In Minneapolis, businesses are at a tipping point

Heather Bray started the Lowbrow restaurant on 42nd and Nicollet in south Minneapolis in 2011, and has developed a loyal clientele in the Kingfield neighborhood.

None of Lowbrow's menu items — think neighborhood cafe serving burgers, sandwiches and homemade desserts — costs more than $12.75, which allows the restaurant to function as what Bray calls a "kitchen replacement" for regulars who might otherwise cook at home or find even less expensive alternatives.

Bray has 43 employees, and non-tipped workers make at least $15 an hour. Her tipped servers make $42,500 to $50,000 annually and work an average of 30 hours a week. Bray said the restaurant's profit margin is 6 percent to 9 percent of revenue, so her $2-million-a-year restaurant is doing well.

But sadly for Bray, her employees and customers, that could soon change.

The Lowbrow and hundreds of restaurants and other small businesses in the city appear likely to have their business models turned upside down by the Minneapolis City Council and Mayor Betsy Hodges. Unless the momentum is reversed, later this month the council will adopt a $15-per-hour minimum wage — without a tip credit for restaurants — to go along with the new mandated paid sick time ordinance that takes effect July 1.

The Star Tribune Editorial Board has previously argued that $15 is an unrealistic minimum wage for Minneapolis, one that would make the city a less competitive island in a state with a current minimum of $9.50 for large employers and $7.75 for smaller businesses. Two important studies — one from the Brookings Institution and the other from the Harvard Business School — highlight the potential damage done by outsized wage mandates.

In fact, a city staff report recommended that the council consider a new minimum between $12.49 (based on regional peers and potential negative impact from forcing additional costs onto employers) and $15 (reflecting what it called "the current national trend"). That so-called "trend" appears to be driven not by economic analysis but rather by unions — including the powerful Service Employees International Union in Minneapolis — that have picked $15 as part of a national campaign.

The lower figure received little discussion in Minneapolis and, after Hodges abandoned her opposition to making the city an economic outlier, $15 regrettably seemed to be set in stone. Election-year politics in the DFL-dominated city have also provided momentum for well-organized proponents such as the organization 15 Now.

It also appears that the council — like Hodges, whose re-election bid has received SEIU's endorsement — will reject a tip credit system in which restaurants could count gratuities to make up the difference between the state minimum and $15. That's likely despite the convincing arguments made by Minneapolis restaurant owners such as Bray and by former Mayor R.T. Rybak, whose common-sense June 11 Star Tribune commentary should be required reading for the current council and his successor in the mayor's office.

The Editorial Board has questioned the wisdom of a statewide tip credit in the past, but that was in the context of more modest minimum wage increases. Saddling businesses — especially smaller employers — with the added costs of phasing in a market-distorting $15 minimum for all employees by 2022 would mean they'd have to make up costs somewhere. Some restaurants would no doubt consider higher prices, while others might turn to iPad ordering or counter service to cut payroll. And some Minneapolis servers are concerned that restaurants would eliminate tips or replace tipping with service charges.

Bray told the Editorial Board that her profit margin would nearly disappear unless the Lowbrow raises prices and that she'd move her restaurant to Richfield if the ordinance passes in its current form.

Meanwhile, some states, including Maine, are considering restoring tip credits. "The trend is toward more recognition of tips, not less," Dan McElroy, executive vice president of the Minnesota Restaurant Association and the Minnesota Lodging Association, told the Editorial Board. A 2016 survey by the association found that Minneapolis restaurant servers make an average hourly wage of $28.51.

A public hearing is scheduled for June 22, and there is still a glimmer of hope that the City Council will adopt a more accurate definition of a "large business" — 250 employees rather than 100 — approve a longer phase-in period for smaller employers, extend the time limit on paying a youth or training wage, and reject efforts to create a "right of private action" if employees sue employers for violating the ordinance.

Even though they may fight a losing battle against crowd-pleasing politics, residents, employers and employees who want Minneapolis to be an attractive city in which to start and expand a business need to call and e-mail their council members, voice their support for organizations such as Pathway to $15 and show up at City Hall on June 22.