Franny's Levies a Three Percent Obamacare Surcharge on Guest Checks

The state minimum wage is rising. The tip credit is shrinking. Rents are sky high. The market for cooks is tight. The cost of running a restaurant in New York, in other words, is increasing, which means going out to dinner will become a bit more expensive in 2016 and beyond. Some establishments are coping with these realities by raising prices and ending tipping. Others are simply raising prices. But Franny's, a heralded Brooklyn pizzeria, is taking a more unusual step: It's levying an Obamacare surcharge. And it's also hiking prices.

[Update: Franny's has reversed course and retracted the healthcare fee.]

"A three percent surcharge will be added to all checks to cover the Affordable Care Act for all Franny's employees," the restaurant's website states, a policy that goes into effect today. The ACA, better known as Obamacare, requires businesses with 50 or more full-time staffers to provide reasonably priced health insurance by 2016 or face yearly penalties of at least $2,000 per worker. Franny's doesn't have enough employees to trigger the ACA mandate by itself, but because the owners also run Rose's, a bar and grill, and BKLYN Larder, a gourmet market, the employee count is met and the law applies.

The owners of the Prospect Heights pizzeria, in a 400-word email to guests on Monday, described employer-mandated health care and rising minimums as "wonderful things in dozens of ways." But the letter also noted that such policies don't come free of charge. "Not only are costs rising," the owners wrote, "the overall costs of living in New York have increased so significantly that many of the talented cooks we employ are leaving, choosing to cook elsewhere, because they can't afford to live in New York." Or as co-owner Francine Stephens said during a phone interview, "We need to raise prices in order to attract really good cooks."

All back of the house staffers will receive raises. To make that happen, pastas will increase to $19, while pizza prices will rise to $20. The margherita pie, previously listed at $18, will now cost, after tip, tax, and the health care fee, about $26. At Roberta's in Bushwick, by contrast, the $14 margherita will end up costing patrons $18 after tax and tip, while Motorino's $15 pie goes up to $19. Both of those venues, however, employ a slightly cheaper mozzarella than the bufala variety used by Franny's.

Stephens says she hopes and believes it is legal to implement the surcharge. San Francisco restaurants have long levied small administrative fees on guest checks to cover employee heath care, but such charges appear to be much more rare (if not entirely non-existent) in New York.

Why not just raise prices across the board? "I believe in transparency. I didn't want to raise my prices for cooks and then raise a little more for health care," Stephens explains. "This is not a cost we can internalize. The three percent is a very fair and honest number of what my company's health costs will be." Stephens says providing health care will cost her company approximately $200,000 per year. "That's just not a realistic number to not do anything about."

The restaurateur says she expects the changes to cause a bit of attrition at the margins.  "I'm hoping that on a community empathetic level, that most of the people who love Franny's will understand and will continue to come. On a realistic level, I think a number of our guests will not be able to come as much," Stephens says, adding that there are psychological as well as financial factors at play. "There's a perception that if you're eating out in Brooklyn it should be cheaper. There's the perception that pizza should always be cheap. And those perceptions make up the reality of how much people want to spend when they come to Franny's."

Stephens says she's closely following the no tipping policy espoused by Danny Meyer, and is considering that as a future alternative for Franny's. But for now, "I want to see how my guests will respond to a three percent surcharge."

One more thing: Will people who normally tip 20 percent have any compelling reason to tip less than that because of this new policy? "I should hope not," Stephens says.