Restaurants Shrug Off Obamacare

On tap for restaurants next year: price increases and fewer full-time workers, as many chains seek to offset rising costs likely to be brought on by President Obama’s health care reforms.


But critics of the Affordable Care Act should resist the urge to say "I told you so," because the most dire predictions are starting to look far off the mark.

An overall pickup in hiring in the hospitality business could more than offset any slowdown in hiring caused by health care reform. Price increases could be so small that few diners notice. And while some restaurant chains say they plan to substitute part-time workers for full-time ones — to reduce the number of employees they’re required to provide health care coverage for — other changes required under Obamacare could help restaurants and their workers both.

“If it works as it’s supposed to, we’ll probably see a happier, more engaged workplace,” says Victor Fernandez of People Report, a human-resource consulting firm that recently published a forecast of the restaurant industry in 2013. “The law will provide some good benefits compared to what people have now.”

Since Obama’s controversial health care reforms became law in 2010, critics have insisted the Affordable Care Act will be a “job-killing” disaster that will bring the U.S. economy to its knees. Opposition to the law is so visceral that the CEO of the Papa John’s (PZZA) pizza chain provoked a firestorm last year when he predicted that Obamacare would boost the average cost of a pizza by 15 to 20 cents — the kind of price hike most people wouldn’t even notice if it weren’t tied to high-profile political warfare.

As the October 1, 2013 deadline for setting up health care "exchanges" draws near, many restaurant chains are finalizing their plans for how to deal with the new Obamacare requirements. A few restaurant executives continue to warn that the law will cost jobs and reduce pay. Andy Puzder, CEO of CKE Restaurants (parent of Hardee's and Carl's Jr.) recently told the Wall Street Journal that Obamacare will compel companies such as his to install more self-serve kiosks that don't require workers.

Fatburger and other chains have started to experiment with work-sharing deals in which employees work part-time at two different franchises, so they never hit the 30-hour threshold at one establishment that would allow them to qualify for benefits under Obamacare — even if they work 5o or 60 total hours in a week.

More prevalent trend

But the more prevalent trend among restaurant chains may be a reluctance to make big changes in response to Obamacare, and even a declining need to do so. Darden Restaurants (DRI) which operates Red Lobster and Olive Garden, said last year, for instance, that it planned to experiment by hiring more part-timers and fewer full-timers.

But the experiment failed early: After bad publicity and a drop in sales, Darden said it wasn't cutting back on full-timers after all. And earlier this year, Wendy's said it estimated the cost of complying with Obamacare at about $5,000 per store — down from an estimate of $25,000 the year before. The restaurant industry is an important barometer on Obamacare because many franchises fall squarely within the law’s target zone: They employ more than 50 workers, which means they’d have to pay penalties if they don’t offer insurance to everyone who works 30 hours per week or more.

Since many restaurants don’t currently offer insurance, the new law could amount to a big added expense for companies with a lot of full-timers. And since restaurants employ more than 10 million Americans overall, big changes in employment policies could have widespread effects. The Obama administration recently delayed the biggest employer requirements under the ACA by one year, to January 1, 2015, giving companies more time to comply.

But many restaurant chains have already devised strategies for dealing with the law, and the outlook so far is for a new set of demands that will force some changes to the way restaurants operate — but won’t necessarily be more disruptive than other types of cost increases or pop-up problems businesses deal with all the time.

People Report's 2014 forecast, for instance, says the cost of providing health care for employees could rise by as much as 25% per year under Obamacare. Nearly 60% of chains surveyed said they’d have to raise menu prices to help cover cost increases. And 80% of the companies said they planned to substitute part-time workers for full-timers.

Such developments seem to vindicate claims that Obamacare will put people out of work and make it harder for lower-earning workers to get ahead. Yet the People Report forecast also calls for an upbeat year for the restaurant industry and its employees in 2014, with modest raises and improvements in benefits for many workers after several years of cutbacks. Few chains surveyed by the firm said they plan to cut jobs.

Some economists even think a move to more part-timers could boost hiring, since companies might be more comfortable hiring three part-time workers they can easily get rid of during a downturn than one full-timer they make more of a financial commitment to. Such changes would probably be far less disruptive than the scary scenarios predicted by Obamacare critics.

Roughly 60% of the employees on restaurant payrolls are already part-timers, so adding more won’t fundamentally change the way most restaurants operate. A few restaurants have already tried to expand health care coverage to part-timers and found few takers, perhaps because the premiums were too costly or people didn’t plan to stay in their jobs for long. The same scattershot approach is becoming apparent in other industries.

UPS (UPS) made headlines recently when it said it plans to stop offering health care coverage to spouses of white-collar employees who are able to obtain coverage someplace else, a strategy other companies are likely to adopt. That may give some families fewer health insurance options, but it’s hardly a disaster.

Meanwhile, a recent survey of private employers conducted by PwC found little evidence of job cuts or major workplace changes likely to be caused by Obamacare.

Biggest headache

The biggest headache for employers, in fact, may be the law’s complexity and the massive amount of misinformation circulating about what the law actually requires. Some small-business owners fear ruinous penalties or paperwork requirements, for example, even though companies with fewer than 50 workers are exempt from the law and may even benefit from it, since their workers could be eligible for insurance through an exchange.

And as more employers that are affected by the law get familiar with the details, they’ll probably do what businesses typically do: fill out the forms, pay the fees, grumble about the hassle and get on with life. In the meantime, the rollout of the Affordable Care Act will probably be bumpy enough to give critics more reason to attack it, yet smooth enough for supporters to claim it’s a success.

Americans may never agree on the merits of Obamacare, but as implementation of the law replaces speculation, there may be less to argue about.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.