Employers worry over effects of $15 wage law
Many businesses already are factoring in the higher wage costs as they plan for the future. Will they lay off workers or raise prices? Cut benefits and workers’ hours? Four businesses discuss their situation.
Seattle Times business reporter
All eyes are on Seattle as it moves toward a $15 minimum wage, the highest of any major city nationwide.
On June 2, the City Council unanimously passed an ordinance requiring employers to pay at least $15 an hour in the next three to seven years, representing a 61 percent increase over the state’s current minimum of $9.32.
Mayor Ed Murray, who subsequently signed it into law, said it was a bold — but not dangerous — experiment. Labor activists hailed it as a landmark victory for low-wage workers.
Whether Seattle’s $15-an-hour mandate proves successful largely depends on how employers react.
While it’s early, many already are factoring in the higher wage costs as they plan for the future. Will they lay off workers or raise prices? Cut benefits and workers’ hours? Or maybe they’re confident that workers with more money to spend on local goods and services will boost their bottom lines?
The Seattle Times reached out to four local business owners and found all of that in the mix, though layoffs generally are seen as a last resort, and price hikes carry some risk in a competitive landscape. Here’s how these four are preparing for a $15 minimum wage.
Holiday Inn Express, North Seattle
Ron Oh stood before the City Council on a recent Monday afternoon to share the story of his family’s improbable journey from North Korea more than 60 years ago.
He described how his father, John, fled to South Korea as a young boy with three brothers just before the Korean War, then came to the Pacific Northwest to attend the University of Oregon on a full-ride scholarship.
John, an architect, joined his brothers in various local business ventures, including the purchase of a hotel with some wear and tear in North Seattle. To spruce it up, they split the lot into four parcels, sold off three and financed the construction of a Holiday Inn Express on the remaining piece.
The hotel opened Nov. 13, 2001 — nine weeks after the Sept. 11 terror attacks — and took four years to become profitable.
This past May, Ron Oh urged council members to consider families like his in drafting a new $15 wage plan. He tried to no avail to defeat a provision that treats small, local franchisees as large, national employers and puts them on a fast track toward $15.
“The way to become rich is to put all your eggs in one basket and then watch that basket,” Oh said at City Hall, quoting Andrew Carnegie. “This is our basket, and the eggs are the lives of my entire extended family. We are watching that basket carefully.”
The family’s 102-room Holiday Inn Express employs 28 people. Yet because it’s considered a large business and does not provide health insurance, it must begin paying a $15 minimum in three years. Businesses with fewer than 500 employees nationwide, by contrast, have up to seven years to phase in the hike.
Oh, 41, has joined a lawsuit filed in U.S. District Court in Seattle by the International Franchise Association and other franchisees to try to strike down the ordinance, calling it discriminatory and unconstitutional.
In 2005, his Holiday Inn Express recorded its first annual profit of $38,000 and has stayed in the black since then, despite a 20 percent drop in business during the Great Recession.
Oh, the general manager, says 2013 was a record year, with a profit of $600,000 and revenue of $2.9 million.
He says his 20 nonmanagerial employees make, on average, $10.25 an hour, plus tips. Paying everyone at least $11, as he must do next April, will add an estimated $80,000 to his annual labor costs. In 2017, when he’s to pay $15, his costs will increase by $250,000 over current levels, he says.
The hotel spent about $580,000 last year on labor, followed by $300,000 in franchise fees and $160,000 in reservation fees. It also has about $4.2 million in outstanding debt, Oh says.
He plans to raise room rates and reduce workers’ hours to pay for the wage increase.
“We’ll do our best to become more efficient,” he says. “Rooms have to be cleaned faster, and if people underperform, instead of working with them more, we’re going to have to let them go.”
He says he promotes managers from within and works with local colleges to train new employees.
“Would I still mentor and hire interns? I would,” he says. “But could I explain it to my family, the owners, why I’m spending time to train people when I could hire someone who’s fully trained and ready to go? It’s a tough question.”
El Gaucho Hospitality
Chad Mackay picks up a silver-plated fork at the white-tablecloth restaurant he runs with his dad, Paul, in Belltown and admires its clean shine.
“We have an employee whose job is to polish, burnish and take care of the silver,” he says. “Everybody else has gone to stainless steel. But this is still valuable to us because of our heritage.”
Their elegant El Gaucho restaurant won’t do away with its real silverware, even if it has to pay more for the upkeep under Seattle’s new $15 wage law, he says. But the mandate “just makes it harder to do business the way we want.”
Chad Mackay, 44, is president and chief operating officer of El Gaucho Hospitality, a 375-employee company with four namesake steakhouses in the Northwest, a seafood restaurant, Aqua, on Seattle’s waterfront, a food-catering service and a small Belltown inn. Of those 375 employees, 165 work in Seattle, and 100 make the statewide minimum of $9.32, not counting tips.
Mackay estimates that paying everyone at least $15 will increase the company’s annual labor costs by $700,000, potentially cutting its profits by half.
Because it provides health-care benefits, El Gaucho has more time under the law to adjust to $15, starting with $10 next April. Its wage obligation will rise by 50 cents in each of the next four years, then jump to $13.50 in 2020 and $15 in 2021.
The company also can take a small tip credit against its obligation for servers and busers over the next decade. But in 2025, its workers and all others citywide must be paid an inflation-adjusted minimum of $18.13 an hour, regardless of any tips and benefits they receive.
Tipped employees, who comprise El Gaucho’s minimum-wage work force, will see their base hourly pay rise by 7 percent next year. Mackay notes that in the first quarter of 2014, tips added an average of $31.50 an hour to a server’s paycheck, while busers received $12.50 on top of their base hourly rates. Servers work, on average, 28 hours a week.
Nontipped employees, who already make $11 and up in hourly wages, will have to wait until 2018 or longer before the law requires they get a raise, Mackay says.
“Next year, things don’t change much, if at all, for the back of the house. All the benefits flow to the front of the house,” he says. Still, he adds that restaurant competitors on a faster wage track will “drive up labor rates for less-skilled positions, like dishwashers.”
He estimates the company’s Seattle operations will spend an additional $100,000 on wage costs next year. To cover the increase, he’s considering replacing the tip line on customers’ credit-card bills with a service charge. Unlike tips, which go directly to workers, service charges may be used at the owner’s discretion.
Mackay also is considering scaling back on health-care benefits by limiting eligibility to employees who work at least 30 hours a week, instead of 25 now.
Though raising menu prices is another option, he worries about losing price-sensitive customers.
“Yes, we have some very wealthy customers,” he says. “But we have a lot of customers who are maybe here to celebrate their anniversary. It’s their big night out, and they come only once or twice a year.”
He’ll ask his top customers for their opinion on a service charge and other possible changes in the coming months, and get input from employees on trade-offs they might be willing to make.
“Now that we have a law, what are we going to do?” he says. “My guess is we’ll have something implemented by the beginning of the year.”
Glant Pacific Companies
At his family’s scrap yard just south of downtown Seattle, Ryan Glant proudly points to about 350,000 pounds of aluminum shavings piled high beneath a bright June sun.
The shavings soon will be crushed to make large bales of aluminum and shipped worldwide for the production of aerospace parts and other goods.
“It’s easy to forget these types of businesses are around Seattle,” he says.
His great-grandfather Jules Glant, a Latvian immigrant, founded Pacific Iron & Metal in 1917, buying and reselling scrap metal for a tidy profit.
During World War II, the company also accumulated discarded fabric items and sold them to thrifty homemakers who turned them into quilts, blankets and clothing. Since then, the rag business has evolved into a regional chain of five Pacific Fabrics & Crafts stores, including two in Seattle.
A third family business, Seattle’s Doorhouse, sells building materials, such as doors and windows, at a store near the scrap yard on Fourth Avenue South.
In all, Glant Pacific Companies employ about 160 people, half of whom work in Seattle. The mainstay recycling business boasts an average employee tenure of more than 10 years and provides a range of benefits, including medical insurance, profit-sharing and flexible-work schedules, Glant says.
“All of our full-time hourly employees make more than minimum wage, and more than half make more than $15,” not counting overtime pay, he says. “We’ve always taken care of our employees well before the government mandated it.”
Two years ago, Glant, 36, walked away from a career as an attorney at the venerable Perkins Coie law firm to work alongside his dad, Doug, the company’s chief executive officer. He says he made the switch because he wants to ensure the business stays in the family, adding, “There was a dearth of the next generation ready to step in.”
He’s not sure what they’ll do under Seattle’s $15 wage plan, but here are some questions they’re starting to think about: Will store employees in Bellevue, Bremerton and Everett also expect a raise? What about employees who already make $15? Will they get a bump to maintain pay scales?
“We have no idea how our employees are going to react,” Glant says.
Another complication is that commodity-metals prices have been dropping. And while that may mean the Glants can buy scrap metal for less than before, they also don’t make as much money on resales.
The family’s retail stores, beset by low-cost online competition, aren’t faring any better.
“We’d be ecstatic if our two retail businesses would just break even. Normally, our recycling business is able to subsidize them, but that’s been very difficult the past two years,” Glant says.
He says the $15 wage law adds another layer of uncertainty that makes investing in new equipment or hiring employees “next to impossible.”
“We’re going to do everything in our power to keep our businesses running and our people working,” he says. “As it stands now, Seattle is not in our discussions for future growth or expansion.”
Marty K facilities maintenance
Consuelo Gomez apologizes before sitting down to talk. She only has a few minutes before she must be on the move again. Work won’t wait.
As co-owner of Marty K, a commercial-property-maintenance firm out of Bellevue, Gomez says she’s on pace to have a profitable business by 2016, based on annual sales growth of 10 percent.
That she must pay a $15 minimum wage five years from now in Seattle, where she employs 10 to 15 people, does not seem to concern her. In fact, she plans to offer the same wage to all 50 employees companywide.
“The work isn’t any different in Seattle than it is in Bellevue or Everett,” she says. “I think work should be rewarded, and it should be consistent across the board.”
Gomez, 42, was born in Medford, Ore., to immigrant parents from Mexico.
“I grew up in the fields. We sort of followed the fruit through California, Oregon and Washington,” she recalls. “I did that until I was 12. After that, I worked in the janitorial field and did housekeeping. Luckily, I got my GED, went to college and wound up in the business world.”
She started Marty K with a business partner in 2009, providing janitorial, landscaping and other services at corporate buildings throughout the area.
She figures about a third of her staff makes between $10 and $10.75 an hour, while 45 percent are at $11 to $14, and the rest earn $15 or more. About 55 percent of her workforce is full-time. She does not offer health insurance.
Seattle’s new wage plan requires her to pay an $11 minimum starting next April, then a dollar more each year up to $15 in 2019, with subsequent hikes tied to inflation.
She says she’s “ahead of the game already” because most employees make at least $11, and the five-year phase-in gives her time to generate enough new business to pay for higher wages.
“When I sit down and look at my numbers, I know I have to bring in X, Y and Z in new sales to cover that pay raise,” she says.
Despite the challenges, Gomez supports Seattle’s move toward $15.
“I do believe people need to make more money,” she says. “Could you live on $9.32?”
Amy Martinez: 206-464-2923 or email@example.com. On Twitter: @amyemartinez