Category Archives: Restaurant & Hospitality Law

Setback in Seattle for IFA and franchise owners.

Earlier this week, a Washington federal judge rejected the argument of the International Franchise Association that Seattle’s new minimum wage law unfairly targets franchise owners in Seattle.  The new law will raise the minimum wage in Seattle to $15 per hour over the next several years.  The focus of the IFA’s court action was not whether the city had the power to raise the minimum wage, but the way the increase is to be implemented.  Small businesses will be allowed to implement the increase over a seven year period while large businesses (500 employees or more) must implement the increase in only three years.  However, the law places franchise owners in the large business category regardless of the number of employees the franchisee actually employs.  On its face, the law seems to unfairly burden franchise owners simply because they operate using the business format and trademarks of the franchisor.   As franchisees know, ownership of an independently owned franchised business does not equate to being a “large business” employing 500 people.  In fact, most franchised businesses are small, locally owned and lack the resources of companies who employ 500 or more people.   The IFA stated that it will continue its’ fight against a law that it perceives to unfairly discriminate against franchise owners.

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On February 12, 2015, the Philadelphia City Council passed legislation mandating paid sick leave in Philadelphia.  Mayor Michael Nutter signed the legislation into law later that day.    The law, effective 90 days after signing, requires businesses with 10 or more employees to guarantee at least one hour of paid sick leave for every 40 hours worked.  Franchised businesses within Philadelphia, particularly those in the restaurant industry, lobbied against the bill saying that it will discourage businesses from moving to the city and deter current companies from expanding.  Efforts to increase the threshold number of employees from 10 to 15 or 50 ultimately failed.  However, the new law in Philadelphia may be short lived as Pennsylvania considers paid leave preemption in House Bills 1807 and 1796 filed earlier this year.  Both bills would ensure local municipalities cannot pass piecemeal paid leave requirements on businesses in Pennsylvania.  Twelve other states have already passed similar preemption bills.

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NJ Sick Leave Legislation Alert

Since San Francisco enacted mandatory sick leave legislation in 2006, efforts to pass similar laws have gained momentum in municipalities and states across the nation. Recently the New Jersey assembly became the latest state legislature to advance a bill, A2354, which would require most employers to provide their employees with annual paid sick leave. If it becomes law, and odds are strong that it will, it would make New Jersey the fourth state – after California, Connecticut, and Massachusetts – mandating paid sick time for all workers, and it would raise a number of challenging legal and compliance issues for both small and large franchised businesses.

At the core of the bill is the imposition of a legal obligation on employers to provide one hour of earned sick leave for every 30 hours an employee works. Employers with an average of fewer than 10 employees (which includes part-time and temporary workers) must allow each employee to accrue and use up to 40 hours per calendar year; employers with an average of more than 10 employees would have to allow up to 72 hours per calendar year.

As with any statute, however, the devil is in the details. The following is a brief summary of the bill’s provisions that pose the greatest risk to employers’ bottom lines:

Broad Application. Permissible use of earned sick leave is fairly broad under the bill. It permits an employee to use sick leave for themselves or a family member for: preventive medical care; the diagnoses, care, treatment or recovery from mental or physical illness; physical injury; and any adverse health condition. It also provides paid leave to employees who miss work due to closure of the workplace or a child’s school due to a public health crisis.

No Preemption Means Conflicting Employer Obligations. Many communities in New Jersey have already passed mandatory sick leave laws in the past year, including Newark, Jersey City, and Trenton, although the maximum leave provided is generally 40 hours. The state bill, however, does not include a provision which preempts those municipal laws, which would quickly lead to compliance conflicts for employers who have workers covered under different (or multiple) sick leave laws. This will quickly lead to confusion.

Disproportionate Impact on Small Businesses. While proponents argue the state bill is a pro-business and pro-public health policy that will ultimately reduce worker absenteeism and lower health costs for employers, businesses which heavily rely upon part-time workers, such as small local business, restaurants and seasonal businesses on the New Jersey coast, stand to disproportionately suffer adverse financial impact as a result of the legislation’s presumption that a large employer is one with 10 or more total employees. It’s common for these businesses to be staffed with part-time workers consisting of students and people with other full- or part-time jobs, and a small business can easily reach the 10-employee threshold simply because their workers have limited availability.

Practical Legal Ramifications. The bill would also impose certain record-keeping requirements and specifies when an employer may require documentation from an employee requesting or taking sick leave. In addition, the bill expands the legal rights of employees in two ways that raise fairly significant ramifications for even the most well-intentioned employer. First, if an employee makes any statement involving paid sick leave or invokes any right under the law, the employee receives a 90-day window in which any “adverse action” they suffer related to their job is presumed to be retaliatory. “Adverse action” is a broad term which, depending on the circumstances, could include merely changing the employee’s shift schedule. Second, unlike other states in which enforcement is entrusted to a state agency, the New Jersey bill permits an employee to sue the employer to enforce the law’s requirements. So instead of deferring resolution of disputed sick leave matters to a state regulator, aggressive plaintiffs’ lawyers will enjoy a wind fall.

It will be at least several months until the bill comes before the full New Jersey legislature for vote, and even if passed will require an openly reluctant Governor Chris Christie to sign it into law before it can take effect. However, the recent passage of similar leave laws in New Jersey’s three largest cities has led many observers to conclude it’s only a matter of time before New Jersey enacts state-wide legislation. Employers would therefore benefit from monitoring the bill and reviewing their existing sick leave policies to determine whether and to what extent its likely passage in New Jersey will affect workplace coverage and operating costs.

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Gift Card Alert

Does your business issue gift cards? Do you outsource management of your gift cards to a third party or subsidiary? If so, a recent whistleblower lawsuit filed in Delaware underscores the need to carefully re-examine your gift card program or risk significant fines – up to 125 percent of unredeemed gift card balances plus three times the amount otherwise due to the state in which your company operates.

The lawsuit was unsealed recently after having been filed in June 2013 against 33 large retailers, the National Restaurant Association, and Card Compliant, Inc. The lawsuit claims that Card Compliant (and its predecessor) conspired with the other defendants to circumvent Delaware’s law that unredeemed gift card balances are to be turned over to the state as unclaimed property. State of Delaware ex rel. French v. Card Compliant, LLC, et al., N13C-06-289 (Superior Court of Delaware, New Castle).

All states have laws which govern unclaimed property, and some, like Delaware, consider the unredeemed balance of gift cards to fall within the definition of unclaimed property after a specified period of inactivity. Delaware further requires the retailer to remit the value of that balance to the state once the specified period has expired. Other states do not consider unredeemed gift card balances to be unclaimed property or don’t require it to be remitted to the state. Thus, whether or not a business is obligated to turn over those balances to the state depends entirely on which state it calls home, generally the one in which it was formed.

To ensure your business doesn’t inadvertently fall within the sights of state law enforcement due to the failure of what may otherwise seem to be a perfectly legitimate gift card program, here are a few tips to mitigate your risk:

  1. Review all programs which provide for the issuance of gift cards, promotional certificates, and merchandise credits to ensure they comply with your state requirements, which would generally be those of the state of your corporate formation.
  2. If you use a subsidiary to manage these programs, analyze its form and substance. Ensure that it operates from an independent economic standpoint and isn’t merely a shell. Ensure proper intercompany agreements are in place and all formalities are followed.
  3. Check if your state has a voluntary disclosure program where you can report and remit unpaid amounts which you may find are subject to the state’s unclaimed property laws. Organizations formed in Delaware have until June 30, 2014 to do so.
  4. If you have a business relationship with a third party service provider, review your agreements and analyze whether they require amendments to minimize your exposure to potential fines and penalties.

Please contact our office with any questions.

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Tipped Minimum Wage Increase Likely?

A recent debate over federal minimum wage requirements began in November 2013 with the introduction of a bill by Senator Tom Harkin, a Democrat from Iowa. Originally titled the Fair Minimum Wage Act, it was reintroduced on April 8th as the Minimum Wage Fairness Act. Aside from making several changes to existing federal law when it comes to worker pay, the most visible prong of which has been an increase of the federal minimum wage from $7.25 to $10.10 for workers covered by the Fair Labor Standards Act, the proposed bill would also phase in increases to the minimum hourly wage for the nation’s estimated 3.3 million tipped workers to about $7.07 over the course of 6 years from the current federal minimum of $2.13, then indexing it to inflation and finally pegging it to 70% of the non-tipped minimum wage.

There isn’t much dispute that Senator Harkin’s proposed legislation is well-intended, though economists are divided when it comes to the anticipated effects that such a law would have on low-wage workers and the economy as a whole. But whether and to the extent the nation’s waiters, bartenders, and casino dealers are in the same proverbial boat as their non-tipped “low-wage” co-workers is another matter entirely.

Some of the biggest supporters of the bill such as Restaurant Opportunities Centers United argue that the increases will lift low-wage workers out of poverty, particularly women with children, and reduce the reliance by those workers on food stamps, thus effectively reducing taxpayer burdens for welfare programs. In contrast, the restaurant industry has pointed out that the mean hourly wage of tipped workers, including tips, currently stands at $10.10 (according to the Bureau of Labor Statistics) almost $3.00 above the existing minimum wage and equal to the minimum wage proposed by the bill. Restaurant operators therefore argue that this issue is much ado about nothing and a solution in search of a problem.

Further, industry organizations like the National Restaurant Association point out the obvious strain these kinds of increases can have on employers, particularly small businesses which employ the bulk of minimum wage workers, when restaurants already operate on incredibly slim margins of about 3-5%. The result, they argue, would be a reduction in workers’ hours, slow hiring, increased prices for consumers, and the limitation of business expansion. In an uncertain political and economic climate already unsteadied by implementation of the 2010 Affordable Care Act, restaurant employers are understandably alarmed by the potential further erosion of their bottom line.

What’s next? Currently the proposed bill remains under review in the Senate, but odds are low it will pass. Local lawmakers, however, have been addressing the issue within their own states, with more than half of states having minimum wages above the federal minimum or which will take effect soon, and according to the New York Times twenty-four states have already set minimum wage for tipped workers above the federal minimum of $2.13. Seven more states require employers pay tipped workers the same minimum wage as their non-tipped counterparts. Pennsylvania is one of the states which currently pegs minimum wage to the federal minimum for non-tipped workers and to $2.83 for tipped workers. Recently, two Democratic state senators from Southeastern Pennsylvania (Daylin Leach, D-Montgomery, and Mike Stack, D-Philadelphia) introduced a bill which would raise minimum wage for all workers in Pennsylvania to $12 per hour. However, none of the four Democrats in the primary race for Pennsylvania governor have expressed support for a hike quite so high. State treasurer Rob McCord, U.S. Rep. Allyson Y. Schwartz, and York County businessman Tom Wolf all support the wages proposed by the federal bill, with tipped minimum wage pegged to 70% of non-tipped wages, while only environmental protection secretary Katie McGinty has cited support for paying tipped and non-tipped workers the same minimum wage, though set to what amount has been unclear. Governor Tom Corbett has already signaled he does not support a minimum wage hike, making passage of any legislation during his term or any reelection term highly unlikely.

Meanwhile, a recent survey by the Lincoln Institute Spring 2014 Keystone Business Climate Survey of 378 Pennsylvania business leaders found while most opposed a minimum wage hike, 63% reported that the minimum wage in Pennsylvania has no impact on their businesses, “largely because their employees already earn above that standard.” In other words, many Pennsylvania businesses are already voluntarily paying more than the minimum wage, which raises doubts about both the purported beneficial impact for employees of an increased minimum wage and the necessity of mandating it at all.

While the federal and state climate regarding minimum wages remains uncertain, there is significant and vocal support from both sides of the issue, which from a strictly commonsense standpoint makes passage of any hikes in opposition to the status quo seem somewhat less likely. Nevertheless, it’s an issue we are watching closely for potential effects on our clients’ interests, particularly this year during the Pennsylvania governor’s race and federal election cycle.

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