California Raises Minimum Wage for Fast-Food Workers

California Governor Gavin Newsom recently signed a new law that raises the minimum wage from $15.50 to $20 per hour for fast-food workers starting April 1, 2024. Chris Simms, CEO and Founder of Lazy Dog, a casual dining restaurant that started in California and spans 49 locations across the US, joins the podcast for a discussion of how this law may impact employees, owners, franchisees, and consumers across the entire food-service industry.  
 
In this podcast, we look (and will continue in future episodes) at compensation from a variety of perspectives. We’ll cover tipping models from convenience stores to fine dining; what happens when wins slant toward some of the workforce and are not shared by all; and how automation figures into the equation.

The “Distinguished” podcast is produced by Boston University School of Hospitality Administration.

Host: Arun Upneja, Dean
Producer: Mara Littman, Director of Corporate and Public Relations
Sound Engineer and Editor: Andrew Hallock
Graphic Design: Rachel Hamlin, Marketing Manager

Music: “Airport Lounge" Kevin MacLeod (incompetech.com)
Licensed under Creative Commons: By Attribution 4.0 License
http://creativecommons.org/licenses/by/4.0

Transcript

Arun: Gavin Newsom, governor of California, recently signed a new law that will raise the minimum wage from $15.50 to $20 per hour, starting April 1, 2024. Interestingly, this raise is limited to fast food workers. This targeted raise was negotiated between the governor's office, service employees, International Union California, and the fast-food chains.

Welcome to the Distinguished podcast produced by the Boston University School of Hospitality Administration. I'm Arun Upneja, Dean of the school, to talk about this issue. Today, my guest is Chris Simms, CEO and founder of Lazy Dog, a casual dining restaurant that you started in California and now spans the United States with 49 locations to date. Welcome, Chris, to the Distinguished podcast and thank you for joining us from California.

Chris: Thank you very much, Arun. Happy to be here.

Arun: So we have you here to talk about wages in the restaurant and dining sector overall. However, before we jump into a discussion of this law and what it means for the industry, employees, owners, franchisees and consumers, give us a quick description of Lazy Dog restaurants.

Chris: Well, let's see, I started Lazy Dog restaurants about 20 years ago and my goal was to start the next generation of casual dining. And so what I had seen is I had seen a lot of the competitors had opened their doors 40, 50 years before and so I felt like some of them had lost their way. So we decided to open up Lazy Dog with a focus on scratch cooking, great innovation, a people-focused culture that encouraged our teammates to give their all to our guests. And then we wrapped it all up in a rocky mountain theme based on my childhood in Jackson Hole, Wyoming.

Arun: You know, interestingly, I was in Houston a couple of weeks ago and as I was driving I saw Lazy Dog restaurants. I know you started in California, but you seem to be now in many parts of the country. So congratulations on having all of these restaurants all over the United States. So let's start with the distinction between fast food and rest of the food service. Well, we all understand generally what fast food is. It's the McDonald's, the Burger King, Taco Bell and the like. But here is how fast food is defined in terms of this law that we're talking about. So I'm reading. National fast-food chain means a set of limited-service restaurants consisting of more than 60 establishments nationally that share a common brand or that are characterized by standardized options for decor, marketing, packaging, products and services, and which are primarily engaged in providing food and beverages for immediate consumption on or off premises where patrons generally order or select items and pay before consuming with limited or notable service.

A big exception, those that break bread on site. Panera is a big beneficiary of this exception. So let's talk about how this new law might affect all restaurants. So the idea here is to raise the income of some of the lowest paid workers in the state. It also opens up discussions about minimum standards and working conditions. All good. But what I want to ask you is what does this mean for business owners? And we are obviously just talking fast food now, but does this law signal more changes? What might be next?

Chris: Yeah, I think from what I've heard, I've talked with some folks in the fast-food industry. Obviously, a change of this magnitude is unprecedented. I don't think we've ever seen one group of employees receive this large of an increase in minimum wage. Unfortunately, I think what it does for employees is it does encourage those operators to focus on technology, to potentially reduce the number of people that are needed in the business. Unfortunately, with every additional dollar of cost that an operator has to pay, it becomes more and more credible to spend that money on technology. I think we've seen that in a lot of the fast-food restaurants here in California, at least in the front, with tablets as opposed to teammates at the counters. And from what I understand, they're now really focused on the kitchens and trying to automate as much in the kitchens as possible to save those dollars.

Arun: You're right. This is going to accelerate use of robots and artificial technology and other kinds of technology to replace labor. But the other aspect that I wanted to briefly talk before returning back to replacing labor with robots is this is going to have an impact on you and other full-service restaurants because now the kitchen staff can leave full-service restaurants and go to fast food and earn that $20 wage. So it does have the impact of raising wages overall for the entire restaurant sector.

Chris: Yeah, the way we're looking at it, I mean our average cooks already make $20 an hour, so I don't think that the impact will be very large on our particular business. But I think that it could be really hard on a lot of the independent restaurants that may not be able to pay their kitchen staff that $20 wage. I don't think there will be a direct impact, but I think there probably will be a ripple effect, where if my friend is working at a fast-food restaurant, they get that type of a raise, hey, I'm now going to go to my boss and kind of find out what's going on with my wages. And I may not understand the fact that that's just limited to fast food. But for me, hey, if I'm a cook and they're a cook, maybe we should be making the same amount of money. So it'll be interesting to see what happens with a lot of the restaurants, full-service restaurants here in California, when that ripple effect takes place, when the minimum wage is increased.

Arun: Yeah, and also the minimum wage is for someone who's just starting out. So someone who's been working with a cook for you for five years and says, you know, I go to fast food, and I get $20 day one and I've been doing five years, I'm much more experienced. So I should probably get more money. So it is going to have some ripple effect. You know, the other issue with minimum wage that people generally, many economists say is that if you're not as productive, with a lower minimum wage, you can still find work. But if the minimum wage is set very high, then if you're not as productive, you know, either you have a disability or you are just starting out and you're learning the ropes or you're a college student just trying to make some pocket money or some, you know, a lot of the opportunities in the long run would dry out with a high minimum wage. 

Chris: You know, I think that definitely makes, I mean, it definitely makes sense. You know, I think, you know, as an operator decides who they're hiring and the more expensive that, you know, that person is, then you're right. I would imagine that, you know, that the standard or the quality of that individual that you're hiring would go up along with the wage.

Arun: Right. And this goes along with your previous comment about technology. So restaurants are now going to be investing much more in technology to reduce the labor. What's going to happen to costs? Have you raised menu prices in the last two or three years, you know, in response to the supply chain and logistics and inflation?

Chris: You know, I think along with everybody, there's definitely been some price increases to cover that additional cost, you know, caused by inflation. You know, that's another thing that probably will impact, you know, the fast-food restaurants, you know, as these wages go up. From what I've heard, you know, a number of them are thinking about, you know, some pretty sizable increases to cover that cost. So I think that will continue to raise the prices in fast food, even above and beyond where they've come to today.

Arun: And then what does that do to the eating out behavior of people? Does that reduce if, you know, your people are spending more money going out and eating in restaurants?

Chris: I mean, you know, it's an interesting dynamic because, you know, obviously, I guess some people will be making more money, and so they'll be able to afford that additional price on the fast-food product. But maybe not everybody is going to be getting that increase. So they will definitely see and feel that increase for those companies that have to take price to cover the cost.

Arun: Yeah, you know, there is a rise in the interest rate, the mortgage rates, the rise in inflation, supply chain issues. It just seems to me that there is an upward spiraling thing, and I don't know where it stops. And now, of course, California has put an accelerant into that spiraling inflation by increasing this wage.

Chris: Yeah, you know, the weather is just too good here in California. And so, you know, I think we're just going to have to pay a little bit more for the beautiful weather.

Arun: Exactly, exactly. Although I was just reading in the Wall Street Journal that the biggest set of people, Texas has seen a huge influx of people from all over the country, and the biggest group of people are fleeing California to come to Texas because of the high cost of living in California.

Chris: We've seen a number of our teammates decide to go and open up restaurants out of California with us at Lazy Dog, and a lot of them just said, we can't afford to live in California anymore, so we want to move with Lazy Dog to Colorado or Texas, Nevada, some of the other states. 

Arun: So let's talk about the positive side of this wage increase. A lot of fast-food workers don't really need a very high level of education. And on one side we think that this is a starting job where if you're in college or you just finished high school and you won, but there are a big, big group of people who are primary wage earners and working in fast food. So this increase could mean that now they don't have to pick up a second job or a third job to access health insurance or better housing and be able to afford to live in this high-cost state of California.

Chris: You know, as I said, at Lazy Dog, our average wage is over $20. And so I think we have focused heavily on making sure that our teammates are properly paid for the work that they do. And obviously the goal is to avoid having them to have another job or something like that. And so we actually tip our kitchen teammates at Lazy Dog as well. We've developed some technology that enables us to tip out those cooks on a daily basis because we felt like we really wanted to make sure that our back of house kitchen teammates was fairly compensated, both on a base salary wage and additionally as part of that sharing of the tips that come in from the sales.

Arun: That's a very interesting point that you've raised and I'm actually interested in tips and how it has the potential to raise the wage level. So can you talk a little bit more about how do you do that? How do you make sure that the kitchen staff are getting the tips or some sort of service charge? How do you sort of manage all of that?

Chris: Yeah, for us, we have this technology that is able to calculate a certain percentage of the sales each day or each shift. And then we're able to allocate a certain amount of those tips or a certain amount of the percentage of those sales to the teammates in the kitchen. And so it really, it's great because there's multiple benefits to it. For one, it aligns the kitchen teammates and our service hospitality teammates, because now all of them are encouraged to take extra special care of the guests, to cook only the best food, put out only the perfect product, because everybody is compensated on the sales that are coming through the front door and the guests that are dining in the restaurant. I really like the fact that we're able to align those motivations between the kitchen teams and the hospitality teams. What that looks like in the restaurant on a daily basis is they're working together to take care of the guests. There's not nearly that conflict that is traditional in the restaurant business where the kitchen and the hospitality team are fighting over whose job is more important. Instead, they're aligned, and I really like the fact that we've been able to achieve that.

Arun: So is there a subminimum wage that exists in many states for tipped employees in California, or everyone has to make that 1550 minimum?

Chris: So in California, everybody makes the 1550 minimum wage, whether you're a tipped employee or not. That is not the case in a lot of the states in the country where they have a tipped income wage that you make that is below the actual minimum wage. And it basically acknowledges the fact that that employee is making more than the minimum wage when you include the tips that they're collecting.

Arun: Right, interesting. So no subminimum wage for tipped employees in California, so the servers really collect all the tips. And in your restaurants, are tips pooled in some way? I guess not, since you are paying the back of the house staff separately.

Chris: Yeah, in some of the states, we were able to share the tips with the kitchen teammates. And again, we've developed our own app that allows that calculation to take place. That also helps with tipping out the support staff for the hospitality side as well, including runners and bussers and the like. So this isn't necessarily a new thing for servers in our restaurants because they have traditionally tipped out the support staff since we opened the doors 20 years ago. We now have the ability to be able to add the kitchen to that process as well, helping the kitchen teams make some more money.

Arun: Yeah, you know, interestingly in Massachusetts, the law is that you can pull the tips, but they have to be paid out to the front of the house staff. You cannot pull and tip out the back of the house staff.

Chris: Yep. Yeah, I think that's consistent in some of the states that we operate as well. I think there are some of the states that we are not able to pull the tips and tip out kitchen because of those same laws. Based on which state we are in, that's what we do, whatever is legally allowed.

Arun: And so the servers are whatever tips they are making. They get the tips that they are making in your restaurants then, particularly in California.

Chris: Yeah, just on a typical shift, a server will make, I don't know, 20% of the total sales that they sell for the day. And then out of that 20%, they'll then give a certain amount to the runners, a certain amount to the bussers, and a certain amount to the bar, and a certain amount to the kitchen. So out of the tips that they make. And that's kind of why we felt comfortable with it from the start, because obviously we have to think about each group of teammates. And so we felt comfortable with the servers as the minimum wage continued to increase for the servers, even though they were tipped employees, we felt comfortable that those teammates could continue to make more and more money, while at the same time, sharing a little bit of those tips with the kitchen team.

Arun: So on a sort of, since we are on tips, I have a slightly different question. Everywhere you go, there are tips, even when you're picking up a coffee from a counter or picking up a food, they'll turn the iPad around and say, okay, tip. In fact, some people have reported tips even on automated machines as well. So what do you make of this proliferation of tipping in the United States?

Chris: I personally love it because the issue with full-service dining for a long time was the fact that it was the only type of restaurant where tips were a part of the transaction. And so now that I see tipping more prevalent in all of the service industries, I feel like it actually evens the playing field with casual dining. I think I was at the gas station, and I got a Gatorade and it asked for a tip. And I was like, what? This is crazy. I was the one that went to the refrigerator. I got the Gatorade. I brought it over to the counter. It was really interesting. And I think it all started with the necessity for the chip and pin credit card processing. And because all of the credit card processing is now done on a piece of technology at checkout, it provides that opportunity for that last question before you finish that transaction. And the question is, how much do you want to tip? So, I do believe that there's some backlash coming if it hasn't started already. I'm definitely hearing rumblings where there's a bit of backlash when it comes to those types of transactions where there is very minimal service and there's a tip that's suggested. So, I don't know, I would imagine you'll see more companies start to back off of that as the consumer becomes a bit more concerned with that additional charge.

Arun: During the pandemic, people voluntarily were giving tips to all frontline service staff regardless of what kind of service, even if they were not in typically tipped employees, you know, bell desk staff or restaurant servers. But now it is everywhere, and I agree with you, there is some sort of a backlash which is accumulating in the society. Okay, so Chris, you've been in this business for a long time. In fact, you grew up in the restaurant business and your grandfather and your father owned restaurants, and you opened Lazy First Ladies Dog in 2003 with your father. So, as we said at the beginning, you're opening your 49th restaurant. So, you're obviously doing something right. What advice do you have on keeping compensation level high for workers, making sure your customers are happy while keeping your restaurant profitable?

Chris: Yeah, obviously, we're always going to make sure that the compensation for our teammates is even more than competitive. We want to make sure that we're taking great care of our teammates from a compensation perspective. But I think that there's a lot more to it than just the dollars. I think that creating a culture in your company is, I think, it's even more important. A culture where your teammates feel cared for, they feel empowered, they feel trusted, they feel like somebody's got their back and that somebody's there to support them. I got that from my grandfather, Arthur Jay, when he had coffee shops in Hollywood in the 50s. He believed that if you provided that type of an environment for your teammate, that the teammate would then turn around and show that genuine care for your guests. My dad learned that, he took it to Mimi's Cafe, I learned it from him, I took it to Lazy Dog. I think that's really, really important because while people obviously deserve to be compensated fairly, even more so, they deserve to be treated fairly, and they deserve to be treated like a family member.

Arun: Very well said. Thank you, Chris, for joining us for the podcast. It has been an absolute delight to talk to you. If anyone wants to join the conversation and share your thoughts on this subject. Please email me at shadean@bu.edu. Thank you for joining us today. Special thanks to the team who produces this podcast, Mara Littman, Andy Hallock, Kayla Sawyer, and the entire team at Boston University School of Hospitality Administration.

To keep up with Distinguished podcasts, be sure to subscribe wherever you listen to your favorite podcasts. You can also learn more about our undergraduate and graduate programs at Boston University School of Hospitality Administration by visiting bu.edu/hospitality. Have a great day.