Legal and Economic Woes Threaten Restaurant Industry

The National Restaurant Association, along with the Council of State Restaurant Associations and the National Federation of Independent Business, filed a suit against the U.S. Department of Labor (DOL) over its new tip-credit-notice regulation, stating the DOL did not allow them to comment on the new rules.

The new rule took effect immediately on May 5 without giving restaurants a chance to comment, forcing employers to comply with the tip-credit regulation within 30 days. The lawsuit argues the DOL failed to comply with the Administrative Procedure Act, which requires federal agencies to seek out public comment on proposed regulations.

In April, the DOL changed the Fair Labor Standards Act to stating restaurant owners would have to explain to each employee the exact amount of tips that would be credited toward minimum wage, noting that the tip credit wouldn’t apply to employees who hadn’t received notification from their employer. Essentially, if the employer failed to notify employees about the tip credit, the employer would be liable to pay the employee cash to guarantee the worker was receiving the federal mandated minimum wage, while also facing civil penalties of $1,100 if they didn’t comply.

Tip credits allow restaurants to count employees’ tips as part of their wages. Before the DOL regulations, employers had to inform workers that tips would be used as a credit toward the minimum wage.

The DOL said they published the rule in 2008, allowing organizations to comment publicly on the ruling. The restaurant organizations, however, claim nothing in the ruling put the public on notice of these significant changes.

This complicated issue is an added burden on restaurant operators, who also are dealing with a sluggish economy. They now face an increased regulatory burden and expense in order to comply with this new ruling.

This news comes on the heels of even more disparaging news for the restaurant industry. Technomic, the Chicago-based hospitality industry consulting and research firm, shows in its most recent research that restaurants and consumers don’t feel confident about the overall economic recovery, estimating that restaurant sales growth will fall 0.8%, while the real growth rate for the full foodservice industry will fall 0.6%. Currently, many restaurants are raising menu prices as food costs increase, though most consumers recognize that economic factors (higher gas prices, high cost of ingredients, the overall economy, etc.) are to blame.

While that's a bleak outlook, trends show the industry is improving and experiencing more sales recovery in 2010 than 2009. According to Technomic, sales for the largest 500 chains rose 1.8% in 2010, with one in five operators reporting they did indeed feel recovery from the recession. Also, the restaurant sector is expected to grow 2.6%, an improved rate compared to the 1.6% growth calculated last fall.

Employers and operators have cause for concern with new regulations and indicators of a slower-than-hoped-for recovery, as well as more operator liability than expected, but if operators remain cognizant of changes and aware of where the industry is headed, they’ll be able to innovate and survive these recent economic and legal woes.

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