Increased Regulation for Restaurants Poses Headache for Operators | Food Newsfeed
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National Restaurant Association

The More You Know

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Restaurant regulations that should be getting your full attention. Now.
By Daniel P. Smith May 2011 Legal

In April nearly 500 restaurateurs from 44 states gathered in Washington, D.C., for the National Restaurant Association’s (NRA) 25th Annual Public Affairs Conference. For many, the three-day adventure, complete with visits to Capitol Hill and interactions with Congressional members, was a sobering reminder of just how much the government has thrust itself into restaurants’ 21st century affairs and just how sniping certain regulatory issues could prove for an industry already at odds with a sluggish economy.

While restaurants once held little regulatory concern aside from their local health departments, today’s operators face a barrage of oversight. Regulations impact everything from daily operations and hiring to the infusion of new blood into the restaurant industry’s ranks.

“So much of this regulation is coming in areas operators didn’t have to deal with before, such as nutrition and health care, and so many, including state and local agencies, want to touch the industry, that it’s exposing the restaurant industry to regulation many times over,” says Scott DeFife, the NRA’s executive vice president of policy and government affairs.

Steven DiMillo runs DiMillo’s on the Water in Portland, Maine, an upscale-dining eatery DiMillo’s father started in 1954. He says he spends twice as much time today tending to regulatory work today than he did just one decade ago.

“These regulations have crept up on us,” says DiMillo, who also serves as chairman of the Maine Restaurant Association. “It used to be we could put out a sign saying ‘Good food and drink. Come on in.” Those days have passed. We’re dotting so many i’s and crossing so many t’s just to appease the state and the feds, all of which takes us away from our mission of serving good food in a quality environment.”

Owners and executives in all segments are feeling the pressure. “After health care, we see mandates for menu labeling, paid sick leave, and immigration tracking systems adding to our costs. At the state level, we see beverage taxes and more as [states] try to balance their budgets,” Popeyes Louisiana Kitchen CEO Cheryl Bachelder says.

As a result of government intervention, Bachelder says Popeyes’ franchisees have endured a negative impact to their bottom line. She says the rush of poorly considered regulations, many concocted by elected officials with limited understanding of the small business environment, and the economy’s turmoil, has sparked many restaurateurs to question the industry’s viability.

“In a labor-intensive and low-margin industry such as ours, it is very difficult to absorb these costs,” Bachelder says.

Yet, amid the confusion, frustration, and annoyance emanating from the restaurant industry ranks, DeFife urges perspective.

“The very nature of the industry’s relationship with government continues to evolve and that’s one thing we can count on,” he says.

Here’s a rundown of the most pressing regulatory issues facing the restaurant industry and its operators:

Health Care

DeFife labels health care reform “the largest single set of regulations to affect the restaurant industry.”

Passed last spring, the nation’s new health care reform legislation requires employers with 50 or more full-time-equivalent employees to offer an affordable “minimum essential coverage” health benefits package. Failure to comply could lead to fines up to $3,000 per employee.

“Even for those who currently provide some type of health package to employees, health care moving forward will be a significant cost driver that many restaurants are not dealing with now,” DeFife says. “Because of the mandate, we anticipate there will be much higher participation among employees.”

DiMillo says the vagueness of health care’s terms and mandates creates a lingering unease.

“It’s hard to prepare for something that is still so far from being complete,” he says, fearing that the regulations as they stand could put many restaurants out of commission if not by their financial requirements than the sheer paper and auditing obligations.

“This blanket mandate has been passed as law with no thought given to the consequences for employees, for job creation, or for new restaurant growth,” Bachelder says.

If left alone, Bachelder says the health care bill will lead to many unintended consequences, such as restaurateurs shifting to a 100 percent part-time workforce.

Many industry insiders argue that until the health care reform is repealed or materially revamped, the uncertain future will dampen owner enthusiasm for hiring and developing workers and investing in new restaurants.

“The good news is we have until 2014 to get this fixed in Washington, D.C.,” Bachelder says.

Indeed, the 2014 implementation date, DeFife says, is the one positive of legislation that threatens to shake the industry’s core, one packed with a part-time, seasonal, and mobile workforce.

“While the health care reform bill has been enacted, most provisions haven’t been finalized and there’s a two-year process for filing comments,” he says. “Rest assured, the small business community will be working on several changes and repeals before activation.”

Subsequently, DeFife’s message to operators is clear and succinct.

“Pay attention. The game’s not over yet and we’re going to try and change what we can,” he says, pointing to the definition of part-time, which stands at 30 hours a week, and adjustments for seasonal employment, as two particular focus areas.

Menu Labeling

Amid the sweeping health care legislation sit guidelines for menu labeling at restaurants. On April 1, 2011, the FDA announced its proposed rule, which then opened for a 60-day comment period. The NRA is in the process of working with restaurant operators to provide a comprehensive response.

The FDA proposal calls for any restaurant or retail food establishment with 20 or more locations to disclose calories and provide point-of-purchase materials that define additional nutritional content. The proposed regulation includes a voluntary component for restaurants with fewer than 20 units.

“This is an issue that will affect a large segment of the restaurant industry,” NRA public affairs specialist Dan Roehl says. “Our message to operators is to make plans and prepare for how you are going to communicate this information.”

While the NRA opposed the overall health care bill, the organization supported the menu labeling provision.

“We saw the growing patchwork of menu labeling regulations on the state level, so it was only a matter of time before things moved to the federal level,” Roehl says. “The truth of the matter is that the severe lack of consistency posed a challenge for both operators and customers.”

According to Roehl, the FDA stands open to comments and interested in alternatives. The NRA’s focus will be on making the menu labeling guidelines more usable from the operator’s perspective. This will include the enforcement process and how restaurants might label combo meals or variable menu items—after all, there are thousands of ways to make a salad or pizza. While the FDA has expressed hopes to have the final regulation in place by year’s end with a six-month implementation period, the NRA is pressing for a one-year implementation window.

“Our restaurant operators want to know precisely what they need to do to ensure compliance and that’s precisely the clarity we’re working on getting right now,” Roehl says.

Swipe Fees

While restaurant operators often find themselves at odds with regulations, proposed changes to swipe fees, also referred to as interchange fees, delivers good news to small businesses.

According to the NRA, swipe fees trail only labor and food as the largest costs for the average restaurateur. Proposed regulatory changes could drop the “hidden” fees up to 75 percent, representing positive savings for restaurants big and small and a major coup for the NRA and the Merchants Payment Coalition, a collective of retailers pursuing a more transparent card system, both of which have fought for reforms in the swipe fee arena.

“For so long, only the banks and the card companies have been winning,” DiMillo says, adding that swipe fees have emerged a growing business issue as customers increasingly turn to plastic payment.

In early 2010, Congress passed the Durbin Amendment, which instructs the Federal Reserve to ensure that the debit card swipe fees merchants encounter match the costs of processing transactions. Banks and debit card companies derided the amendment and immediately began lobbying to halt the restaurant-friendly reforms.

“The banks and credit card companies went ballistic and there’s been an all-out assault to delay or kill the regulations,” says David Koenig, the NRA’s director of tax and profitability.

Last December, the Federal Reserve issued draft rules to enforce the law, proposing to scale back merchants’ debit card swipe fees from an average of 44 cents per transaction to a cap of 7 to 12 cents per transaction under the “reasonable and proportional” standard set by the law.

“They’re fighting mightily to make sure these bills don’t get traction in Congress,” Koenig says of the regulation’s opponents.

As of mid-April, the Federal Reserve continued its process of reviewing comments and assembling the final regulation. While Koenig and others do not expect the final decision to be as favorable as the initial proposal, they remain optimistic about the positive changes, which are slated to take effect this July 21.

Immigration Compliance

New York-based attorney Carolyn Richmond, co-chair of Fox Rothschild LLP’s Hospitality Practice Group, says immigration compliance remains a source of unease for many business owners, particularly as the federal government intensifies its workplace immigration enforcement.

“This is one of those issues where many operators have anxiously crossed their fingers for a long time hoping that immigration reform would come before Immigration and Naturalization Service or Immigration and Customs Enforcement came knocking on their front doors,” Richmond says.

While the issue of immigration reform remains a hot Washington topic, reform and a host of new regulations appear in limbo. Yet, it is important for restaurateurs to stay in compliance with the federal Immigration and Nationality Act, which makes it unlawful for any employer to knowingly hire an alien not authorized to work in the U.S., hire any person without complying with the law’s employment-verification and record-keeping requirements, and continue to employ a worker knowing the person is or has become an unauthorized worker. In addition, all employers are required to verify employment eligibility of every employee hired and complete a Form I-9.

“Unfortunately,” Richmond says, “a lot of operators fail to follow the procedures with respect to properly filling out Form I-9 documentation.”

Richmond cites discriminating against new employees by limiting the choice of acceptable documents to use, “over documenting” the process, and failing to fill out all of the form’s sections as common mistakes. Faced with an I-9 audit, the financial penalties can mount alongside potential criminal penalties.

“It is incumbent on restaurateurs to plan in advance and make sure they are in compliance,” Richmond says. “Conduct an I-9 audit today as a first step.”

Gainful Employment

Often tucked into the background behind the hot-button issues of health care, menu labeling, and immigration, the issue of gainful employment holds a far-reaching impact for the industry’s future workforce. NRA projections hold that the restaurant industry will add as many as 1.3 million workers over the next decade, topping 14 million jobs by 2020.

“And many of those jobs will be behind the kitchen door,” DeFife says.

As the recession lingered and unemployment numbers relayed little positive, the U.S. government encountered a hefty problem with student loan defaults. As a result, the U.S. Department of Education proposed a new set of standards to determine whether students in specific post-secondary educational programs would remain eligible for financial assistance. The government’s proposal would close loan access for those seeking degrees in specific areas, including the culinary arts.

To arrive at its proposal, the Department of Education assembled a formula of prospective salaries and investigated prospects for employment in a given industry. DeFife says the proposal failed to note the unique apprentice-like aspects of the culinary world while punishing the culinary vocation models that have long served as the industry’s training ground.

“It was an appropriate thing for the government to examine why [so many student loan defaults were happening] … but the government failed to see the bigger picture and how gainful employment would specifically hamper the culinary world,” DeFife says. “If this would go into effect, the supply of chefs could be severely diminished at a time when the interest in these skills and the need for such workers would be growing.”

Given the NRA’s vocal efforts and the ongoing review of more than 90,000 comments, the gainful employment regulations sit on hold as the Department of Education pursues additional study.

To be considered for a feature, contact Restaurant Mangement’s editor, Ellen Koteff, at [email protected]