Can Sacramento restaurants survive a major increase to the minimum wage?

Zocalo is one of Midtown’s most hopping restaurants. You’ve probably seen the lively patio on Saturday nights, with the servers ushering margaritas and nonstop baskets of chips, and the ever-churning salsa music. It’s a scene. But at the end of the shift, things calm down and Zocalo servers count out their tips, just like tens of thousands of other restaurant workers in the Sacramento area. Some of these servers earn $35 an hour between their base wage and gratuity—and more

And, lucky them, it looks like they might be getting a big raise this year.

Last week, the state Senate passed a bill that would up California’s minimum wage to $13 an hour (it’s currently at $9, but goes to $10 in January 2016). That proposed law, Senate Bill 3, has yet to make it to Gov. Jerry Brown’s desk for final approval. But it has momentum.

Meanwhile, a few blocks away at City Hall, Mayor Kevin Johnson will soon unveil a task force that will explore raising the city’s minimum wage, perhaps as high as $15 an hour. That’s a 60 percent jump over the current rate.

The prospect of payroll shooting to unprecedented heights has restaurant owners like Jimmy Johnson concerned.

“We’re already thinking about it. We see it coming down the pipe already,” said Johnson, who runs the show at Zocalo. He explained that, between looming wage increases and new health-care requirements, because of the Affordable Care Act, there’s a “double whammy” poised to wreak havoc on California restaurants’ bottom lines.

“And that really, really hurts. We’re terrified,” Johnson admitted.

Consider: For every dollar increase in wages, he says Zocalo incurs an extra $1,000 in payroll costs. Each week.

“Any increase in labor costs for restaurant owners … can have devastating impacts,” explained Jot Condie, president and CEO of the California Restaurant Association, an advocacy group. “Such a drastic increase would force many to raise prices, cut hours and jobs, and in some cases, close their doors,” he wrote in an email.

Phil Courey is worried about how he would keep his business open if wages go up. The owner of Opa! Opa! in East Sacramento used the same word as Condie to describe a minimum-wage increase, and its singular impact on his micro-business: “devastating.”

Courey employs 21 workers, all of them earning some kind of tips. He says that if the minimum wage ticks higher at mom-and-pop restaurants like his—which make up half of all the restaurants in California—we’re going to see a lot less of them.

But he’s convinced that the Legislature, and even the CRA, don’t care about his brand of small businesses, places that own only one location.

“They’re in bed with the Chipotles and the Starbucks,” he argued. He thinks that wage increases at micro-businesses will lead to higher costs for food, and customers will flock to corporate chains, which are better suited to absorb significant payroll costs.

“That food dollar will migrate to an increased dollar share for the corporate food chains,” he said. Courey is also prepared to sue the city of Sacramento, in a class action on behalf of the independent operators.

Restaurant owners like Courey and the CRA do agree on some issues, such as capping wages for tipped employees, as is done in 43 other states across the nation.

In Texas, for instance, servers who earn at least $30 a month in tips only need to be paid $2.13 per hour. That’s a super-low wage compared to New York, where this cap on tipped wages is slated to go up to $7.50 an hour, from $5.

Without a cap, the choices for restaurateurs are a dire, they say.

“You either have to raise prices, or you have to cut employees,” Johnson explained. “I’m not even sure the servers like” the proposed wage increases, he added, because it could cost them hours—or their job.

There are hundreds of restaurants in the Sacramento area, and more than 450 are members of the CRA, which estimates some 1.6 million restaurant employees in the entire state. Profit margins are infamously slim at restaurants, so big changes in costs can be disruptive and worse.

Yet restaurants are up against a tsunami of national change. Last year, five states—Alaska, Alabama, Illinois, South Dakota, Nebraska—increased their minimum wages. San Francisco voters upped the city’s minimum to $15 this past November, and Los Angeles recently voted for $15, as well. Even Wal-Mart and McDonald’s have agreed to raise their wages.

Here in Sacramento, Mayor Kevin Johnson has put increasing the minimum wage on his list of yearly goals.

Economists say they have little clue as to how these significant wage bumps will effect local businesses.

Ann Huff Stevens, a UC Davis economics professor and director of the Center for Poverty Research, told SN&R earlier this year that “we know virtually nothing” about how a $15 minimum wage would impact small businesses. “We really don’t know, and so there’s a risk,” she said.

This is why the CRA prefers prolonged implementation of wage hikes, instead of quick jumps like what we’ve seen in Los Angeles or San Francisco. This way, businesses have time to adjust to new payroll realities. The CRA also advocates for a “teen wage,” for entry-level workers.

“Such measures are critical to the success of any minimum wage increase,” Condie argued.

A bill to cap the minimum wage in California for tipped employees stalled in the Assembly this year. This means that, in the city of Sacramento, higher wages at restaurants might very well be a reality this year.

Is the $20 cheeseburger coming soon to a restaurant near you?

Restaurateurs like Johnson say they’ll have to somehow pass the increased operating costs on to customers.

“If it goes up to $15, that really is a huge impact,” he said. “We can’t absorb it.”