July 29, 2024. The hospitality industry, particularly those with 500 employees or less, faces significant change at the end of this year with the sunset of the total compensation credit in the Seattle Minimum Wage Ordinance, effective Jan 1, 2025.
Currently, small businesses may use $2.72 per hour in total compensation (tips and/or payment towards medical benefits). This system has existed since Seattle’s minimum wage was enacted on April 1, 2015, and has worked as intended for a decade.
Many small business owners are now asking the Seattle City Council to continue to protect small businesses by eliminating the sunset of total compensation.
Without total compensation, every small restaurant operator faces a 20% increase in labor costs on Jan. 1. Several organizations, including the Seattle Restaurant Alliance, are lobbying the Seattle City Council to make the total compensation credit in the Seattle Minimum Wage Ordinance permanent.
Background
Seattle’s minimum wage ordinance went into effect on April 1, 2015, and categorized employers into two categories. Schedule 1 (large employers) has 501 or more employees, and Schedule 2 (small employers) has 500 or fewer employees worldwide. (Franchises count all employees in the franchise network.) Former Seattle City Councilmember Jean Godden shares an insightful historical piece concerning the development of Seattle’s minimum wage ordinance here.
Schedule 1 employers—all large employers—pay the full minimum wage. On Jan. 1, 2023, the minimum wage for large employers was $18.69/hour, and starting on Jan. 1, 2024, it is now $19.97/hour.
Schedule 2 employers may pay the hourly minimum compensation, or the minimum wage shown in the following schedule, and make up the balance with employee tips reported to the IRS and payments toward an employee’s qualifying medical benefits plan (total compensation).
In 2025, total compensation ability expires without the Seattle City Council passing a new law protecting small business owners. If the Council does not pass a new law, small employers will pay the same minimum wage as large employers and can no longer count employee tips and payments toward an employee’s medical benefit plan. This will increase by over 20 percent and more than $3 per hour.
Continuing total compensation for small businesses
From the outset of Seattle’s minimum wage ordinance, total compensation has been a critical option for small employers, and the city council recognized this policy need back in 2014. At that time, the city council recognized that small businesses, especially restaurants, operate on small profit margins and also compete with supply chain issues, rising costs of goods, and inflation. Allowing for the continuation of tips in industries where they are common gives those businesses the flexibility to reach Seattle’s minimum wage.
Local small businesses, particularly restaurants and other hospitality businesses, are fundamental to building a thriving neighborhood like Magnolia. Our restaurants have reported challenges in running their businesses, especially through the pandemic and post-pandemic periods. It has been reported that the average restaurant accumulated $160,000 in debt after any government relief programs, which could take four years to retire. Several restaurants have altered menus, raised prices, and reduced hours of operation to meet current economic challenges.
Currently, total compensation can also include medical benefits. Allowing for the cost of medical benefits to be counted to make up the balance towards the minimum wage not only incentivizes small businesses to provide health benefits to their employees but also assists in the overall cost structure.
Many in the hospitality sector are encouraging the city council to support continuing total compensation through employee tips and payments toward an employee’s medical benefits plan for small employers.
If total compensation is not extended by new legislation, starting in 2025, small employers will see their labor costs jump significantly, placing additional strain on the small business community.
Next steps and Actions Taking Place
The Seattle Restaurant Alliance is actively meeting with council members and staff to discuss this issue, introduce a legislative fix for the sunset clause, and extend the total compensation credit.
If you are interested in learning more, you can reach out to Austin Miller, Washington Hospitality Association Senior Manager for Local Government Affairs at austinm@wahospitality.org with questions. We also attach more information from the Seattle Restaurant Alliance here.
For additional news, information, & action kits on the issue so you can contact your city council member, please see:
Total Compensation Talking Points by the Seattle Restaurant Alliance
Seattle Minimum Wage Total Compensation Ability for Small Businesses Backgrounder, Seattle Restaurant Alliance.
