'It’s Going To Dismantle Our Industry': Restaurateurs Say New Chicago Wage Rule Will Close Venues, Kill Expansion

Tip tip hooray? Tipped workers are celebrating the city passing a plan to eliminate subminimum wages, but some restaurant owners aren’t as pleased.  

Restaurateurs, already operating on thin margins, told Bisnow they are concerned that the increase in labor costs will halt future expansion plans, incentivize some to move to the suburbs or force others to shutter businesses altogether. Those concerns are backed up by an industry study.

The Chicago City Council passed the One Fair Wage ordinance on Oct. 6, eliminating subminimum wages for tipped workers by 2028. Through the five-year phase-in plan, tipped workers will gradually see wages increase until they reach the city’s $15.80 minimum wage. The minimum wage for tipped workers will go up by 8% starting July 1, 2024, and another 8% every year until 2028.

The base pay for tipped workers in Chicago is $9 an hour for employees at small companies, or those with between four and 20 employees, and $9.48 an hour for employees at large companies, or those with 21 employees or more. 

Employers can pay this subminimum wage if workers average at least $6.32 or $6.80 per hour in tips, depending on the size of the company. This is because a portion of tipped workers’ gratuities can count toward the minimum wage under current city law. The difference between the employer’s requirement and the mandated minimum wage is referred to as the tip credit.

The city advocated for the change in part to create more equitable wages for tipped workers. A WBEZ analysis of Census Bureau data showed that earning at least $15 an hour dramatically improved tipped workers' chances of staying above the federal poverty line.

Over half of the roughly 85,000 bartenders and waitstaff in the Chicago area earned less than $15 an hour before tips, per the analysis. The poverty rate for those workers was 24%, compared to just 10% for those who earned $15 an hour or more in base pay, WBEZ reported.

But Mario Ponce, founder of Takito Brands Restaurants, which has three locations throughout the city, said the ordinance won't help workers put out of a job. Ponce said more full-service restaurants will close as a result of the new wage because they will have trouble adjusting to the increased costs and changing business environment. In their place, Ponce said more fast-casual restaurants will open and some full-service restaurants will become quick-service restaurants.

“It's going to be disruptive, and it's going to dismantle our industry as we've known it,” Ponce said. “The tip credit has been part of our business model for decades.” 

In an August survey of 315 Chicago restaurant operators by the Illinois Restaurant Association before the ordinance was passed, 77% of respondents said the tipped wage increase would have a “very negative” impact on the growth and expansion of their restaurants. Over one-third of respondents said they would open future locations in surrounding jurisdictions or other states.

Additionally, 66% said they would have to reduce their staff or consolidate positions. Some 80% of respondents said they would increase their menu prices.

While raising prices is one option to offset increased costs, Ponce said there is only so much of an increase a customer will tolerate.   

“We cannot raise our prices fast enough,” Ponce said. “We just can't. A consumer won't let us, right? They'll just stop coming to us.” 

Ponce said there are a couple of paths forward for owners and operators: automation, implementing a service charge or a combination of the two. 

At restaurants that automate, Ponce said customers can expect to order via a counter or through their handheld devices. The entire process will be automated, with the exception of the person running the food, he said. 

T.J. Callahan, the owner of Farm Bar in Lakeview, already experimented with adding a 20% service charge to bills and paying his servers the full Cook County minimum wage at a new Evanston restaurant he opened. Callahan said the entire state may eventually eliminate the tip credit, and he wanted to get ahead of the curve. 

The experiment didn’t go well. Callahan said pushback was immense from customers and he believes visits dwindled because it was in place. The restaurant opened in April and closed on Sunday. 

“Americans still want to tip in a full-service restaurant environment,” Callahan said. “Unless you're a Charlie Trotter or Rick Bayless or Grant Achatz, they can get away with service charges, but the rest of us mere mortal restaurant operators, people want to tip.” 

One of the most divisive points of the ordinance was how long restaurants would have to adjust to the increases. The ordinance originally mandated restaurants meet the new wage obligations in two years, Restaurant Business reported. However, the Illinois Restaurant Association dropped its resistance to the measure after city officials agreed to a five-year phase-in plan, per Restaurant Business.

A spokesperson from the Illinois Restaurant Association told Bisnow in a statement that while it “wholeheartedly disagrees” with the decision to eliminate the tip credit, it believes the amended five-year phase-in plan is an acceptable compromise from the city. 

“Change is always difficult, and we have fought such proposals for years; however, negotiations require concessions by both sides to come to a resolution,” the statement says. “While imperfect, our Board of Directors believed a deal to extend the implementation period was the best way for our industry to move forward and adjust to the City’s new stance on this issue.”

Chicago is the largest city to eliminate subminimum wages for tipped workers, per Lexology. Washington, D.C., approved a 2022 initiative to eliminate subminimum wages by 2027, and several states — including California, Washington, Oregon, Nevada, Montana, Alaska and Minnesota — mandate that employers pay workers full minimum wage, even if they receive tips.

In D.C., some restaurants have responded by tacking on a 20% service charge to each bill, WUSA9 reported, with owners there also predicting multiple closures ahead.

A Harvard Business School study found that a $1 increase in the minimum wage led to a 14% increase in the likelihood of closure for restaurants with the median 3.5-star rating on Yelp. But the study found “no discernible impact for a 5-star restaurant,” suggesting the less expensive and lower rated the restaurant, the greater the impact.