Selections Newsletter - Spring 2016

March 2016


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Table of Contents

Who’s the Boss? Changes in Joint Employer Liability
Compensation Strategy in the Restaurant Industry
Why Should Restaurants Embrace Transparency in Management?
Client Spotlight: Smiling Moose Rocky Mountain Deli
PErspective in Restaurants: Private Equity Hungry for Deals in the Restaurant Sector

Who’s the Boss? Changes in Joint Employer Liability

By James D. Woods, Ph.D., Chris W. Johnson, Marcy Wright 

Last April, the restaurant industry warily watched as a series of National Labor Relations Board (NLRB) hearings sought to name fast-food giant McDonald’s as a joint employer with its individual franchisees. 

We wrote in Franchising World about how changes in joint employer liability could affect franchisors and franchisees, potentially upending long-standing industry employment practices and causing major ripples throughout the restaurant and retail industries.

The potential economic costs of such a significant change fostered worries in the restaurant sector that franchisors would struggle to absorb new costs for overhead and liability, and that some would ultimately need to buy back or shut down locations. Though the NLRB has offered some clarity around the standard in the months since the initial hearing, uncertainty remains.

What has the NLRB ruled so far?

In August 2015, the NLRB redefined its standard for determining joint employer status, expanding the standard that had been in place since 1984. In its decision, the NLRB asserted that an entity with the potential to exercise control over another entity’s employees–regardless of whether that control is directly exerted–is a joint employer and therefore obligated to assume responsibility for the other entity’s employment practices, such as participating in the collective bargaining process. This ruling has direct implications for restaurant franchisors, who might require franchisees to apply certain standards for the purpose of consistency or trademark protection. Because these practices can indirectly affect employment conditions of the franchisees’ workforce, some commentators have argued that they could satisfy the new standard for determining a joint employer.

A few states, such as Michigan, Texas, Virginia and Wisconsin, reacted with legislation designed to redefine “employer,” protect franchisors and maintain the traditional model the industry has operated under  for decades. The NLRB’s first application of the new joint employer standard, the Browning-Ferris case involving a Houston-based waste management firm, also offers some guidance as to which practices could precipitate a finding of joint employer status. Specifically, the NLRB stated that a parent entity could be considered a joint employer for another company’s (or companies’) workforce if it: 
  • Maintains a common-law relationship with the employees in question, meaning the joint employer has control over what employees do and how they perform tasks, and
  • Has sufficient control over employees’ essential terms and conditions of employment to permit meaningful collective bargaining.

What’s on the horizon?

The issue is once again in the spotlight after the Department of Labor earlier this month issued new guidance broadening the definition of joint employer, explaining that under the Fair Labor Standards Act of 1938 and the Migrant and Seasonal Agricultural Worker Protection Act of 1983, “it is possible for a worker to be jointly employed by two or more employers who are both responsible, simultaneously, for compliance.” The NLRB is also preparing to hold hearings, though they’ve been delayed, to determine whether McDonald’s had a significant hand in setting work conditions for employees who were fired in association with wage protests in 2013.

What does this mean from an economic perspective for restaurants considering the impact of these changes on their business? While the uncertainty has eased somewhat since last year, it remains critical for franchisors to evaluate how their workforce-related practices may expose them to potential liabilities under a joint employer standard, such as employment-related lawsuits filed by their franchisees’ employees. Moreover, both franchisor and franchisee should consider analyzing the economic impact of any future employment practices they may implement through the lens of how those decisions may trigger a joint employer determination.

James Woods, Ph.D., is a principal at BDO Consulting. He can be reached at [email protected].
Chris Johnson is a director at BDO Consulting. He can be reached at [email protected].
Marcy Wright is a regional marketing director at BDO. She can be reached at [email protected].


Compensation Strategy in the Restaurant Industry

By Tom Ziemba, Ph.D.

In step with the industry as a whole, compensation for restaurant managers and professionals is evolving faster than ever to support increased focus on–and demand for–enhanced customer experience. Restaurants are recalibrating their compensation practices to respond to the competitive environment and attract career-oriented staff in an increasingly tight labor market.

Average hourly wages of restaurant industry employees increased at a 3.7 percent rate on a year-to-date basis through late 2015, according to figures from the Bureau of Labor Statistics. To contend with these increases, it’s important for restaurants to put a plan in place.

What’s the key to having an effective compensation program in this environment? Preparing a well-articulated strategy that serves as a guide for making compensation decisions. Furthermore, building a management compensation package will ensure that a company can attract and retain talent that will contribute to the company’s growth.

The following are key components to consider when creating your compensation strategy:

Market Definition: Most companies use both local and regional markets to benchmark compensation levels for positions such as restaurant manager and regional manager.

Market Comparisons and Market Position: Consider and define target total compensation, including base salary, bonuses and long-term incentives for each job group. It’s worth noting that in the most competitive markets, a target total compensation at the 75th percentile of the market can be essential for retaining top talent.

Pay Mix: Based on our research, about 75 to 90 percent of total pay for management positions, such as general manager or restaurant manager, typically comes in the form of a base salary. The rest is variable pay, like annual performance-based incentives and, possibly, long-term compensation.
Annual Incentives: Annual incentives are typically determined by more than one performance metric. For example, one popular incentive program among restaurants is profit sharing based on regional or restaurant profits after controllable expenses. After a specific profitability threshold is met, the percentage of “sharing” accelerates.

Long-term Incentives: There is a growing trend of including regional managers and high-performing restaurant managers in long-term incentive programs to promote loyalty and boost retention. Equity programs are preferred, but aren’t always viable. Of course, the company must have an ownership structure that is willing to share a piece of the pie with top performers.

Another program gaining in popularity, regardless of the equity structure of the company, is a three-year performance unit plan. Units, which have a cash value, are awarded after three years. The value is often based on both the performance of the group receiving the unit (e.g., a region) and the appreciation in the value of the company over three years.

A key goal of these programs, whether equity or cash-based, is to provide a sense of ownership in the company, helping management feel more vested in the business and its successes.

Deferred Compensation/Benefit Programs: Some benefit and deferred compensation programs have historically been viewed as entitlements with little relationship to individual or corporate performance. However, amid heightened competition for mid-management talent, these programs can promote long–term retention in an industry notorious for turnover.

401(k) with Vesting Match: 401(k) plans are a traditional—yet still effective—incentive tool to encourage retention. A discretionary match with a vesting schedule can serve as an incentive for key employees and management to save for retirement and stay to earn the benefits of vesting. For example, a plan can start with zero vesting for the first three years of employment and then jump to 100 percent cliff vesting, or it can be a gradual schedule of 20 percent per year with full vesting after 5 years.

Retention Bonuses: Retention bonus programs run the gamut among restaurant companies and can take a number of different forms. Essentially, they stipulate a promise to pay a lump sum after a period of employment (e.g., three years). The amount is usually established as a percentage of base salary at the beginning of the vesting period.

One of the key differentiators among companies in this industry is the ability to both attract and retain talent. The fluid nature of the talent pool makes job changes in pursuit of a few additional dollars an ongoing reality that’s unlikely to fade. A well-developed compensation strategy can not only help mitigate this risk, but also bolster loyalty and strengthen the commitment of employees to their company.

Tom Ziemba, Ph.D., is a senior director in BDO’s Compensation and Special Services practice. He can be reached at [email protected].


Why Should Restaurants Embrace Transparency in Management?

By Dirk Ahlbeck

As Jack Stack says in his book, The Great Game of Business, the more employees know about their company, the better the company will perform.

He goes on to outline the goal of open book management: to teach people how to work together to achieve common goals.

Open book management is a philosophy of transparency that includes the sharing of financial information with employees so they become aware of the implications of their actions, where the business stands at any given moment and how they can contribute to the business in the future. The concept is popular among many restaurants, originally gaining popularity and prominence with business consultant John Case’s book on the subject.

While some restaurants have a hard time buying into the idea of open book management and consider the idea crazy, anti-business and a threat to security and privacy, more and more business owners are adopting the style. Open book management styles satisfy the thirst today’s workforce has for transparency and honesty in business. It also helps employees feel more vested in the company and its successes by helping them understand exactly how the business works and how it makes–or doesn’t make–a profit. Information is shared as an educational tool and not as a way to intimidate, control or manipulate people. If used correctly, the practice can contribute to a satisfied and productive staff, as well as improve retention.

It’s important to note that not every detail needs to be shared in order for a restaurant to see positive results. Management transparency, when employed strategically, can give restaurant employees direction and help them visualize their own impact on the restaurant’s bottom line. Further, restaurant owners who create a free flow of information will likely see a stronger bond of loyalty and trust with their staff, which helps prevent an “us versus them” mentality.

On the other hand, revealing too much information has its disadvantages. Risks include information security concerns, fraud schemes and potentially overwhelming workers with too much financial information they cannot understand. Restaurants can avoid pitfalls by creating a roadmap for presenting fiscal information to their employees. Consider using a financial whiteboard to post weekly results and metrics, including sales, costs, guest retention figures, customer comments and a sales thermometer. Share and discuss the information at regular fiscal meetings open to all employees.

Explaining the company’s metrics and working through specific line items as a group might require some investment of time and resources. However, improving transparency practices can help management and employees come together as a team, understand how their roles function as parts of the whole and, ultimately, boost performance.

Dirk Ahlbeck is a tax partner in BDO’s Restaurant practice. He can be reached at [email protected].


Client Spotlight: Smiling Moose Rocky Mountain Deli

Our own Dustin Minton sat down with client Sue Daggett, CEO of Smiling Moose Rocky Mountain Deli, to delve into her concept, its recent rebranding and ongoing growth strategy.

Tell us a bit about the history of Smiling Moose Rocky Mountain Deli—how did it start, and how has it evolved over the years?
Inspired by the adventuresome spirit of the Rocky Mountains, a group of close, mountain-loving friends opened the first Smiling Moose in 2003 in Edwards, Colo., to meet the demand for a fresh, bold and hearty meal in a welcoming environment. The name Smiling Moose Rocky Mountain Deli draws on the adventurousness of the Rocky Mountains and the friendly, gregarious nature of the employees who foster a culture of camaraderie between one another and guests.

Since the first deli opened, Smiling Moose has roamed beyond its borders to bring its exciting, robust menu and warm, mountain town experience to 18 locations across seven states including Colorado, Montana, North Dakota, South Dakota, Texas, Wisconsin and Wyoming.

Smiling Moose has now evolved into a place where guests can create made-to-order and unique, chef-created hot and hearty or cool sandwiches, chopped and tossed salads, savory soups, wraps, breakfast sandwiches and skillets with fresh ingredients and bold flavors.
In 2015, we embarked on a brand overhaul that included both a major menu update and complete restaurant redesign, as well as infrastructure and technology improvements. Working with four different chefs, Smiling Moose created or reimagined 20 menu items—over half of our total menu.

In 2016, the Denver and Edwards, Colorado, restaurants will be remodeled to the new restaurant aesthetic that reinforces the deli’s Rocky Mountain roots. All new Smiling Moose restaurants will have this design and existing restaurants will incorporate retrofits over the course of the next three years. Three levels of the remodel are being created to fit the revenue levels and investment requirements for a variety of franchisees.

You’ve mentioned that Smiling Moose underwent a rebrand last year. What did you hope to achieve with the rebrand, and what factors did you need to consider as you planned this initiative?
Prior to this rebrand, Smiling Moose made trade dress updates as we grew from the first location in 2003 to the 18 delis we have open today, but there were no company-wide design or menu updates during this time.

To gain a better understanding of who our guests are and what draws them to the brand, Smiling Moose conducted an extensive research project that highlighted the need for a new and more uniform restaurant design. The research showed that guests love the multi- sensory experience at Smiling Moose, from the smell of fresh-baked bread and sizzling meats on the grill, to watching salads being tossed in front of them and hearing the exuberant “Mo!” calls from the staff.

We also found that our guests tend to be rugged and outdoorsy, active, social, health-conscious doers who like customization and don’t love the idea of a chain.

To meet these guest preferences, Smiling Moose launched a brand update ranging from an interior redesign, infrastructure improvements and a reimagined menu, to a refined logo and new website focusing on these core attributes.

Smiling Moose has grown quite quickly over the past decade, expanding to other states and franchising the business. What factors enabled this growth, and how do you see this growth continuing in the years ahead?
Prior to 2015, Smiling Moose’s growth had been very organic. Entrepreneurs traveled to Colorado for work or vacation, experienced our fresh and unique menu, enjoyed the welcoming environment and wanted to open a deli of their own. When I joined in 2013, our founders and I realized there was a great opportunity to accelerate our growth.

The primary reason for Smiling Moose’s brand overhaul is to meet our goal of opening three to five new delis in 2016, as well as meet our longer-term goal of having more than 100 delis by 2020. The path for growth will include working with current franchisees to expand existing trade areas, adding new franchisees with restaurant experience and a desire to own multiple units, and strategically expanding the supply chain to support efficient growth and ensure brand quality and consistency.

Smiling Moose will focus growth in areas where the demographic mirrors its guest base, such as Arizona, Colorado, Minnesota, Montana, North Dakota, South Dakota, Texas, Utah and Wyoming.

What are some of the challenges you encountered as you grew the business? How did you overcome them?
Two years ago, we were recognized for having awesome food, a great culture and truly loyal guests, but our biggest challenge was that we did not have a unifying brand or the infrastructure and systems necessary for growth.

The good news is that we embodied the elements of a successful concept that are hard to achieve. Tweaking the brand and building the infrastructure around the already successful concept, while time-consuming and disruptive, was a more manageable challenge. In order to actually reposition the brand and lay the technology and systems foundations, we engaged outside resources–don’t be afraid to do so! We did a tremendous amount of research and partnered with those organizations who were a good cultural fit and provided “best in class” solutions. It has been a two-year adventure, but we now feel that we are positioned for growth and that the time spent will turn out to be a great investment in the longevity and success of the brand. 

What advice would you offer to a fast casual restaurant looking to grow? What should they consider if they’re thinking about franchising the business, and how does their size/existing footprint affect these considerations?
First and foremost, it is important to understand your concept’s authentic reason for existing from a consumer perspective. It is important to understand why guests frequent your concept and how they interact with the brand.  If this is clear, many of the elements—from the menu and service model, to the interior design and footprint—fall into place.

Whether a concept is looking to grow with a corporate store or franchise model, it is important to spend the time upfront to ensure that the operating model is scalable and establish the infrastructure, whether it be the menu, the design, the technology or the training programs. In a franchise model, it is critical to understand the benefits of your concept vis-a-vis the competition. While it is also important to have the support programs in place, these programs are the entrée into the game, and not necessarily the differentiator.  Finally, understanding the economic model of your concept will lead to better real estate decisions and will likely set prospective franchisees up for success.

Every concept is different and it is important to not only understand the consumer demographic information surrounding a particular location, but also to set target ranges for sales to investment, sales per square foot and occupancy costs in order to optimize a process by which decisions are made.

Looking at the restaurant industry as a whole, what do you see as some of the biggest opportunities facing the sector right now? The biggest challenges?
I see the biggest opportunity and the biggest challenge to be one and the same.  I see the next big industry trend to be the continuing evolution of guest-facing technology that will enhance the guest experience via online or mobile ordering, entertainment and mobile payment. New technologies will also continue to generate significant aggregations of data that brands can use to understand guest behavior and, ultimately, market to individuals, further customizing the  experience.

But how does an organization keep up with consumer-based technology advances and deploy fully integrated systems that will enhance the guest experience and maintain relevance in a quickly changing environment? While it is tempting to adopt the newest, sexiest technology, it is more important to have a strategic technology roadmap that results in an enhanced guest experience and/or improved operational efficiency. 

Another significant challenge is the availability and rising cost of labor. The challenge here, and the opportunity, is the need to create a culture and work environment that is differentiating and encourages retention. Now is the time to evaluate how well your organization’s culture is embodied throughout the entire team and whether your work environment appeals to the employees that you are attempting to retain. Retention in the current labor environment is a significant challenge, but the cost of higher-than-normal employee turnover is not sustainable.

Dustin Minton co-leads BDO’s Restaurant practice. He can be reached at [email protected].


PErspective in Restaurants: Private Equity Hungry for Deals in the Restaurant Sector

By Dana Zukofsky

PErspective in Restaurants is a feature examining the role of private equity in the restaurant sector.

Over the past year, private equity activity has heated up in the restaurant industry. Historically, investors wanted to see proof of concept in multiple markets, minimum revenues, EBITDA, number of units and a good story before they were willing to invest in a restaurant.

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For more information on BDO USA's service offerings to the restaurant industry, please contact one of the following national practice leaders:

Adam Berebitsky

Dustin Minton