Pizzeria operators feeling the effect of wage increases

Pizzeria operators feeling the effect of wage increases
Tags: Operations Management
August 27, 2009 - Richard Slawsky

The federal minimum wage rose again last month, and pizzeria operators are feeling the pain.

The minimum wage jumped to $7.25 an hour on July 24, up from $6.55. The increase was the last of a series of annual wage increases that have boosted the minimum wage from $5.15 over the past three years.

Because many states have their own minimum wage, though, the effect was varied and not everyone saw their paychecks go up. Workers in 29 states and the District of Columbia got a raise while workers in 21 states saw no change.

"For me, here in Pennsylvania, it was a 10 cent an hour increase, and with a 300-hour weekly payroll that is another $30, plus the taxes, that comes out of my pocket," said Scott Anthony, owner of a Fox's Pizza Den location in Punxsutawney, Pa.

"It doesn't sound like a lot but it certainly adds up," he said. "The timing is bad. We're in the middle of a recession and now we are seeing cheese prices go up again, so it's really hard to cope with."

Although many of Anthony's employees were already making more than the new wage, some thought they deserved a boost as well. Anthony went ahead and gave everyone an extra dime.

Story continues below...

"That is a very common attitude, and I personally don't blame them," he said "Generally, when the minimum wage goes up the cost of living goes up. Nobody really has a choice but to pass on the cost of doing business."

Some strategies may backfire

California Pizza Kitchen officials touched on the effect of rising labor costs in their Q2 2009 earnings call. According to chief operating officer Sue Collyns, "We have been able to mitigate the full impact of these minimum wage increases by managing our labor more efficiently." Collyns warned the most recent wage hike could have an impact on Q3 results.

At Domino's, higher labor costs in the second quarter offset the benefit of lower cheese prices, officials said. Domino officials also warned the recent wage hike could impact its Q3 results.

For Anthony, the hike means he'll probably have to raise prices for the first time in more than a year.

"We have been trying to hang in there with prices for the customers' sake, but in my situation we really don't have any choice," he said.

Some companies are looking at paying drivers under a "tip credit" system as a way to control labor costs. Under the system, drivers are paid less than the minimum wage, generally about $2.13 an hour, with the tips they receive making up the difference.

Pizzeria chains may have inadvertently spawned a legal nightmare that may ultimately cost them more than they save in labor costs, however. The three top pizza chains are currently being sued by drivers who claim the tip credit system resulted in them being paid less than minimum wage.

story continues below...

This story and all of our great free content is supported by:

Firefly Technologies Choose Phoenix™ Point-of-Sale from FireFly Technologies for complete pizza delivery, table-service, and multi-store management. You'll enjoy reliability, ease-of-use, and the latest features. Call 866-678-6781 for a personalized online demo.

Anthony evaluated the effect of switching to a tip credit system, but decided it wasn't worth it. Paying someone less than the minimum wage would ultimately make it more difficult to attract and retain quality employees.

"You have to hope that you have enough deliveries and people are tipping good enough to keep people here," Anthony said. "What we concluded was you aren't going to attract good workers who are going to stay for that kind of wage."