Restaurants to Mitigate Health Care Costs by Cutting Hours; Reflections on Productivity

NPR "Restaurant News" confirms exactly what I have been saying about Obamacare: Restaurants to Mitigate Health Care Costs by Cutting Hours.

“What we’re seeing is that this health care law puts unique challenges on chain restaurants,” said Rob Green, executive director of the National Council of Chain Restaurants. “The law will have cost implications on a lot of different business sectors, but restaurants and retail are in the bull’s eye.”

Specifically, two parts of the PPACA may raise costs for restaurant chains: The definition of full-time employees as those who work 30 or more hours per week, rather than the traditional 37-40 hours per week, and the fact that the law applies to any business with more than 50 employees — a number some say will discourage franchise growth.

Orlando-based Darden Restaurants Inc., which operates more than 2,000 restaurants under the Olive Garden, Red Lobster, LongHorn Steakhouse and other brands, is currently testing limiting some employees to 29.5-hour work weeks in some markets. “This is just a test,” said Rich Jeffers, the casual-dining company’s director of media relations and communications. “This is something we’re trying at some locations…we’re trying to figure out the optimal mix [of employees] for our restaurants.”

Currently, about 75 percent of Darden’s employees are part time and 25 percent are full time, he said. “We’re looking at it now instead of waiting until the eleventh hour,” he noted, adding that Darden had not made any decisions based on the analysis.

Jimmy John Liautaud, chief executive officer of Jimmy John’s Gourmet Sandwiches, spoke Monday on Your World w/ Cavuto on the Fox News Channel about possible ramifications of the health care law.

During the interview with talk show host Neil Cavuto, Liautaud said his company will be forced to cut employee hours as a result of the PPACA. However, Jimmy John’s has not yet reduced hours or raised prices, he said.

“We’re not doing it now,” he said. “But we have to bring [employees] down to 28 hours. There’s no other way we can survive it, because we think it will cost us 50 cents a sandwich.”

Liautaud added, “It’s very expensive just to pay the penalty as well. We have to manage around it.” The penalty for not offering health insurance to employees, he said, is $2,000 per employee. That means if a company has 40 or 50 employees at a specific restaurant location, not offering health care could cost up to $100,000.
The law may also adversely impact franchisees who want to grow their businesses beyond the 50-employee threshold, said Matthew Haller, vice president of public affairs at the International Franchise Association. “It puts people who want to grow at a disadvantage,” he said. “The costs are very real and very scary.”

David Barr, a Kentucky Fried Chicken franchisee who owns 22 locations thinks most franchisees aren’t looking at the law closely enough, he added.

One aspect of the law that Barr believes franchisees need to pay more attention to is the “measurement period,” or the time during which employee hours will be measured to determine their status as full time or part time. Barr’s 12-month measurement period begins in January 2013, meaning that he has to start analyzing employee statuses now, he said.

Barr is currently looking at employees who work between 30-33 hours per week and will likely be reducing their hours to below the 30-hour threshold, he said.

Misdiagnosing the Setup

Reader "Flapping Eagle" says I have it wrong and Obamacare will cause unemployment to rise. Here is his logic:

When you can only work 25 hours at a job, you have ample time to work two jobs.

In this situation the better low-wage employees will all quickly have two jobs freezing out a large number of people from any job. I can easily envision a scenario where a Red Lobster and an Olive Garden work out a system of schedules so that the good employees can get 25 hours at each restaurant with no scheduling conflicts.

Remember I said it first, this will cause unemployment to go up, not down as many are suggesting.

Flap

Flawed Analysis

Did you catch the flaws in Flap's analysis?

I responded to Flap as follows: Many, perhaps most of these part-time workers have hours or shifts that change week to week. Moreover, they are expected to be on call in case someone is sick. Scheduling two 25 hour weeks, both subject to change and call-ins does not work!

Furthermore Red Lobster and an Olive Garden are part of the same chain. The employer, Darden Restaurants, would increase full-time employment if it did what Flap suggested, and that is precisely what the chains want to avoid.

Reflections on Productivity

This will be resolved in the manner that I said, with one more peculiarity that I failed to mention earlier. Productivity will go down. People want more hours and get less of them. Morale will suffer.

Also, some of these new hires are marginal. I have run into the issue twice already. I have had clearly new, as well as inept waiters at two different Olive Gardens in the past month.

Restaurants are hiring to avoid Obamacare ramifications, and that hiring has lowered the unemployment rate.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com