Maria Elena Durazo
Maria Elena Durazo
U.S. Department of Labor / via Flickr

Before Minimum Wage Vote, Labor Made Last-Minute Effort to Close Restaurant "Loophole"

As L.A. City Council members prepared to vote this week to lift the city's minimum wage to $15, Maria Elena Durazo and Rusty Hicks engaged in some last-minute lobbying.

The L.A. County Federation of Labor had already secured its two main objectives — a $15 minimum and funding for enforcement to crack down on wage theft. But Hicks, the group's leader, and Durazo, his predecessor, were still looking for more. In meetings with council members on Monday, they pressed for a change in the ordinance that would treat restaurant service charges the same as tips.

In nine months of debate on the minimum wage, this issue never came up. Yet in the last 36 hours before the vote, it became the most hotly contested element of the ordinance. To Durazo, it was a matter of closing a loophole that would allow restaurant owners to take their employees' tips. But to the restaurant industry, already reeling in defeat, it was one last stick in the eye.

"They have adopted this as their pet cause to sting restaurants," said Bill Chait, the owner of Republique, Redbird and Bestia. "They think everyone who works for us is enslaved."

According to city-sponsored study, the restaurant industry will feel the greatest effects of the city's decision to raise the minimum wage to $15 by 2020. A coalition of L.A. restaurants tried — and failed — to blunt the effect of the increase by getting the city to count tips toward the minimum wage. Without that provision, called "total compensation," many restaurant owners warned that they would have to do away with tipping and switch to mandatory service charges.

That's already happening in San Francisco, where voters last year decided to raise the minimum wage to $15 by 2018. For restaurants, the logic of service charges is simple. Under state law, a tip belongs to the waiter. It can't be shared with "back of the house" staff. A service charge, by contrast, belongs to the restaurant, and can be shared however the restaurant pleases. So by switching from tips to service charges, a restaurant could redistribute wages from the front of the house to the back. Kitchen staff would make more, and waiters might make less, but everyone would make at least $15 an hour.

Labor advocates see that as a form of theft. They also argued that the city's policy on service charges has already been settled. Durazo pointed to two hotel living wage ordinances, which apply to a few dozens hotels, service charges belong to the hotel employee, just like a tip.

"It's not a new issue," Durazo said in an interview. "It's been hashed out. It's been tested. We've dealt with it." 

She argued the citywide wage law should conform to the hotel ordinances. Speaking at the council hearing on Tuesday, Durazo said that if the council did not do that, it would be creating a "loophole" on service charges "that means a pay cut for tens of thousands of workers in the 11th hour." She urged the council to close the loophole.

"A surcharge is a tip by any name, period," she told them. "You are taking workers' pay away from them... We say, 'Don't cut anybody out. A wage raise for all workers.'"

In the interview, Durazo said that tipped employees — such parking attendants, car wash workers, and waiters — could end up making less than the minimum wage if the loophole is not closed.

"When you put that much control and authority with the employer, the workers always lose," she said.

She also said the restaurant industry was seeking special treatment. 

"There's hundreds of thousands of workers, and thousands of businesses, and they’re all going to have to adjust," she said. "Why does the restaurant association think they should get a pass on this?"

For restaurant owners, this was adding insult to injury. The restaurant industry had already been defeated on total compensation. As a result, many say they will have to change their business models to accommodate a 67-percent raise for their kitchen staff. A service charge is one of a few options open to them. It's not something they want to do — customers tend not to like it — but for many it beats the alternatives: cutbacks in hours, layoffs, automation and price increases.

Labor organizations were attempting to foreclose that option. Worse yet, from the restaurant industry's point of view, they were doing it at the last minute, and behind closed doors. Just like a clause requiring all employers to provide 12 days of paid leave, the provision on service charges first appeared last week in a motion approved by the council's Economic Development Committee. As with the clause on paid leave, it was slipped in without discussion.

"Everybody should be disgusted by the fact this is how the City Council does business," Chait said. "It’s clear who controls the playing field. It’s certainly not restaurants. It’s certainly not small businesses. It’s the unions."

The paid leave clause, once it came to light, generated an uproar and was stripped. The service charge issue did not get the same public attention, but some on the council did have reservations about it. In Tuesday's debate, Councilman Mitch O'Farrell noted that many restaurant are already operating on very thin profit margins.

"State law allows the service charge," he said. "In some instances, perhaps it is used as a loophole. But in the overwhelming majority of instances it is not."

He cited one restaurant where service charges are used to fund health insurance for kitchen workers. Several other council members, as well as representatives of Mayor Eric Garcetti, were also concerned about the process. In their view, issue simply had not been adequately studied.

Council President Herb Wesson was seeking the broadest possible majority for the minimum wage. Shortly before the vote, he decided there wasn't a consensus to push ahead on the service charge issue. The provision was stripped from the committee's motion, as was the paid leave clause, and set aside for further debate.

"It is being put on a separate track," said Vanessa Rodriguez, Wesson's spokeswoman. "It will be fully studied and vetted at another time."

Councilman Mike Bonin, who has become labor's most outspoken council ally, was obviously disappointed. He had pushed hard to close the loophole.

"As someone said, 'A service charge is just another name for a tip,'" Bonin said on Tuesday. "It's a big irony that we're going to be voting today to create a [wage theft enforcement office] on a day when we're effectively deferring on this loophole and allowing wage theft."

For her part, Durazo vowed to fight on.

"We're going back to that," she said. "Obviously it's not over."

If the city does end up treating service charges like tips, restaurants do have other options. Instead of listing a separate service charge on the bill, they could raise prices by an equivalent amount and tell patrons that service is included. Right now, though, restaurant owners are in no mood to be told how to adapt to the new reality.

"If I hear that one more time" — price increases — "I’ll slit my wrists," Chait said. "What people are paid actually comports with what a willing buyer is willing to pay. There is a real world out here."

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