Increasing Your Odds of Competing Successfully with the Chains for Employees

RestaurantOwner.com members consistently cite referrals as among their most successful sourcing and recruitment tactic. In theory, we all "get" it. Who is better qualified to promote your employee experience better than your employees?

National quick-service chains, including Chipotle and McDonalds, are offering an average starting hourly wage of $15, hiring bonuses, and a variety of attractive perks to staff their units. It is no news the ante has been raised in a seller's market for labor. So, how can independent restaurants compete to hire the staff they need to operate at capacity? Here are the pros and cons of employee referrals and other tactics employed by independent operators.

But there's more to it than that. People with similar characteristics and interests often spend time together. While referrals can result in better quality hires than non-referrals, according to the Harvard Business Review, there's a right way and a wrong way to go about it. If you're going to offer employee referral bonuses, you need to approach it methodically.

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Build a Stronger Employee Program

For example, simply offering referral bonuses to your team without considering how well they know the applicants is no better than random hiring, a recruitment crap shoot that has dragged down the quality of many businesses. Consider, with social media, we have many "friends and followers" about whom we know little other than perhaps viewing pictures of their pets.

When referrals have a weak connection to employees, it's a toss-up as to how they'll perform if hired. These are people that your workers don't know well, such as acquaintances or friends of friends. If they're responding to a link shared on social media, your employee may not know them at all. When your employee actually knows and can vouch for the referred applicant, referrals are far more likely to work out.

Structure your referral program accordingly to bring in high-quality connections. Don't share QR codes, app links, or anything else that's easily passed around online. Instead focus on word-of-mouth channels. A referral can say in their application form they've been referred, by whom, and how long they've known that person. You can verify this information easily by checking with your employee.

Put a time qualifier on the bonus. A new hire should have to earn it by staying with you for a period of time you select, such as 90 days. It might take longer to fill the open position, but someone who is focused solely on the dollar sign won't be a good fit for your concept in the long run.

Kevin Danilo, owner of Batch Hospitality Group, which operates four units in Florida, offers a referral bonus and a signing bonus. New hires receive $150. Employees receive $150 per referral if the referral completes their training. Batch also has a bonus designed to reward existing employees and retain talent in the long term. New hires and existing employees are now eligible for a $5,000 check at the end of two years of full-time employment. Salaried managers will get $10,000 at the end of two years with the company.

Referrals generally work on cash bonuses, but they don't have to. You can offer a gift card bonus, raffle entry, or some other perk that is doable. Set a referral bonus that makes sense for your business model and budget.

Then tell your employees exactly how it works. What do they need to do to get credit for a referral? What's in it for the new hire, a hiring bonus? When will that be paid out?

"At first our staff didn't believe it," says Danilo. "Many of our hourly employees had never received bonuses in their lives until we paid them, so they thought there was a catch," he explains. "When we laid it all out and assured them we actually wanted [referrals], it was like a light switch flipped. We immediately saw a decrease in turnover, an improvement in team morale, better check averages, and more employee applications."

You can't manage what you can't measure. You've heard this before. After launching a referral bonus, you need to track its effectiveness. How many referrals are coming in? Are they suitable candidates, or are you recruiting better applicants through other sources?

Turnover is expensive. It reduces the return on investment in hiring, onboarding and training. What is the employment longevity of referred employees versus new hires recruited from other sources? What is your average per-employee cost of recruiting, hiring and training? If the program seems worthwhile, keep it going. If it's not what you hoped, consider whether it's time to tweak the program or if you'd be better served with another approach.

Hiring bonuses can be controversial. They'll bring new people to your restaurant; but those new hires might not stay. Some could jump ship as soon as you've paid out, in the hopes of earning their next hiring bonus at another concept.

Hiring bonuses also create tension between old and new hires. Christina Hollerbach of Hollerbach's, a German-themed restaurant in Sanford, Florida, puts it this way: "I don't believe in hiring bonuses because I feel like it's a slap in the face to every employee who busted their ass working overtime and then you bring someone in at a higher rate. It definitely discourages teamwork."

Nor does she offer a referral bonus. The restaurant does offer other benefits, including a 401(k) with a three-percent match after 1,000 hours of work and health insurance for full-time employees (more on that below). To compete in the current labor market, Hollerbach is raising starting wages. She is also actively promoting the benefits package that goes along with the job. She says the restaurant is "doing okay" with front-of-house employees at present, but that "back of house is really tough."

WHERE ARE YOU GOING TO FIND EXTRA INCOME TO COVER THE COST OF INCREASED WAGES AND BENEFITS? AT THE BOTTOM LINE OF YOUR P&L STATEMENT, OF COURSE.
The best-and-brightest independent operators have always combed through their expense line items weekly and dived into their general ledger to ferret out questionable increases in expenses. In this economy and labor market, to survive, restaurateurs need an accountant's thirst for financial detail. Without it, they are dinosaurs grazing in the shadow of an impending asteroid.

While Danilo paid signing bonuses to new hires, he also thinks the practice is wrong. "It made more sense for an employee to quit, and start another job elsewhere to get a signing bonus. This didn't seem fair, and we didn't want this happening," he said. Nor did he want his current employees to feel left out. So, he offered them a bonus in recognition of their hard work. Existing employees got $250 if they worked for 6 months, $500 if they worked for over a year, and $1,000 for over two years of service.

If you're going to offer these bonuses, how can you pay for the extra expenses? One option is to use what you might normally spend advertising on job boards or local media. Allocate that part of the budget toward referrals and hiring bonuses, then see which strategy works better.

The Work Opportunity Tax Credit (see "On Target" below) can offset the extra expense of hiring bonuses if you hire individuals who were previously unemployed. You should note, this credit can't be claimed if you rehire your previous employees laid off in the wake of the pandemic. As you might know, a tax credit is an amount of money that taxpayers can subtract directly from taxes owed to their government. Unlike deductions, which reduce the amount of taxable income, tax credits reduce the actual amount of tax owed.

You can claim this credit when a new employee has accrued 120 hours of employment within their first year on your staff. At that point, you'll receive 25 percent of their wages. The credit increases incrementally with hours worked (40 percent for someone who's worked 400 hours) to a cap of $2,400.

There are extra incentives for hiring certain types of workers who are underrepresented in the job market, such as disabled veterans. You'll need to file a pre-screening IRS Form 8850, within 28 days of the new hire's starting date to be eligible for this tax credit. While this credit is nice, it's not something you can count on for each new hire. Given the high turnover rates in the industry, some new hires may quit before they reach 120 hours.

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Instructions for IRS Form 8850

For their part, Batch is absorbing these costs. Danilo doesn't believe "the end consumer should be on the hook" for staffing. He hopes the restaurant group will end up cash flow neutral by decreasing employee turnover, saving money on staff training, and having higher sales from a team that's better trained. "Basically, we're hoping to save money from bad hires and then reallocate those dollars to our really great team members," he explains when asked how he'll cover the increased costs.

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Our members report that their employee referral program is the most effective way to focus their recruiting efforts on attracting a much greater percentage of high-quality, A-player level prospects. This course will show you, step by step, how to set up a world-class referral program that will turn your team into an army of recruiters and provide a steady stream of the top job candidates in your area.

Sure 'Nuff

Given the tight margins in the restaurant industry, opera- tors have historically struggled with whether to offer health insurance and how to afford it. There are no easy answers to this question, but the present moment suggests this may be a need-to-have, not a nice-to-have, going forward. Restaurant point of sale company Toast's 2019 Restaurant Success Report shows that 31 percent of restaurateurs are already offering health insurance to employees. Those who already offer insurance benefits, like Hollerbach, understand the role this plays in creating an environment that naturally attracts and keeps top-tier candidates.

At Hollerbach's, full-time employees can get coverage during the annual open enrollment period or if there's a qualifying event, like aging out of a parent's insurance plan at 26 or moving to a new state. There are three packages to choose from. For employees with three years of tenure or less, the restaurant pays for 70 percent of the cheapest package. For those with more than three years on the job, they pay for 100 percent of the cheapest package. Alternatively, employees can apply that cost toward a more expensive policy and pay the difference themselves.

"It's not easy [to put] a benefit structure in a restaurant," Hollerbach admits. But she encourages operators to move away from a mentality of "I shouldn't have to do this" and figure out how to get it done.

She shares an anecdote of a time when her restaurant applied this logic. A bill on increasing wages was going up to vote, and she felt sure it would pass. "Knowing that was coming, we were adjusting our pay scale to make sure we could afford that $15 an hour before it went on the bill. We were offering competitive starting rates knowing this was coming. You can't bring people in at $15 and have your managers still making $16, $17 an hour."

Hollerbach had the luxury of time, but right now, restaurant operators are being asked to adapt on the fly. Hollerbach says a professional employer organization (PEO) can help operators compare, select, and roll out employee benefits quickly. PEOs provide small business services, such as hiring, benefits management, and payroll. They have insurance to cover their operations, which Hollerbach likes because "if something is wrong it's on them, not you." Because PEOs can negotiate rates based on economies of scale, "you'll get faster results and better benefits than doing it yourself," she adds.

Another resource Hollerbach recommends is Score.org, which runs a mentor program for entrepreneurs. "Getting a mentor is a great way to keep yourself on track and soundboard off other people in the industry" as you plan for big initiatives, like offering benefits.

If you're a member of the National Restaurant Association, or of your state's restaurant association, they may have member discounts on employee coverage. Currently the National Restaurant Association offers coverage through United Healthcare. That said, as Carol Wright, CEO of the New Mexico Restaurant Association, told reporters, United Healthcare's plans are "not very competitive." Plans offered on the state's health insurance exchange have cheaper premiums. The New Mexico Restaurant Association made the decision not to offer plans through UnitedHealthcare. But they found another option that may interest Independent operators: telemedicine through Teladoc.

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New Mexico Restaurant Association Starts Offering Limited Benefits

It's typically hard for restaurant workers to schedule things like doctor's appointments when their schedule is likely to change. Telemedicine is more convenient; they can do it from home with internet access. It's a cheaper way to manage care than visiting neighborhood urgent care clinics or, worse, the emergency room. For restaurants in rural communities, it can be a time-saving option compared to driving great distances to seek care. The New Mexico Restaurant Association is currently offering Teladoc for $9 per employee per month, but other state associations have cheaper prices. In Washington state, it cost operators less than $3 per month per employee.

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Washington Hospitality Association Telemedicine Benefits

Bear in mind, you should note programs like Teladoc are halfway measures. They're not health insurance coverage, but they provide benefits and a place to start.

Where are you going to find extra income to cover the cost of increased wages and benefits? At the bottom line of your P&L (profit-and-loss) statement, of course. The best- and-brightest independent operators have always combed through their expense line items weekly and dived into their general ledger to ferret out questionable increases in expenses. In this economy and labor market, to survive, restaurateurs need an accountant's thirst for financial detail. Without it, they are dinosaurs grazing in the shadow of an impending asteroid.

Keep an eye on your prime costs and make adjustments where necessary. Changing your hours of operation, scheduling swing shifts, and cross training employees all help reduce labor. Chances are, you've already explored this approach out of necessity. Think about menu engineering to avoid supply chain price hikes and conserve costs. Shave portion sizes so they're ample, but not overly generous.

Raising prices can be done, but only once you've carefully considered the other options. Some costs can be absorbed. Others can be offset by increasing employee productivity and decreasing turnover. It costs a lot of time and money to find and train new people.

Hollerbach's has been in business for 20 years. The concept has a long history of sales projections to rely on when forecasting business. They use this data when planning for things like salary increases or health benefits. "We want our payroll, including benefits, to stay around 35 to 39 percent. Do we need to restructure management? How can we reduce overhead and use the savings to employ staff? [It's] a constant adjustment of basing things on sales projections, shooting for sales you're comfortable with and seeing how that pay scale fits within the numbers," she explains when asked how the concept is able to afford the benefits package.

When making staffing decisions, Hollerbach looks at it from the guest point of view first. If the numbers suggest they can get away with one less server on a slow night, it's an easy way to shave labor costs. If it seems tight, and the guest experience might be negatively impacted, it's better to play it safe.

Non-traditional Perks

Danilo says it was "no surprise so many people left this industry" during the pandemic. "As much as we hate to admit it, like so many other restaurants, we unknowingly perpetuated the exodus" within the industry. Determined to be part of the solution moving forward, he and his part- ners are brainstorming ways to "modernize our industry and [show] people that hospitality is a viable career path."

The Batch team is investing in workplace culture through a monthly raffle program and a staff retreat house where managing partners can kick back "with fun amenities like ATVs, a hot tub, a basketball court, a giant summer kitchen and commercial indoor kitchen that is loaded with all their favorite food and drinks, and everything else we could think of to create an awesome getaway for some R&R. It's always free and they can stay there an unlimited amount of time (so long as their work is done)." Danilo hopes the retreat house will incentivize junior-level management to stick around and climb the ladder to gain access to the exclusive perk.

All Batch employees are eligible for the monthly raffle for prizes like paintball outings, blue-tooth ear buds, or tickets to sports games. "As much as staff likes to be paid well, it's important they feel appreciated," he says. When staff earn raffle entries and get rewards for exceptional service or by picking up extra shifts, it's a win-win.

While Hollerbach offers generous benefits, she's the first to admit that they're not the answer to everything. "Competitiveness is not always about money, it's about their quality of life and wanting to come to work every day. Building a culture is a lot more difficult than throwing money at a problem. All the benefits in the world" can't change a bad workplace culture.

If bonuses and health benefits seem like a stretch for your concept, consider what other perks you could afford. Hollerbach's closes on holidays to give employees a break. They routinely throw employee parties, including a pizza party after their big Octoberfest event.

Benefits can help you keep up in the current labor market. But workplace culture will set you apart from other restaurants. Jobs with the chains often have attractive starting wages and benefits, but the job might be dreary and unfulfilling, particularly for more creative souls. At least one chain has already signaled interest in replacing human beings with robotics, a pretty clear message of how they value human capital.

Whatever you offer, make sure a culture that appreciates staff, provides them adequate training, and gives them a reason to stay is on the table. This will always benefit you, regardless of the labor market.

GOT YOUR BACK…

Competing for the best and brightest back-of-the-house staff might be easier than you think if you create an environment that is creative and manageable for those seeking career advancement. Training cooks with the goal of promotion is what separates good kitchens from great ones. Filling sous-chef and chef positions from within the ranks is best. Today's cooks are tomorrow's chefs.

With so many young people and older career changers attending culinary school, restaurateurs often find a better-educated applicant than they did years ago. And that number will continue to rise. Culinary school graduates are entering the hospitality industry in greater numbers, but don't assume that the lessons learned in school will translate to success. This makes training and mentoring more important than ever.

What makes training and mentoring so important is that growing the kitchen crew from within produces team members who understand how the kitchen works. In addition, the kitchen crew knows the chef's expectations and will be more accountable for results.

Hire for ambition and attitude on the line. Find candidates motivated to become better cooks and better chefs, even if the first rung on the ladder is dishwasher.

ON TARGET

The Work Opportunity Tax Credit (WOTC) is a federal tax credit available to employers for hiring individuals from certain groups who have consistently faced significant barriers to employment. WOTC joins other workforce programs that incentivize workplace diversity and facilitate access to good jobs for American workers.