GRAND RAPIDS, MI – Michigan restaurant owners are warning that recent changes to the state’s tipped wage laws will have a “devastating” effect on local businesses.

Those changes, they say, will result in higher prices for customers and risk jobs for workers.

A state Supreme Court ruling this week is set to raise Michigan’s minimum wage and gradually phase out the tipped minimum wage over the next several years, replacing it with a regular minimum wage for restaurant servers and bartenders who typically rely on tips for the bulk of their earnings.

The laws are expected to take effect Feb. 21, 2025.

Under the new regulations, the lower wage for tipped workers would increase from $3.93 to about $6 next year, and it would be eventually eliminated altogether by 2029. Proponents of the changes say eliminating tipped wages will offer more stable earnings to the 125,000 tipped workers in Michigan’s hospitality industry.

But many restaurant owners have raised concerns that being forced to pay higher wages will force restaurants to raise menu prices, cut hours for workers, lay off staff or close altogether.

Jon O’Connor, co-owner of Long Road Distillers, said the elimination of tipped wages will drastically change the restaurant’s labor costs, and he’s still working to unpack what those changes will mean for the restaurant and its employees.

The Grand Rapids distillery was one of several businesses that raised its minimum wage to $15 in 2021 and instituted a tip credit to ensure that tipped employees walk out the door having earned an hourly pay of at least $15, even if business is slow.

O’Connor said the company’s tip credit system has worked well, and tipped staff typically walk home with “much consistently higher than $15 an hour” with their hourly rate plus tips.

But if the base labor rate is forced to go up, O’Connor said that will become a higher fixed cost that employers will have to balance out by changing their pricing models – which means customers will see higher prices on the menus.

“If the fixed labor cost goes up substantially, that means that prices will probably have to go up to cover the base,” O’Connor explained. “And so that’s going to impact the cost of a cocktail or a food item.”

O’Connor worries that raising prices for customers will threaten a restaurant industry that was already fragile from inflation and the pandemic over the last few years.

“If the cost of a meal goes up 20% or 30% to go out to a restaurant, I’m probably less likely, as a customer myself, to be able to go out and spend money,” he said. “I certainly don’t go out and eat and drink as much as I used to because the cost has gone up, and so this is going to have another pressure on an already fragile hospitality economy.”

Some restaurants may also be forced to lean into technology like QR codes and ordering kiosks because of the higher labor costs, resulting in a more automated restaurant experience for customers, said Jeff Lobdell, who owns a restaurant group that operates 22 restaurants across Michigan.

Lobdell is the president and founder of Restaurant Partners Management, a company of over 800 employees that owns and operates 16 restaurants in Grand Rapids, six in the Traverse City area, and two hotels in Traverse City. He is also the chair of the National Restaurant Association and has 35 years of experience in the restaurant industry.

Ultimately, Lobdell said, it will be restaurant workers who will take the biggest hit as a result of the new wage laws. Smaller, neighborhood restaurants won’t be able to significantly raise their menu prices to cover the higher labor costs, which means they’ll unfortunately have to cut staff, he said.

“If you’re a little neighborhood burger place that has $12 burgers, you can’t raise that $15 to $20, or raise an omelet from $10 to $25,” he said. “Consumers just won’t do that. So the biggest pain, in my opinion, will be for the industry workers. And that’s devastating to me because I love all the industry workers and I want to see a healthy hospitality industry, not just for businesses, and not just for our amazing guests and tourists, but also for our staff.”

A recent survey from the Michigan Restaurant and Lodging Association found that two-thirds of restaurant operators would lay off employees, with an estimated 40,000 to 60,000 restaurant jobs lost, as a result of eliminating tip credit for Michigan workers.

The survey also found that 94% of operators would raise menu prices by an average of 25%, while roughly 20% full-service restaurants would close permanently as a result of the changes.

The restaurant association’s President Justin Winslow said in a statement that Wednesday’s decision was “a likely existential blow to Michigan’s restaurant industry and the nearly 500,000 workers it employs.”

“We urgently call on the Michigan Legislature to act swiftly, implementing a compromise solution that prevents this impending catastrophe before it is implemented,” Winslow said.

In addition to the wage changes, the state Supreme Court on Wednesday elected to reinstate new paid sick leave laws that require businesses to provide a certain amount of paid sick leave for its employees, depending on the size of its workforce.

The new sick leave laws have also drawn criticism from business owners, who say the new regulations will force employers to scrutinize and keep track of their workers’ time off request in order to meet the mandate.

The Supreme Court’s ruling dealt with a case involving two ballot initiatives that were adopted by the state legislature in 2018 and subsequently watered down.

In 2018, two petitions called the Michigan Paid Sick Leave Initiative and the Michigan Minimum Wage Increase Initiative sought to raise the minimum wage to $12 an hour and drastically increase tipped wages, as well as expanding paid sick leave.

But a Republican-led state legislature decided to adopt a watered-down version of the proposals in 2018 instead of letting voters decide the issue. This kicked off a legal battle that has been winding its way through the courts since 2021.

In the 4-3 ruling Wednesday, the court ordered that both ballot initiatives be reinstated as originally adopted.