The Santa Monica City Council is set to debate a local minimum wage ordinance on Sept. 29 and while there is growing consensus about the value of a $15 wage, the local restaurant industry is expressing concern with several provisions in the proposed rules.

Santa Monica has patterned its rules after the City of Los Angeles. Both cities propose a phased increase in wages beginning in 2016 and reaching $15 an hour by 2020. However, the Santa Monica rules include provisions still under debate in Los Angeles.

Restaurant owners said restrictions on the use of service charges are particularly onerous.

Traditional tips are the property of the employees and can only be distributed among front-of-house workers such as servers, busboys and hosts. Back-of-house employees, like chefs, are prohibited from sharing in voluntary tips left at the table.

A service charge is a mandatory fee, often set at a fixed percent of the bill. Service charges are considered the property of the restaurant and are distributed as the owners see fit. Some owners use the fees to cover items like health insurance and/or to equalize compensation among front- and back-of-house employees.

In Los Angeles, the city council removed language related to the use of service charges and directed staff to conduct additional analysis. In Santa Monica, the minimum wage ordinance would limit who can benefit from a service charge.

“Santa Monica’s Council directed staff to include language in the ordinance that ensures any service charge remains the property of the staff providing the service,” reads the staff report. “The proposed ordinance includes language to this effect, drawn from the City of Los Angeles Hotel Service Charge Reform Ordinance. This provision does not affect a business owner’s decision to use a service charge, but ensures that the charge is spent on the employees providing the service.”

Mayor Kevin McKeown said the proposal is intended as a transparency measure, to prevent restaurant owners from somehow tricking customers.

“Listing a ‘service charge’ on a restaurant or hotel bill will make most customers believe they’re tipping the servers and other staff. Keeping that money for the company, not passing that charge through to the workers, is something we may want to question as to ethics and appropriateness,” he said.

Josh Loeb, owner of the Rustic Canyon Family of Restaurants, said he supports the wage increase but said the service charge rules make no sense.

“The minimum wage ordinance is a good thing,” he said. “Everyone should make $15 an hour ‚Äî no one is disputing that.”

He said the service charges are listed on the menu and he has no issue with the city helping to craft the necessary language to inform customers of the fee. Loeb said customers are free to choose which restaurants they want to eat at and if they don’t want to pay a service charge, they can find restaurants that don’t use them.

However, to micromanage the service fee is actually counterproductive, according to Loeb, because replacing voluntary tips with a service fee actually equalizes pay among all employees, not just those the customer can see, while the City’s rules prevent the payment to back-of-house staff.

“We’re replacing (tipping) with a more equitable paradigm,” he said. “Consumers always have a choice and our intent is not to be malicious, but don’t vilify the restaurant industry for trying to be creative.”

He said a service charge is actually the most transparent option. Business could just raise prices, but a service fee allows customers to see how costs are factored into their bill.

Hunter Hall with the Santa Monica Neighborhood Restaurant Coalition said some elements of the local rules seem to be disconnected to the issue of raising wages and could spoil what is an otherwise noble pursuit.

He said Santa Monica’s rules could be in conflict with state law.

“Service fees should be the operator’s decision,” he said. “If you muddy the water between state and local rules all it does is create a breeding ground for animosity and litigation.”

Hall said the city should follow the path of Los Angeles and pull the service fee issue from the rules.

“It just doesn’t make sense for the city to use the small business community as a guinea pig for this issue,” he said.

Loeb said he’d also like Santa Monica to delay or possibly eliminate union exemptions to the minimum wage rules.

According to the staff report, the City Council has directed staff to exempt “employers whose staff are protected by a collective bargaining agreement. The proposed ordinance includes this requirement. Union supersession is already a condition of Santa Monica’s living wage policy and some development agreements.”

Similar rules were pulled from the City of Los Angeles language.

The staff report says business owners have said the union exemption creates a competitive disadvantage for non-union businesses, a concern Loeb and Hall echoed.

“To allow (unions) to negotiate around the minimum wage allows them to market themselves and get more union businesses,” said Loeb. “It’s a tool to incentivize unions and it puts some of us at a competitive disadvantage.”

Hall said there’s no good argument for the exemption other than politics and said the restaurant industry is more than willing to participate in discussions over the issues.

Staff has proposed the development of a working group with local businesses pending the results of the Council discussion Tuesday night.

Council will meet on Sept. 29, at 5:30 p.m. at City Hall, 1685 Main St.

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