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Ready or Not, Healthcare Law to Move Forward

A Bigger Worry: Insurance Mandates

If posting nutrition information on menus represents a burdensome provision of the Affordable Care Act for operators, mandated insurance coverage is, in the view of many, a significantly bigger worry. Unlike menu labeling, it's not supported by the industry and, indeed, is greatly feared for the impact it is expected to have on profitability and, in many cases, on how chain restaurants manage their workforces and their operations.

In brief, the law states that all employers with 50 or more full-time-equivalent (FTE) employees – defined as those who work 30 hours a week or more – must provide them with affordable health insurance coverage or face per-employee penalties. For employers who choose not to offer coverage, the law gives a penalty "discount" for the first 30 employees, so a company with 50 full-time employees would pay the penalty on 20 of them. Companies that do offer coverage must also satisfy other tests, namely affordability and minimum value. If the employer's plan doesn't meet one or either of those criteria, the penalty increases to $3,000 multiplied by the number of employees for whom the plan is too expensive and who opt instead to access healthcare coverage through an exchange and receive a tax credit for doing so.

"This law will impact the restaurant and foodservice industry unlike any other with the exception of our friends in the retail and grocery space and a few other similarly situated businesses in terms of the kind of workforces we have," says Michelle Neblett, director of labor and workforce policy for the NRA. "We will be impacted greatly, especially those who are subject to the employer responsibility sections of the law. That's a huge piece of this, even for those who are currently offering coverage, in terms of cost of compliance. And it's not just that part of the law. There are a lot of things that all restaurateurs need to worry about and things that change for everybody. Operators need to be paying attention, understanding what the law says and what the regulations are, because it's likely here to stay, and there's a lot to prepare for."

Among the top impacts of this mandate, says Henkes, is a bigger squeeze on profitability thanks in part to higher back-end administrative and labor costs. In the current economic environment, most operators can't realistically raise menu prices and ultimately will bear the brunt of those higher costs. He says hiring and labor practices in the industry will likely change significantly, as well, specifically with regard to replacing full-time workers or positions with part-time ones in order to skirt the insurance requirement.

Indeed, many operators already are working to do just that. The highest-profile recent example is Darden Restaurants, parent of the Olive Garden, Red Lobster, LongHorn Steakhouse and Seasons 52 brands. The company announced last fall that it is testing limiting some employees to 29.5-hour workweeks in some markets. The Wall Street Journal reported in early November that CKE Restaurants, parent of Carl's Jr. and Hardee's, has also begun to hire part-time workers to replace full-time employees who left. Andy Puzder, CEO of CKE, told the Journal that the company offers limited-benefit plans to all employees but that the federal government won't allow those policies to be sold starting in 2014 because of low caps on payouts.

Jimmy John Liataud, CEO of Jimmy John's Gourmet Sandwiches, has said his company will also be forced to cut employee hours as a result of the new law. In an October interview with Fox News Channel's Neil Cavuto, Liataud commented that the company will have no choice but to do so given the costs and penalties involved.

"Certainly, there is big cost and business operations implications that are not even fully understood yet," notes Henkes. "One of the things that we're beginning to see, for instance, is a rise in franchising. That's where a lot of the industry growth has been, in large part because, rather than bear all of the risk themselves, chains are expanding through franchising. We'd expect to see more of that as the healthcare law goes into effect."

Franchisees in the Bull's-Eye

For franchisees, however, the law's implications are perhaps even more worrisome than at the corporate level, where most companies already offer health insurance benefits to full-time employees. As small-business people, franchisees run the gamut from single-unit owner-operators to multiunit franchisees who may own many units and brands. Each unit may employ only 15 full-time employees, but under the law, the multiunit franchisee is treated as a single firm with 60 full-time employees, thus requiring ownership to provide healthcare benefits or pay the fine ($2,000 per FTE employee per year).

As such, employers may face the decision of whether to close a business, eliminate jobs or shift workers from full- to part-time to avoid having to provide health benefits or, if they choose not to, paying the penalties. That's according to Haziz Hashim, president and CEO of National Restaurant Development, a Decatur, Ga.-based franchising company that owns and operates some 60 units under the Popeyes Louisiana Kitchen, Checkers/Rally's and Domino's Pizza brands. "We are likely to choose the latter," he stated in a recent editorial in an Atlanta Journal-Constitution blog.

Hashim went on to say that, in addition to causing major shifts in hiring (toward more low-wage part-time workers), the healthcare law will ultimately cause many businesses whose employee base is nearing the 50 full-time-equivalent mark to curtail growth. He also expects to see more automation to help employers get by with fewer employees as a way to keep costs in line. "Utilizing automated checkout counters and purchasing new machinery are options we must consider to reduce the number of employees and remain profitable under these mandates," he wrote.

Scott Pierce, chief financial officer at Front Burner Brands, the restaurant management company for the Melting Pot Restaurants, Burger 21 and GrillSmith, agrees that the law stands to have a big impact on franchisees. "The effect of the healthcare reform bill on our franchisees is a financial concern," he says. "Our franchisees are small business owners; most of them own one or two restaurants. We are maintaining regular communication with our franchisees to give them updates as we learn the nuances of the law. While those who operate one store may not have enough full-time employees to be subject to the plan, it may affect some others and could have an impact on the potential future success of our franchisees."