Intended and Unintended Consequences: The ‘Darden Approach’ to Obamacare

Intended and Unintended Consequences:  The ‘Darden Approach’ to Obamacare 

Courtesy of Dr. Paul Price 

One of the few bright spots for job creation over the preceding year or two was the hospitality segment. This includes restaurants, hotels, bars etc. Most of the work comes with low base pay. Tip income makes up a majority of the employees’ total compensation.

Managements were happy to add workers as business conditions permitted. Obama’s reelection cemented the fate of his new healthcare monstrosity. It now will be implemented and that’s very, very bad news for the restaurant industry.

Why is that? Many fast food and casual dining chains generate decent revenues but low net profit margins. Some, like McDonald’s (MCD), have been offering employees low-priced but relatively bare-bones health care policies on a voluntary sign-up basis. That was affordable both for low-wage employees and MCD.

Obamacare takes away that option. Minimum coverage requirements under the ACA [Affordable Care Act] mean that (post-January 1, 2014) those limited coverage plans can no longer be offered.

So much for that infamous claim, “If you like your present health plan and want to keep it… you can.”

The ACA requires that full-time employees must be enrolled in an approved healthcare plan or the employer will be subject to a $2,000 per head penalty (now called a tax by the Supreme Court). Worse still, the definition of full-time has been dialed back to just 30 hours a week.

At November’s Restaurant Finance & Business Development Conference Darden Restaurants’ (DRI) test plan was much discussed. They are reducing hours of employees to below 30 to limit the number of employees who would be eligible for coverage.

Darden is the parent of Olive Garden, Red Lobster, Longhorn Steakhouse, Bahama Breeze and other chains. They employee about 185,000 people.

 

 

Can employers simply wait until 2014 to make adjustments to their employee hours? No. The ACA has a look-back period to keep businesses from doing exactly that. Determining if a worker meets that 30-hour threshold will be done using their 2013 hours worked.

The cost of providing an approved policy will likely be well above the $2,000 tax imposed. Employers have a huge incentive to purge their businesses of scheduled workers with 30+ hour schedules. That means many people will be getting hours cut back now, in 2012, in order to avoid being classified as full-time in 2014.

Instead of helping waiters, greeters, kitchen staff and busboys become more prosperous ObamaCare may well curtail their ability to work as many hours as they would prefer.

It might also deprive business owners of the chance at rewarding their best workers with maximum earnings power. The cost differential between part-time and full-time might be the swing factor separating profitability and bankruptcy.

Brad Richmond, Darden’s CFO, was asked whether reducing hours will allow the restaurant to maintain customer engagement and employee satisfaction. “I think it’s going to be very hard,” he said. “They work 30 – 35 hours for a reason.”

Another potential strategy discussed at the conference? Don’t provide health insurance at all. From a strictly economic viewpoint paying the $2,000-per-year, per-employee tax penalty for not providing coverage might well be the best choice.

Alexis Becker, of accounting firm SS&G, noted that most scenarios find paying the penalty will be cheaper for employers than providing coverage.

The ACA only covers employers with 50 or more workers. Franchise owners will be loath to exceed, or even approach this potentially business- lethal number.

That could mean cutting back on overall operating hours or running with much leaner staffing levels. It also makes opening new units much less attractive. All three of those trends are bad news for workers and jobs. 

Most franchiser owners keep each unit as a separate legal entity in order to avoid triggering the 50-employee rule. Rumors have been floating around about new government regulations that would  lump multiple units back together for ACA purposes.

That would be an absolute dagger to the heart of owners of these multiple units with segregated legal ownership.

Hasn’t our president been saying since 2008…“Job creation is my #1 priority”? Obamacare is a job killer.

Actions speak louder than words. 

No matter how this ultimately plays out it will be a huge headwind for the profitability of this industry. Avoid stocks in this group until they start pricing in the future bottom line hits.

 

Dr. Paul Price, at Beating Buffett Blog, and Market Shadows,  Nov. 15, 2012

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