Faced with significant increases in labor costs due to the Affordable Care Act (“ACA”), a midwest restaurant owner decided to sell his 16 International House of Pancake locations.
Western Journalism reported earlier this month on the negative impact increasing the minimum wage to $15 per hour is having on the Seattle restaurant industry. However, restaurant owners around the nation are beginning to experience the impact of yet another government mandate that is greatly increasing their costs of doing business.
For Scott Womack, an Indiana franchise restaurant owner with over 25 years in the industry, the ACA mandate–coupled with the likely prospect of a minimum wage increase–meant it no longer made financial sense for him to stay in the casual dining business. The Daily Signal reports that he sold his 16 IHOP locations around the Hoosier state before the January 1, 2015 Obamacare employer mandate took effect.
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Womack testified before Congress in 2011, after the passage of the ACA, about the impact it would have on his business. At the time, he had 12 IHOP restaurants with about 1000 employees. He had also signed a development agreement, prior to the law’s passage, to add 14 new locations in Ohio.
He testified at the time his plans were now in jeopardy due to the new costs of doing business associated with Obamacare. He explained that profit margins for him range between five and seven percent. He added:
The law [the ACA] is one-size-fits-all for employers, and restaurants don’t fit. Though some restaurant companies offer coverage now, the cost is prohibitive for many employees, and many of their plans will not qualify in 2014. The only viable alternative is to pay the $2,000 per employee penalty, which is not tax deductible. A quick study of public restaurant companies shows that many did not earn enough in 2010 to pay the penalties and likely will not survive in the future. For my company, these penalties amount to 60% of our earnings, and again, our company is very profitable by industry standards…
Let me state this bluntly: this law will cost my company more money than we make.
Womack told The Daily Signal: “You have to fund your development through your profits…and if you have no profits, you’re not building restaurants.”
He sold his restaurants last year, not going forward with plans to build several new locations, which meant hundreds of lost jobs for those who would have worked in his restaurants and those who would have built and serviced them.
Owners of multiple franchise locations, like Womack, can often particularly feel the law’s impact. Despite each restaurant really being a stand-alone enterprise in terms of profitability, they are grouped together in terms of the number of full-time employees with regards to Obamacare. The ACA’s employer mandate kicks in at the 50 or more full-time employee threshold.
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International Franchise Association’s spokesman Matthew Haller explained its impact: “Rather than helping existing and aspiring franchise owners expand by adding jobs, locations and more hours for their employees who need them most, the law’s arbitrary definition of ‘large employer’ and ‘full-time work week’ have contributed to the steady increase in part-time employment in America and have been a drag on new franchise business formation.”
Womack decided to stay in the restaurant business by purchasing Popeyes restaurant franchises in the Kansas City area. He employees 180 now, rather than over 1000. Quick service dining, rather than casual dining like IHOP, makes more sense in the new business climate created by Obamacare. He wants to continue to grow his quick service locations, adding, “It’s a tightrope walk that you do, balancing between the risks in the industry vs. the reward of growing your business.”