San Diego restaurateur Arturo Kassel is taking on dining’s long entrenched culture of tipping and eliminating it come Jan. 1 when he will instead add a service charge to diners’ bills in hopes of blunting the impact of mandated wage hikes.

It’s a daring move but an unavoidable one, says Kassel, as San Diego — and the state — begin implementing a series of increases in the minimum wage.

Last Monday, the first of two hikes that will boost the city’s mandated minimum pay 15 percent by next January, went into effect, bringing the hourly wage to $10.50 for about a quarter of the city’s workforce. By Jan. 1, San Diego’s wage will jump to $11.50, thanks to voters’ approval in June of a measure to boost pay of low-wage workers and also expand sick leave to five days a year, based on hours worked.

Kassel’s transition to an automatic 20 percent service charge — which will allow him to keep the overall amount earned by servers constant while boosting pay for kitchen workers — could be a foreshadowing of things to come as employers grapple with how to preserve their profits while complying with the law.


× WhisknLadle, a restaurant in La Jolla has begun a new approach to accommodate their hourly employees and the raising of the minimum wage. Video by Hayne Palmour.

The change, which Kassel confesses he agonized over, effectively gives his restaurants control over the money from service charges, something that they don’t have over tips, which are the property of the tipped employees and can’t be counted toward their salaries.

The goal, he says, is that servers, through base pay increases, revenue-sharing and expanded health benefits, will see little change in their compensation, while dishwashers and cooks, who already make above minimum wage, will see their pay rise still more, narrowing the earnings gap between the two tiers of workers.

Kassel reasons that because tips at his restaurants average a little over 20 percent, most diners wouldn’t feel an impact on their pocketbooks, although less generous tippers clearly would.


“A lot of operators I’ve spoken with are torn but understand the inevitability of this change and are terrified of how our guests will react and embrace it. But we know it’s not a matter of if but when and how we do this,” said Kassel, co-owner of five mostly upscale restaurants, including PrepKitchen and Whisknladle. His servers, like those at most restaurants, are paid the minimum wage because a sizable portion of their earnings comes from tips.

“What’s important for consumers to know is this is kind of the tipping point,” he says. “All of the restaurants are going to have to do something. What we’re doing is the right thing, but it’s not the easy thing. The easy thing is to raise prices and continue to ignore the problem.”

It’s difficult to calculate precisely the number of San Diego workers earning the hourly minimum wage, although based on U.S. Census annual earnings data, an estimated 25 percent of the city’s workers 15 years and older make the equivalent of a full-time minimum wage salary, said economist Kelly Cunningham, of the National University System Institute for Policy Research.

Restaurant, hospitality and retail sales positions are among the most common low-wage jobs, and “by far, restaurants and food-serving establishments are the most common employers of low-wage earners in San Diego,” Cunningham said in a 2014 study.


A report that same year by UC Berkeley’s Institute for Research on Labor and Employment looked at the potential impact of San Diego’s current minimum wage law and concluded that between 148,000 and 182,000 workers this year would be affected and as many as 214,000 next year, or 29 percent of the city’s workforce.

Study co-author Ken Jacobs points out that the numbers take into account a ripple effect that occurs when employers opt to also raise the earnings of slightly higher paid low-wage workers with greater responsibilities.

Kevin Crooks serves food to customers at Fireside by the Patio restaurant at Liberty Station in San Diego on Tuesday. Restaurant owner Gina Champion-Cain hasn’t decided what changes she’ll make to cover increased costs from minimum wage boost but she won’t eliminate tipping. (Hayne Palmour IV)

While it’s too early to know what exactly will be the fallout of rising wages, opponents have raised the specter of layoffs, cuts in employee hours, higher prices and, possibly, business failures. San Diego’s new law comes amid a parallel move by the state to eventually boost the minimum wage to $15 an hour by 2022. Starting in 2019, the city’s minimum wage will increase annually based on the consumer price index, which gauges inflation.


Until 2014, when the minimum wage bumped up to $9 an hour, the wage had been stuck at $8 an hour for six years.

“We’ve got really good evidence on what happens when cities and states raise the minimum wage,” said Jacobs, who chairs UC Berkeley’s Labor Center. “We tend to see a decline in worker turnover and better performance, which brings some savings to the firms, and the rest of the cost is passed on to consumers in slightly higher prices.”

The increased wages, though, presumably lead to more spending, softening the effect of higher prices, Jacobs said.

An ongoing study of last year’s hourly wage increase in Seattle from $9.47 to $11 (it’s now $13) hints at the possible impact in San Diego. There is evidence that employers reacted by cutting operating hours and employee hours, and there have been some price increases, although they were largely within the restaurant industry, which raised prices on average 8 percent, said Jacob Vigdor, professor of public policy and governance at the University of Washington.


“The minimum wage (increase) might be decelerating things a bit,” he said. “But imagine driving 65 miles per hour down the highway and taking your foot off the gas pedal. You’re decelerating, no doubt about it, but you’re also continuing to move forward. That’s about the worst-case scenario for Seattle — maybe we’ve slowed down a bit, but our tech-fueled economic boom is still carrying things forward.”

Brian Miller, owner of a chain of nine Geppetto’s toy stores, is not so sanguine. The current retail economy, he worries, is not well positioned to absorb the sharp increases in the minimum wage that are coming. He’s not sure yet what he will do.

“It’s very tough for a small business where you have to slide up the whole pay scale,” said Miller, who employs more than 80 people. “If we raise our prices or cut our staff, our service level may go down and people won’t come to us as much. It’s too much and too quickly.”

Debra Ponce, a 20-year-old minimum-wage employee at American Eagle Outfitters in Mission Valley, lives with her mom in Normal Heights but is hoping that the scheduled pay increases might help her get an apartment of her own, possibly in City Heights. She’s currently going to school to get a medical assistant certificate.


Before the increase went into effect last week, she had been thinking about asking her boss for a raise.

“I’ll wait to see if the 50 cents makes a difference,” she said.

What might seem like a minor pay boost for low-wage workers could have a colossal impact on Point Loma Nazarene University, said George Latter Jr., its vice president for finance and administrative services.

He said when the state minimum wage went from $8 an hour in early 2014 to $10 an hour in January 2016, it cost the university $600,000 a year to bump up pay for roughly 450 student employees.


The university’s lowest paid non-student employees make $12 an hour. If the university wants to maintain that $2 hourly differential by the time the minimum wage hits $11.50 an hour in January, the increased cost to the university will be $1.8 million in 2017, Latter estimates.

In the last three years, Latter said the school decreased costs by $3 million by reducing staff, cutting several academic programs and giving some professors early retirement.

“It really feels like one step forward and two steps back,” he said. “It’s a huge concern for us.”

Still, the biggest consternation over wage increases comes from restaurant operators, who argue that the minimum-wage boost benefits most those who need it least — highly tipped workers, some making $25, $35 an hour and up. Many midscale and upper-end restaurants say they already pay their dishwashers and cooks more than minimum wage given the keen competition in the industry for qualified workers.


George Hauer, owner of George’s at the Cove in La Jolla, said he has raised menu prices modestly to cover his higher labor costs, which he estimated could run at least $150,000 a year for every $1-an-hour increase for his 100 tipped employees. Other employers in the hospitality industry say they will manage higher labor costs by paying much closer attention to how and when they deploy their workers and trying to avoid overtime.

“You respond by cutting costs and raising prices, and every business does that, and if they don’t they’ll go out of business,” said Hauer, whose oceanfront dining complex ranges from casual to upscale. “We’re talking about a million dollars of extra labor costs layered in the last couple years and someone has to pay for that. I’m not griping about that, but I am griping about a law that is giving increases to people making as much as $75,000 a year.”

While replacing tipping with a service charge is likely a hard sell for many restaurant owners, Michael Rosen, owner of the celebrity-chef-helmed restaurant Juniper & Ivy in Little Italy, says he would consider taking such a step. For now, though, he’s absorbing the added labor expense.

“I’m not going to do anything, I’m going to watch it and eat it, but every restaurateur will have to do something, whether it’s raise prices or move to Arturo’s service charge,” Rosen says. “One can argue it’s noble to have a higher minimum wage but in the restaurant industry, it’s going to the wrong people.”


Union-Tribune staff writer Phillip Molnar contributed to this report.

lori.weisberg@sduniontribune.com (619) 293-2251 Twitter: @loriweisberg