with gratuities. 

This tipped wage vs. non-tipped wage status mainly comes into play during tax season and with regard to overtime regulations

There are a number of factors that go into setting a salary or hourly wage. While federal and local labor laws set the fundamental parameters, you also have to take into account the nature of the role in question and your operating costs. For example, you may decide to pay a General Manager (GM) or bar manager a higher salary than a kitchen manager because they play a bigger role in the guest experience. 

Consider downloading our Restaurant Metrics Calculator to help you understand important operational metrics at-a-glance, like your COGs, prime cost, and labor cost. This will help you better understand what wages are feasible from a budgeting perspective.

How do I Decide How Much to Pay my Employees?

In an article for Entrepreneur, executive and entrepreneur coach Steven Robbins outlines a process for setting salaries. 

He advises that you start by determining the highest salary that you’re willing to pay by looking at whether the position helps drive growth or if it’s a support role that, if done well, can create efficiencies. 

Both matter, it’s just a factor of where it all fits in the big picture for your business.

After that, you flip the coin and consider the lowest amount you’re willing to pay. This is where you can use online tools to determine the market rates for specific roles. Payscale gives you a top-down view by consolidating data across the restaurant industry as a whole (you can even request a free report), while Glassdoor and get more granular by pulling salary ranges within a specific location. You can also go low tech and reach out to other business owners in your community to find out how much they pay their employees, though it's not guaranteed they will share their numbers with you. 

And last, but not least, consider the individual: A candidate with lengthy restaurant experience may be worth more to your business than someone just joining the industry. 

Read More: What is Time and a Half and When Does it Apply in Restaurants

What Wage and Hour Laws Should I Know?

It’s important to know that, depending on where your restaurant is located, there can be federal, state, and even local labor laws that determine minimum wage and overtime.

The Fair Labor Standards Act (FLSA) sets the federal (national) standard for minimum wage and overtime, which are $7.25 per hour and time and a half after 40 hours in any workweek. However, most states and several cities/metropolitan areas also have their own minimum wage and overtime laws — and, in most cases, employees are entitled to the higher rate of pay and additional overtime regulations, like time and half after eight hours worked in a day. 

You can find the most current list of state level minimum wages for both tipped and non-tipped employees here.

Regardless of whether your restaurant wage structure, when distributing wages to your employees, you need to pay your employees on time, the correct amount, all while staying compliant with federal and local labor laws and taxes. If you're using a restaurant payroll spreadsheet, punch cards, or pen and paper, payroll will likely eat up many hours of your time and your pay period could be rife with costly errors– but if you integrate your payroll process into your POS system, you'll save time, increase accuracy, maintain compliance, and keep your employees happy when payday comes around. 

Read More: Predictive Scheduling: How to Adjust to Local Labor Law Changes

What is the Tip Credit?

The tip credit is another component of the FLSA that lets restaurants pay tipped employees a minimum cash wage (below the national minimum wage), while allowing for tipped income to make up the gap by either reaching or exceeding minimum wage. 

It is worth noting that, should in a given shift a tipped wage worker not earn what they would have had they been paid the non-tipped wage hourly rate, it is the employers responsibility to pay that employee the difference. 

Per The US Department of Labor, the current federal minimum cash wage is $2.13 with a maximum tip credit of $5.12 per hour, which combined equals $7.25. Employers using the tip credit must be able to prove that the employee earned at least minimum wage through a combination of the minimum cash wage and any tip credit contributed by the employer.

Like minimum wage, many states and several cities have their own legislation. Often, if the minimum wage is higher, the minimum cash wage and tip credit will also be higher. Seven states Alaska, California, Minnesota, Montana, Nevada, Oregon and Washington – don’t allow the use of a tip credit. Instead, they require that tipped employees be paid minimum wage plus tips.

With the ongoing debate over the federally recognized minimum wage, its important that restaurant owners and operators stay up to date on the legally recognized minimum wage for tipped wage and non-tipped wage workers in their area by checking The Department of Labor's website regularly. 

Does Paying Above Minimum Wage Make a Difference?

Using the fast-food industry as an example, Sonic, McDonald’s, and In-N-Out pay workers at corporate-owned stores more in order to gain a competitive advantage by being seen as more attractive and desirable employers.

Back in 2015, McDonald's found that by offering workers $1 above minimum wage, they saw lower crew turnover and higher customer satisfaction ratings.

In-N-Out Burger is known for paying well above minimum wage; they are also one of the most recommended restaurants in the United States. Along with strong word of mouth among customers, In-N-Out is also rated highly as top place to work

In fact, a survey of 80 senior business leaders showed that 95% of survey respondents feel company culture affects consumer purchase decisions: Businesses ranked with the worst customer experiences are also considered the worst places to work. A 2017 Harvard Business School study found that raising minimum wage actually weeded out the weaker performers in restaurant space while restaurants with high approval ratings showed no impact from the wage increase.

Read More: Everything Restaurants Need to Know About IRS Tip Reporting

What Does it Cost Me if an Employee Quits?

According to Cornell's School of Hotel Administration, the cost of turning one hourly employee can be as high as $5,864. If you consider how much it costs to train a replacement, losing an employee costs an employer 16% the former employee’s total first-year compensation. If this person was paid minimum wage, the cost is pegged at nearly $2,500.

What Else Can I Offer On Top of Competitive Wages?

Though compensation is an important factor for existing and prospective employees when deciding to take or stick with a company, today's job seekers are much more interested in companies that offer career advancement opportunities, job place perks, and employee benefits that make their lives easier. 

Fostering growth starts on day one with new hire onboarding. Consistently training your staff from the moment they join your team will not only improve the overall quality of your guest experience, but it will breed loyalty amongst your staff who recognize and appreciate your willingness to help them grow and get to the next level professionally. Employees today want to work for companies who care about their personal and professional growth. 

To learn more about the impact onboarding has on employee retention, sign up for Toast's Hiring the Modern Restaurant Workforce Course, a 5 chapter, interactive course that helps restaurant owners, operators, and managers master the hiring cycle and reduce turnover. 

We've also put together this list of enticing and impactful non-traditional employee benefits to help you stand out to job seekers and retain the rockstar staff you already have. 

Beyond benefits, you want to create a culture that makes your restaurant employees excited to come to work everyday. Millennials, for example, favor supporting values-based organizations, so put some time into developing your restaurant core values, as well as your mission, vision, and purpose in order to attract them to open spots on staff or entice them to stick around. 

Recognition and appreciation also go a long way when it comes to improving your restaurant's employee retention. In a post for InCredibly, service industry consultant, Charles D’Amico explains, “If you have an A+ employee who can only work Tuesday and Thursday nights, that means there’s two shifts a week when you don’t have to worry about operations. It’s counterintuitive to your business to say that you’d rather have C-grade employees working full-time than an all-star team of part-timers.” Recognize the all-stars on staff with bonuses, free meals, a section of their choice, or additional time off. 

Though working in a restaurant can be stressful at times (honestly, what job isn't) it's also a lot of fun helping guests enjoy a night out. You can further encourage employee engagement with incentives, games, and prizes; check out this post filled with ideas that are sure to motivate your staff to deliver memorable dining experiences every time. 

Don't Let Compensation Make You Cringe

There you have it, the top questions owners and operators ask when it comes to deciding how much should restaurants pay employees. Again, how you choose to approach payroll, wages, and compensation should be unique to your restaurant, your employment philosophy, and your budget. 

If you're curious to see whether a gratuity free model could work for you, do some research! There are a number of restaurants testing the waters with non-traditional employment models. Check out this episode of The Garnish where host, Dahlia, spoked with the teams behind Juliet, in Somerville, MA, and at barcito, in Los Angeles, CA about what it's like to run a gratuity free restaurant. 

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