The minimum wage is increasing for many states at a fast pace to $15. But, once it hits that amount, it will continue up. Florida is one of those States. In November, the voters of Florida narrowly approved Amendment 2 that increase the minimum wage to $15 by September 2026 with a tip credit of $3.02. So, in September 2026 the minimum wage will reach $15 per hour and the tipped wage will be $11.98.
The increase in the wages is best shown in this chart. Yes, that is right, a 116% increase for tipped wages and 75% increase for minimum wage.
“These increases are an attack on the tipped employee”.
Chad Mackay, CEO, Fire & Vine Hospitality
According to Chad Mackay CEO of Fire & Vine Hospitality, based out of Seattle, WA, “these increases are an attack on the tipped employee”. Chad is more than qualified to speak about the burden these increases will impose on full-service restaurant concepts. When Seattle imposed the increases over 5 years ago, he calculated that the cost to two of his restaurants for tipped employees alone would be over $700,000. Facing this magnitude of cost increase, Chad and his team determined that the best way to survive without eroding profit would be a new compensation model along with implementing service charges. The new compensation model they implemented was a commission-based model for compensating servers and bartenders. The model has proven effective for his portfolio of restaurants that include El Gaucho in Seattle, WA https://elgaucho.com/elgauchoseattle/. The plan gives them a long-term solution and not just a short-term band-aid fix.
Simply put, the commission model of compensation is to pay employees based on sales. An additional benefit is under DOL rules, Section 7i allows for a excluding overtime pay. This exclusion is commonly referred to as the 7i Exemption. Under this model, the servers and bartenders, the restaurants real sales force, are incentivized to sell more food and booze because their compensation is increased. The restaurant includes a service charge as a percentage of the ticket.
The following is from the US Department of Labor. These are the requirements to meet for overtime to be exempt for commission pay.
If a retail or service employer elects to use the Section 7(i) overtime exemption for commissioned employees, three conditions must be met:
Unless all three conditions are met, the Section 7(i) exemption is not applicable, and overtime premium pay must be paid for all hours worked over 40 in a workweek at time and one-half the regular rate of pay.
In general, the previously tipped employee will now be paid an equal or greater amount of commission pay compared to tips previously earned. In the tipped model, the employee would share tips with other team members, like hostess, busser, bark-back and others. In the commission model, the employee does not share commission pay. The bussers, hostesses and other employees now receive all of their pay from the restaurant, and their pay may be increased or decreased depending on amount of shared tips previously received.
A good starting point for the commission percentage is around 15%. The net tips received under the tipping model is approximately 15% after accounting for the shared tips they share. So, this commission model should result in no harm, no pay reduction and the opportunity to make more.
A service charge is now billed to the customers. And, the service charge is not an optional pay item, but is a required payment on the ticket. Typically, the service charge percentage is between 18% and 22%, unless the service charge is tied to a private party or special event. These percentages for a service charge match the range of what is normally tipped by customers. So, in theory, the customer is paying approximately the same amount under this model as customers that tip would pay under the tipping model.
One of the keys to a successful implementation of this commission model is to base decisions on data. How much should the percentage of commission be? It should be based on historical data of what total pay, including tip have been, including tip share. Historical data for sales, discounts, and shift should also be accounted for in determining the commission percentage to use.
Using understandable and relevant data to make decisions and communicate with employees is very important. As questions arise about pay, the data can be a reference point to either support or refute any questions that employees have. This sets the stage for a quick resolution of questions. Accurate and reliable data that is presented in an understandable way will help reduce the drama that could happen around change in compensation plans.
Restaurants that use the tipping model, which is the majority of full-service restaurants, do not report on their P&L’s about 20% of revenues and costs attributable to the operations of the restaurant. Since the tips are owned by the employee, tips are not counted as revenue to the restaurant, nor is the cost accounted for as a cost to the restaurant. The revenue and cost are not truly a ‘wash’ since payroll tax cost on the tips are included as a cost of the restaurant. To keep it simple, what other business excludes 20% or more of it’s revenues and costs?
The service charge and commission model require all costs and revenues associated with the operations of the restaurant to be reported on the P&L of the restaurant. Service charge collected from the customer is owned by the restaurant. And, commissions paid to employees, plus associated payroll taxes are reported on the books, records and P&L of the restaurant. This seems like a great improvement in accounting and financial reporting.
In many states, minimum wage is scheduled for a rapid increase to $15 and beyond. Seattle, WA is nearing $17 per hour now. Other states have recently jumped on the train headed to $15, but the rate will not stop there.
Action Plan for Implementing the Commission Model:
The commission model along with service charge is only one of the options to evaluate to help manage the increase in costs. This sole option has many, many iterations to consider and should be rolled out with extreme care. Successful implementation will take time, a lot of communication, transparency and decisions backed by data. Plan early, plan often and prepare to address questions and issues early. Also, consider consulting with an employment law attorney and CPA/financial consultant for data analysis and projections.