Menu Prices, Minimum Wage, and Making It Work: Restaurant Leaders Chart a Path Forward

The restaurant industry is at a crossroads, grappling with unprecedented challenges that are reshaping its foundation. 

Rising minimum wages. Higher employee expectations. The lingering effects of the COVID-19 pandemic. All of these factors (and more) mean that restaurateurs are navigating a complex and confusing roadmap of labor costs and operational hurdles. 

Labor issues in particular have spilled over into politics – the future of the tip credit is up for debate and discussions about  ‘no taxes on tips’ are suddenly everywhere. The federal minimum wage for tipped employees is $2.13 per hour as long as the “amount combined with the tips received at least equals the federal minimum wage,” according to the Department of Labor. This is known as a “tip credit.” The maximum tip credit against the federal minimum wage is currently $5.12 to meet the federal Basic Combined Cash & Tip Minimum Wage Rate of $7.25 per hour.

To understand these issues and what we should do about them, Toast talked with restaurant operators across the country to get first-hand insights and real-world advice. 

Here, industry veterans like Charlie Eblen of Singletree BBQ, Shaz Khan of Tono Pizzeria + Cheesesteaks, Michael Ungaro of San Pedro Fish Market, and Robbie Soskin of yum! Kitchen and Bakery share their perspectives on the stark implications of wage increases (and their ripple effects on menu prices). They also highlight some creative and innovative approaches to employee retention – and share how technology can help. 

Their perspectives – along with brand-new data from Toast – offer a ground-level view of how restaurants are adapting to not only survive, but truly thrive in this new era.

Key takeaways: 

• Rising labor costs: Increasing minimum wages and changing employee expectations are driving up labor expenses for restaurants.

• Operational challenges: Restaurants are facing staffing shortages, reduced profit margins, and the need to adapt their business models to remain competitive.

• Focus on employee retention: Restaurants are offering improved benefits packages and finding creative ways to foster positive work environments to attract and retain quality staff in a competitive labor market.

• Consumer impact: Diners are experiencing higher menu prices and feel an increased pressure to tip, leading to changes in dining habits, experience, and expectations.

• Industry evolution: The restaurant sector is shifting towards more efficient operations, adopting new technologies, and exploring innovative business models.

Rising Minimum Wage

Minimum wages have been inching up over the past five years, and restaurants are feeling it. While many states and cities have been increasing the minimum hourly worker rate, some are specifically targeting the restaurant sector. 

Several jurisdictions have moved to either eliminate or reduce the tipped minimum wage, for example, requiring restaurants to pay servers the full minimum wage regardless of tips. These changes have varied widely by location, with some areas seeing sharp increases.

Between 2019 and 2023, 29 states and the District of Columbia upped their minimum wage through legislation, ballot referendums, or indexing to inflation. Toast saw an almost 11% increase in hourly wages across quick service restaurants alone – from an average of $13 an hour in April 2022 to $14.42 in April 2024.1

In January 2024, California raised its minimum wage to $16 per hour for all workers. Hourly base wages (excluding tips) for cashiers at quick service restaurants steadily increased from $16.33 in December 2023 to $17.00 per hour in April 2024.2

In some ways, the higher wages are good: these increases have helped address some wage concerns. Yet they have also presented challenges for restaurant owners in managing labor costs – potentially leading to higher menu prices or operational changes to absorb higher hourly wages.

Changing Wage Expectations

What’s behind the demand for higher restaurant worker wages? There are a few factors – some specific to restaurants, and some outside of it.

Inflation and rising costs of living mean that restaurant workers need more pay just to make ends meet. As the prices of essentials, like housing, food, and healthcare, have outpaced wage growth, many in the restaurant industry (and beyond) have found it increasingly difficult to sustain themselves on traditional restaurant wages and tips.

The COVID-19 pandemic dramatically affected restaurant operations – but it also dramatically reshaped wage expectations for restaurants. The industry's vulnerability during lockdowns, coupled with the health risks faced by frontline workers, led many to reassess the value of their labor. 

This shift, combined with widespread staff shortages as the industry reopened, has empowered restaurant employees to demand higher wages and better working conditions. Many establishments have had to increase their pay scales to attract and retain staff, leading to a broader recalibration of wage norms across the industry. 

“To get employees, we had to bump their wages,” said Charlie Eblen at Singletree BBQ in Murfreesboro, TN. 

“You had guys that were making $10 bucks an hour, $9 an hour…now they're not coming back to work for $10 bucks an hour,” said Eblen. “They're gonna come back to work for $17, $18, $19, $20 an hour. It's been a drastic change.” 

As a result, there's a growing expectation among restaurant workers for compensation that not only keeps pace with inflation but also reflects the essential nature of their work in a post-pandemic world.

“You can't go, sorry, I need somebody with open availability and wants to work for $12 bucks an hour.” Charlie continued. “You're just not gonna find anybody that can do that or, or will do that.” 

Michael Ungaro at San Pedro Fish Market in Long Beach, CA has had the same experience.  “When it comes to the biggest challenges, right now it is labor,” Ungaro said.  “Since Covid, not only has the industry pivoted, but the worker has pivoted.” 

Employee Turnover 

Due to changing factors in the last several years, restaurant owners are realizing that offering competitive wages alone is no longer sufficient to attract and retain quality staff. Employees are increasingly expecting more comprehensive packages that make their workplace not only tolerable, but genuinely enjoyable and supportive of their overall well-being. 

Forward-thinking restaurateurs are focusing on creating positive work environments with clear paths for advancement, flexible scheduling options, and improved work-life balance. 

Shaz Khan at Tono Pizzeria + Cheesesteaks in Minneapolis, MN sees how a positive culture can make a difference.

“Our retention rate is pretty high,” says Khan. “And I credit a lot of that to the culture that we've built.”

Benefits that were once rare in the industry are becoming more common and even expected. More restaurants are now offering health insurance plans (even to part-time staff), recognizing the importance of healthcare coverage to their employees' security and satisfaction. 

“[Employees] are expecting certain things from their workplace,” Michael said. “They are expecting a different quality of life. And we are excited to give it to them.”

Paid Time Off (PTO) is another benefit gaining traction, allowing workers to take necessary breaks without financial stress. Some establishments are going further by introducing profit-sharing programs, educational assistance, and mental health support. 

yum! Kitchen and Bakery in Minneapolis, MN is one of many restaurants at the forefront of this trend. 

“We pay 75% of all healthcare for everybody that works 30 hours,” says owner Robbie Soskin. “You get a week of paid vacation after a year, two weeks after three, and three weeks after five. So you can be an hourly employee and get three weeks paid vacation.”

By investing in these employee-centric initiatives, restaurant owners are not only addressing the evolving expectations of the workforce; they’re also building more stable, motivated teams that can enhance overall customer experience and (ultimately) business success.

Impact on Restaurant Operations

Of course, these labor challenges and increasing wage pressures have significant repercussions for restaurant operations, creating a complex set of challenges for owners and operators.

One of the most immediate and tangible effects is reduced profit margins. As labor costs rise due to higher wages and increased competition for workers, restaurants see their already thin margins sliced even thinner. The average restaurant sees 3 - 5% net profit, so this financial pressure is particularly acute for small and independent restaurants that may not have the resources to easily absorb the higher costs.

In response, many restaurant owners have increased prices. While this is a logical step to maintain profitability, it comes with its own set of risks. 

Customers may be resistant to higher prices, especially in a time of broader economic uncertainty and inflation. This puts restaurants in a delicate position to try to balance their need for sustainable operations with the risk of alienating price-sensitive customers.

What’s more: Staffing adjustments and scheduling challenges have become daily concerns for many restaurant operators.

According to Toast’s Voice of the Restaurant Industry Survey, in 2023, two of restaurant operators' top pain points were inflation and hiring employees,3 which remained a challenge in 2024.4

Perhaps most concerning for restaurant owners is the potential decline in service quality that can result from these labor challenges. Understaffed restaurants may struggle to maintain the level of service that customers expect, leading to longer wait times, errors in orders, and a general decrease in the dining experience. This decline in service quality can have long-term repercussions on a restaurant's reputation and customer loyalty, potentially creating a vicious cycle where fewer guests further strain the restaurant's ability to attract and retain quality staff.

And, the constant pressure to find and keep staff can divert the attention of owners and managers away from other crucial aspects of running a successful restaurant. Things like menu innovation, marketing, and long-term strategic planning that are required for success. This shift from the long-term focus on growth and development to short-term concerns of mere survival and staffing can stunt a restaurant's ability to evolve and thrive in an already competitive market.

In 2023, 49% of full-service restaurants (FSRs <$500k) Toast polled cited extreme or moderate challenges with labor, and 40% of FSRs $500k+ agreed. In 2024, this number slightly increased for quick-service restaurants (QSR $500k+) to 42%, but drastically dropped for full-service restaurants (FSR <$500k) to just 26%.

This is great news for an industry that has so long struggled with adequate staffing, and may help alleviate some of the pressure in coming years on owners and operators.

The Cost to Consumers

Still, the restaurant industry's challenges have significantly impacted consumers, primarily through increased costs. Menu prices have risen noticeably – 36%  of operators say they increased menu prices due to inflation in 2024. This direct impact on diners' wallets is changing the economics of eating out for many.

For example, Toast found that there were price increases across the board for popular lunch foods at quick-service restaurants. The prices for sandwiches and wraps (+4.6% YOY), bowls (+4.6% YOY), burgers (+4.6% YOY) salads (+2.7% YOY), and burritos (+4.3% YOY), all saw prices increase in Q2 2024 compared to Q2 2023.

“Ultimately, whether it's labor, whether it's food, or anything else, the end user, the customer, ends up bearing a good portion of the cost,” said Khan, adding:  “Even if we, in both good faith and capability, attempt to reduce our margins to do whatever we can to eat some of that, there is a significant portion that is going to be passed along to the customer.”

Simultaneously, consumers are facing "tipping fatigue" and “tipflation”. They're encountering more frequent requests for tips, often with higher suggested percentages, even in establishments where tipping was previously uncommon. Recent Toast research found that 52% of respondents say they see tip requests pop up more often than just six months ago. Some restaurants have also introduced mandatory service charges or kitchen appreciation fees, further driving up the total cost of dining out.

These changes are altering consumer behavior. Some diners are eating out less frequently, choosing less expensive options, or reducing extras like alcohol consumption. 

According to a blind survey conducted by Toast, 55% of respondents are dining out less frequently than they used to, and 79% of respondents said that going grocery shopping and cooking at home is where they get the most value for their time and spend.

There's a growing disconnect between meal costs and perceived value, especially if service quality has declined due to staffing issues.

As a result, consumers are becoming more discerning, researching prices and reviews before choosing where to dine. They're weighing their desire to support local businesses against their budget constraints. This shift is forcing restaurants to continually reassess their offerings and pricing strategies to maintain customer loyalty.

Future Outlook for the Restaurant Industry

The future of the restaurant industry is poised for significant transformation as it grapples with ongoing labor challenges and changing consumer expectations. 

Labor cost trends are expected to continue their upward trajectory in the coming years. As minimum wage laws evolve and competition for workers remains fierce, restaurants will likely face sustained pressure to offer higher wages and better benefits. This may lead to a more professionalized workforce in the industry, but it will also require restaurants to find new ways to manage their labor costs effectively.

We may see a shift towards more streamlined operations, with restaurants focusing on efficiency and automation to offset rising labor costs. And it might result in a polarization of the market, with high-end, experiential dining on one end and highly efficient, tech-driven quick-service concepts on the other. Mid-range casual dining establishments may find themselves squeezed, potentially leading to consolidation or repositioning within this segment.

Some owners are weighing their options. “I’ve thought about going away from a full-service model and going down to more of a fast-casual [concept],” said Eblen.

Emerging business models are likely to play a crucial role in shaping the industry's future. We may see an increase in hybrid concepts that blend traditional dining with retail or entertainment experiences, offering consumers more value for their dining dollar, and restaurants ways to diversify their revenue streams.

Michael Ungaro is exploring how to expand San Pedro Fish Market’s brand. “There's a lot of places where we can grow the brand in different ways,” he said. “Outside the four walls, between e-commerce, sponsorship opportunities, and partnerships.” 

Technology will undoubtedly be at the forefront of these changes. Restaurants will increasingly lean on tech solutions to enhance efficiency, and operators are looking to tech to help run their business. 

26% of respondents in a recent Toast survey said they’d like to start using new tech to help run their business, which is up seven percentage points from last year. Restaurateurs are also eager to adopt AI for a range of purposes, including menu optimization, guest recommendation systems, competitive benchmarking, dynamic pricing, and comprehensive business analytics. 

As the industry evolves, sustainability and ethical practices are likely to become more critical. Restaurants that can balance fair labor practices, environmental consciousness, and profitability may find themselves at a competitive advantage. This could lead to new business models centered around locally sourced ingredients, zero-waste operations, and community engagement.

The good news though, is that hiring and sourcing challenges seem to be improving over time. 

Challenges with hiring and attracting employees are cooling from last year, albeit a bit slower than inflation, primarily driven by full-service restaurants. Hiring challenges likely decreased due to 51% of restaurants reporting higher staffing levels this year compared to last year. Toast has found that full-service restaurants continue to add employees, despite still down 234k from COVID. 

And, the restaurant monthly quit rate is now below 5% – a positive when it comes to retaining top talent. 

While challenges lie ahead, the restaurant industry has consistently demonstrated resilience and adaptability.

The coming years will likely see a reimagining of what restaurants can be, driven by necessity but also by innovation, and a deep understanding of evolving consumer needs and values.

1Methodology: Data from applicable same-store quick-service restaurants on the Toast platform from January 1, 2022, to March 31, 2024. Salaried, overtime, and bonus wages are not included. Paid time off is not included. Employees included in the analysis worked a minimum of five hours in the payroll period. Employees who received tips were included, but tips were not included in the analysis. Base wages are the total wages divided by the number of hours.

2Methodology: Data from applicable same-store quick-service restaurants on the Toast platform from January 1, 2023, to June 30, 2024. Salaried, overtime, bonus wages, and paid time off are not included. Employees included in the analysis worked a minimum of five hours in the payroll period. Hourly wages do not include tips. Base wages are the total wages divided by the number of hours worked. 

2023 Survey Methodology

3To help better understand the restaurant industry, Toast conducted a blind survey of 847 restaurant decision-makers operating less than 15 locations in the United States from May 26, 2023, to June 20, 2023. Respondents include a mix of both full-service and quick-service restaurants. Respondents were not made aware that Toast was fielding the study. Panel providers granted incentives to restaurant respondents for participation. Using a standard margin of error calculation, at a confidence interval of 95%, the margin of error on average is +/- 3%.

2024 Survey Methodology

4To help better understand the restaurant industry, Toast conducted a blind survey of 755 restaurant decision-makers operating less than 16 locations in the United States from May 17, 2024, to June 2, 2024. Respondents include a mix of both full-service and quick-service restaurants. Respondents were not made aware that Toast was fielding the study. Panel providers granted incentives to restaurant respondents for participation. Using a standard margin of error calculation, at a confidence interval of 95%, the margin of error on average is +/- 4%.