Thursday, January 17, 2013

Are Employers Using ObamaCare as a Scapegoat to Cut Back on Workers' Pay?

Last week Taco Bell and Wendy's became the latest businesses to claim that the Affordable Care Act ("ObamaCare") is responsible for their decision to cut back on workers' hours (and thus, workers' pay).  We've heard similar claims from Papa John's Pizza, Applebee's and Darden Restaurants which owns Red Lobster, LongHorn Steakhouse and Olive Garden.  According to these food industry corporations, ObamaCare's requirement that they provide health care for their "full time" employees is too onerous.  This provision of the healthcare law, which goes into effect on January 1, 2014, impose a $2,000 per employee penalty on employers with more than 50 employees who do not offer health insurance to their full-time workers.  The Internal Revenue Code defines "full time" employees as anybody who works over 30 hours per week.  Even though this provision of ObamaCare does not take effect until a year from now, some of the above-mentioned corporations have already begun to reduce their workers' weekly hours to anything below 30, citing ObamaCare as the reason for the change.  Which begs the question: if ObamaCare hasn't even taken effect yet, then how can it be forcing these businesses to cut back on employee hours?  Is ObamaCare the real cause here or is there something else going on?

As it turns out, the number of American workers who have been forced into "part time" status by their respective companies has been on the rise since 2006, well before ObamaCare -- or even Obama himself -- was ever a factor.  In 2006, the onset of the recession had just begun, which created a less-than great business environment, especially for the fast food industry.  This, in turn, caused businesses to cut back on hours for their employees in order to minimize costs.  Meanwhile, profits for the fast food industry have actually gone up since the recession.  Approximately 92% of the fast food industry turned a profit in 2012; roughly 78% have been profitable for the last three years; and 75% have higher revenues now than before the recession (source).

Restaurant CEO's have racks on racks on racks.
Indeed, Clarence Otis, the CEO of Darden Restaurants, received compensation of $8.4 million dollars in 2011.  The year before that he received compensation of $7.7 million dollars.  Andrew Madsen, the COO of Darden Restaurants, received compensation of $5 million dollars in 2011.  Brad Richmond, the CFO of Darden Restaurants, received compensation of $2.5 million dollars in 2011.  John Schnatter, the CEO of Papa John's Pizza, received compensation of $2.7 million dollars in 2011.  Greg Creed, the CEO of Taco Bell, received compensation of $3.3 million dollars in 2011.  Emil Brolick, the CEO of Wendy's, received compensation of $4.6 million in 2011. Julia Stewart, the CEO of Applebee's, received compensation of $5.4 million dollars in 2011.  In other words, the heads of all of these "financially burdened" restaurants are all millionaires.  Meanwhile, their industry -- the fast food industry -- remains the lowest-paying industry in America, according to the Bureau of Labor Statistics.

One of the reasons why the fast food industry is THE lowest paying industry in America is because the vast majority of its workers are already part-time employees who work less than 30 hours a week.  For example, out of all the workers employed by Darden Restaurants, 75% of them are part time workers under the 30 hour mark.  In other words, businesses like Darden, Wendy's, Taco Bell and the like will not have to provide health insurance to the vast majority of their respective employees. 

Another reason why the fast food industry is THE lowest paying industry in America is because many of the operational costs faced by fast food businesses are passed on to their employees.  For example, at Red Lobster (a Darden Restaurant) servers are required to contribute to a daily practice known as "tip share" where the tips collected by all of the servers on any given day are combined into a pool and paid out to all of the hourly staff working that day.  While this is a common practice at some restaurants, Red Lobster takes the position that its servers must provide the tip made on each sale even if the customers do not actually provide a tip.  In other words, if a party of 5 or 6 people refuse to tip their server, the "theoretical tip" will be taken out of the server's pay -- not out of the restaurant's profits -- and then placed into the "tip share" pot.   

Nevertheless, even if we concede that most of the day-to-day operational costs of the fast food industry are passed on to its workers, and even if we concede that it had already begun the trend of relegating its workers to "part time" status as early as 2006, and even if we concede that many of its staff were already "part time" workers to begin with, the question still remains as to whether or not ObamaCare will actually create a significant and unique burden on these businesses.

Health care insurance plans for individuals will run you about $6,000/year.  Taking this into consideration, John Schnatter of Papa John's estimates that ObamaCare will add an additional $5 to $8 million dollars of annual expenses to his business.   To compensate for this new cost, Schnatter has gone on record as saying that he will have to increase the price of his pizzas by 10 to 14 cents per pizza.  The good people over at Forbes, however, checked out his math and concluded that it doesn't quite add up:

Last year, Papa John’s International captured $1.218 billion in revenue. Total operating expenses were $1.131 billion. So if Schnatter’s math is accurate (Obamacare will cost his company $5-8 million more annually),  then new regulation translates into a .4% to .7% (yes, fractions of a percent) expense increase. It’s difficult to set that ratio against the proposed pie increase, given size and topping differentials, but many of their large specialty pizzas run for $16. Remarkably, a 10-14 cent increase on a $16 pizza falls in a comparable range: .6% to.9%. But the cost transference becomes less equitable if you’re looking at medium pizzas, which run closer to $12, meaning a .8% to 1.15% price increase.
For the sake of argument, let’s say that Papa John’s sells exactly half medium/half large specialty pizzas. Averaging the ranges for both sizes, then averaging that product yields a .86% price increase  — well outside the range of what Schnatter says Obamacare will cost him.
So is ObamaCare the sole 100% culprit responsible for higher prices being passed on to consumers and lower hours for workers?  Not exactly.  To be sure, smaller companies that just barely meet the 50 employee threshold may face a significant cost burden when ObamaCare takes effect.  However, this is the minority of employers out there.  The vast majority of employers (be they the fast food industry or otherwise) already provide health care to their full time employees, so for most companies they will experience little, if any, change in their bottom line.  And for those employers like the fast food industry who do not tend to provide health insurance for their employees, the majority of their workers (as many as 75% in some cases) are "part time" employees who will not require health insurance under ObamaCare.  As previously stated, many of these companies (over 90%) are turning significant profits and have been doing so consistently despite the recession.  Therefore it is difficult to imagine how a profitable corporation that can afford to pay its executive officers millions upon millions of dollars every year will somehow be forced to close its doors on account of being forced to provide health insurance to a minority of its workforce.   


QUESTIONS:
1. Are employers using ObamaCare as a scapegoat to cut back on workers' pay?
2. Will ObamaCare cause a real burden for many businesses out there?
3. Putting aside the moral implications involved, is it "bad for business" for companies to publicly declare that they will not provide health insurance for their workers? 
4. If ObamaCare did not exist, would the fast food industry still continue to reduce hours for workers?
5. If ObamaCare doesn't kick in until January 1, 2014, then how can it be forcing businesses to cut back on employee hours today?
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