By ELLEN SIMON, AP Business Writer Wed Jul 23, 5:36 PM ET
NEW YORK - With the cost of everything from air conditioning to whipped cream rising, many restaurants have been raising prices. LongHorn Steakhouse is passing on part of the tab to its servers.
LongHorn has instituted what its parent company Darden Restaurants Inc. calls "a more disciplined" tip-sharing plan — a policy servers say is cutting their earnings.
Under the program, waiters must give up a greater percentage of their total sales each shift to hosts and bartenders — 2.25 percent, up from 1 percent. So a server who sells $1,000 worth of food and drinks on a Friday night must "tip out" $22.50 to the hosts and bartenders.
The tip outs, which allow the company to pay bartenders and hosts a lower wage, were one factor helping Darden, one of the nation's largest restaurant companies, shave labor expenses as a percentage of sales by 0.6 percent in the fourth quarter, the company said in its latest earnings call.
The policy helped "offset wage pressure inside the restaurant," Darden President Drew Madsen said on the call. "It's a more disciplined tip share program than they've had in the past and as that progresses and we see results of that more broadly in more restaurants, that's something we can look at in all of our restaurants."
Darden has 1,702 restaurants; its chains include Olive Garden and Red Lobster.
The company's focus on tip sharing comes as restaurants scramble to trim expenses as customers eat out less and food prices climb. Adding to costs is a scheduled increase in the federal minimum wage, from $5.85 an hour to $6.55 on Thursday.
"A lot of employers are asking how they can get their hands on part of their waiters' tips to offset labor costs," said Paul Paz, an Oregon waiter who runs the Web site waitersworld.com.
Several LongHorn servers, speaking anonymously because they feared losing their jobs, say the policy has cost them money.
Darden, which bought LongHorn's parent company for $1.19 billion in October, says the change in the tip policy was not a specific response to the challenging economy and that LongHorn is structured slightly differently than its other restaurants.
The company says that even amid the sluggish economy, it hasn't raised prices or shrunk portions as other restaurants have.
"Our customers come to us for value," said spokeswoman Phyllis Hammond.
Other chains are finding savings elsewhere; Bob Evans cut its workers' hours by a total 2.6 million for fiscal 2008.
"When you're seeing minimum wage increases like we're seeing now, a restaurant really has two options: Raise prices, which no one wants to do, or reduce labor hours, which is what we did," said Dave Poplar, a spokesman for Bob Evans.
Despite the pressures, restaurants are still hiring. The Bureau of Labor Statistics said restaurants and bars added 16,000 jobs in June.
When Darden acquired LongHorn, the tip out policy increased. Similar policies elsewhere have been ruled legal.
Each servers' total sales at the 305 LongHorn restaurants are tracked electronically. At the end of every shift, LongHorn presents each server with an electronic tally: The company owes the server her credit card tips, while the server owes the company the total of bills customers paid in cash, plus 2.25 percent.
As a result of the tip share, LongHorn can pay hosts and bartenders less; some hosts have wages of $4 an hour. That's possible because in most states, minimum wage law allows tipped employees to earn wages as low as $2.13 an hour, as long as their wages plus tips add up to minimum wage.
Darden's overall wages paid increased for the year ending May 25, rising 18 percent to $2.13 billion from $1.81 billion in the same period the year before, as the new LongHorn Steakhouses and 29 Capital Grille restaurants added to labor expenses. Darden's other restaurants include Bahama Breeze and Seasons 52.
Sales grew to $6.63 billion from $5.57 billion during the same period, and net earnings grew to $377.2 million from $201.4 million.
Some restaurants, including Darden, say the federal minimum wage increase won't affect them, since 23 states require a higher minimum than the increased federal wage. Other chains say their pay bests even the higher state wages.
"The key for us is getting the right people," said Mike Serchia, vice president of human resources at Einstein Noah Restaurant Group, which runs Einstein Bros. Bagels. "If we have to pay a little bit extra to do that, we do, because that's the environment of the store we're trying to promote." He said the chain pays an average of $8 an hour.
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Ellen Simon covers the economy. She can be reached at esimon(at)ap.org or via http://www.facebook.com/profile.php?id659954920
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