poverty – Dickinson Law's Inside Entrepreneurship Law Blog

By: Cameron Crowe

As the world continues to adapt to the seismic shifts the coronavirus pandemic has caused in society, many small business owners are exploring new ways of operating and retaining employees. One of the most significant areas of concern for any business owner is finding employees willing to work for sub-par wages. As a result, the past few years have seen dramatic growth in political and grassroots movements looking to advance workers’ rights and secure fair pay for their labor.

Recent years have seen subscriptions to the subreddit “/r/antiwork” skyrocket from around 10,000 members in 2019 to over 1.7 million members as of February 2022. Another popular movement, known as “The Great Resignation,” has also hit businesses of all sizes with labor shortages, sometimes resulting in dramatically reduced operating hours or complete closure. Restaurants, in particular, have experienced some of the greatest struggles in finding and retaining employees. In October 2021, the U.S. Bureau of Labor Statistics reported that foodservice workers’ “quit rates” had risen to 6.8%, well above the 20-year average of 4.1%. In addition, according to a survey produced by PricewaterhouseCoopers, 65% of employees indicated they are actively looking for a new job, and 88% of executives admitted their company is experiencing higher-than-normal turnover rates.

Legislative Inaction & Legal Poverty Wages

The driving factor among these worker’s rights movements is a demand for better pay that at least approaches a “living wage.” The living wage is a theoretical minimum income standard that, when met, provides employees with the resources to afford a satisfactory standard of living. It is the minimum amount required to avoid falling into poverty. After all, this was the original intent behind establishing a minimum wage under the Fair Labor Standards Act in 1938, designed to provide enough income to afford a living wage. A proper living wage in 2022 would be well above the federal minimum wage requirements set out in the Fair Labors Standards Act. The FLSA currently sets the minimum wage at $7.25 as of July 24, 2009, which would earn a full-time worker just $26,200. It is estimated that a full-time worker in Pennsylvania would need to earn around $50,000, nearly double the minimum wage standard provides, to avoid poverty. While some states have enacted laws providing a higher minimum wage than the federal standard, Pennsylvania currently sets its minimum wage in line with the federal government at $7.25.

Exacerbating these problems is the fact that servers, under what is known as the “tip credit system,” are legally permitted to be paid less than the minimum wage so long as their tips each shift allows them to technically meet or exceed the state or federal minimum wage requirement that applies. A “tipped” employee is anyone who makes more than $30 per shift in tips. Assuming they meet tip minimums, the actual wage paid by owners to servers by law in Pennsylvania is a mere $2.83. This system also leaves tipped employees especially vulnerable to “wage theft” by employers because it requires employers to keep a two-tiered hourly wage system. The law says that tipped employees’ should be paid the full wage for any work done that is “untipped work,” such as sweeping, mopping, and other custodial tasks. Managing a two-tiered time management system like this leaves considerable room for wage theft, intentional or not.

Despite popular movements demanding fair pay, there does not seem to be any real engagement by State or Federal lawmakers to address the situation by raising the minimum wage to an acceptable standard. This places the impetus on business owners to figure out new methods of attracting and retaining employees who feel that the current system of wages subsidizing low wages by tipping customers is forcing them to work for poverty wages. As a method of income, tipping is also unreliable, inconsistent, and heavily dependent on a steady flow of customers. This leaves even full-time servers in a state of stress and uncertainty over whether their job can provide them with enough subsistence to survive.

Experimenting With The Model

In light of this, some business owners have begun exploring alternative business models that don’t rely on customer tips for server wages. One potential model that has emerged is a “no-tip” system that provides a consistent hourly wage to all staff members. For example, Scratch & Co., a restaurant in the Pittsburgh area owned by Don Mahaney, has used the Covid crisis to embrace a model that provides more security and flexibility for his staff by doing away with tipping entirely. Instead, he offers employees a steady, livable wage.

Another Pittsburgh-based restaurant, Bar Marco, has been using the “no-tip” model since 2015 to great success. Within a month of implementing the system, revenues rose and overhead costs dropped significantly. Bar Marco takes this system one step further, providing its employees with a base salary, health care coverage, and 500 shares in the business. Giving employees equity in the company has increased employee awareness and investment. Being equity owners in the restaurant means any time they save the restaurant money by being more efficient or less wasteful, which directly improves their bottom line. Of course, implementing a system like this required other significant changes to balance costs, including retooling the menu to accommodate cheaper local ingredients and slightly smaller portion sizes. Nevertheless, weekly profits soon tripled from $3,000 to $9,000 profit each week, allowing the owners to pay out bonuses to the staff on top of their salaries.

Pre-pandemic, some owners had already been experimenting with these innovative business plans, but the trend has never quite caught on. While there are examples of failure and restaurants rolling back their policies to a more traditional tip-based system, that is to be expected with a paradigm shift this significant. Experimentation is the mother of invention, after all. Finding new ways to strike a balance between owner profits and employee satisfaction will continue to be a priority for workers in the future, and owners who want to retain great employees should explore these new options. Perhaps now is the perfect time for these business models to succeed.

This post has been reproduced with the author’s permission. It was originally authored on February 1, 2022, and can be found here.

Cameron Crowe, at the time of this post, is a third-year student at Penn State Dickinson Law in Carlisle, PA. Before coming to law school he worked for many years as a licensed real estate professional in the Pittsburgh area. His focus in law school has been on corporate and entrepreneurship issues with an aim to work in the business transactions sector of law after graduation. Cameron is also interested in mergers & acquisitions and energy law & policy. He has a passion for public service and recently interned at the YWCA Harrisburg Violence Intervention and Independence Blue Cross in Philadelphia, PA. He is currently interning at the Pennsylvania Office of Attorney General in the Healthcare Division.