Minimum Wage Myths and Realities

 

Minimum Wage Myths and Realities

January 19, 2019
Twenty-nine states and some cities have minimum hourly wage rates above the federal $7.25 minimum.  Twenty states are raising their minimums again in 2019; some already are at the $15.00 widely-proclaimed living wage; other minimums are raised to $12.00 as part of annual step-ups to $15.00 by 2023.

Some minimum wage increase advocates say a person working full-time at the minimum wage should be able to support a family.  At $15.00 an hour, a full-time worker would earn $31,200 a year.  At $12.00, it would be $24,960.

According to the U.S. Department of Health and Human Services (www.healthcare.gov), the current “poverty line” for a family of three is $20,780; for a family of four, $25,100 and for five (mom, dad, three kids), $30,170.

Could a family of three to five people survive, let alone thrive, on $25,000 to $31,000 in New York, Chicago, Los Angeles or any other  major metropolitan area?

However well-intentioned, the minimum wage increase is – and has been since it went up from 75 cents to a dollar in 1954 – a temporary bandaid.  Necessary for folks at the bottom of the ladder, but still a short-lived benefit.

When the minimum wage increases, it has a ripple effect upwards, at least for the next four or five wage levels.  Since labor cost is a component of a company’s, a college’s, a non-profit’s and a government’s total costs, prices, tuition and institutional and government revenues must rise to cover higher costs – or organizations must be willing to absorb reduced profits or even losses – or take other steps to compensate for higher labor costs.

As these steps are taken, up the line from the local shop to the giant corporation, there are two effects: prices rise and organizations, especially businesses, strive to increase productivity – achieve the same -- or higher -- output with fewer labor hours.

Rising prices is the definition of inflation, eroding the value of the higher minimum wage until, in three or so years, it’s time to raise the minimum again.  That’s been going on since the federal minimum wage law went into effect in 1938 at 25 cents an hour, $10.00 a week.  (As a point of reference, my grandfather was a trolley car driver in Brooklyn in the late 1800s-early 1900s for $7.00 a week. Thirty years later, $10.00 wasn’t much of an advance)

The other effect of rising labor costs is increased automation, driving up productivity but reducing work opportunities for the less-skilled people at the bottom of the ladder, those the minimum wage increase was intended to benefit.

Nothing I’ve said here is a novel insight; it’s been said over and over every time the topic of increasing the minimum wage comes up.  The problem is the stance of the two sides: The proponents talk persuasively about the needs of people to earn a decent living; the opponents warn persuasively about the costs – high prices, fewer jobs for the un- and marginally-skilled worker.

Both are more-or-less right.  Higher wages help poor people.  Higher costs force prices up and/or efficiencies that reduce the need for labor.  Since nothing is done to adjust cause and effect, the cycle starts up again.

If the cost of the basics of life – food, clothing, shelter and an internet connection – somehow stays flat or rises less than the minimum wage rises, it’s likely the increased wage would provide a greater benefit to more people and last longer.  If more and more people emerge above the poverty line, however it’s defined, the benefit to the nation as a whole would be enormous.

Imagine what it would be like if the poorest people in the country had enough to eat, decent clothes, a non-leaky roof and an electronic link to the rest of the world (and of course, a good education) so they could climb from the bottom rungs up a few so the next cohort filling in below also could climb the ladder, following upward behind them -- paying higher taxes on increasing income, reducing the need for government aid and contributing to the nation's well-being.

How could that happen?  It would take a collection of wiser heads than mine, especially heads attached to the movers and shakers of government, labor, social movements and business – the people with most skin in the game – to put aside their self-interests to work it out.

Could that, would that ever, happen?  I hope so.  It’s the only answer I can see.
                                                                                                                            - Tom Mac Dermott

You can receive Clarion Group's newsletter, Dining Insights, in your postal mail box or via e-mail. Send your contact info to us at info@clariongp.com.  To learn about the services we offer, visit our website, www.clariongp.com or call Tom Mac Dermott, 603/642-8011 or Ted Mayer, 617/875-7882.

Are You a Co-Employer With Your Food Service Contractor?

            Companies, colleges and others who have outside contractors operating their on-site food services should beware of the risks they face in the rapidly evolving arena of employment law.  The widely publicized finding of the National Labor Relations Board General Counsel that McDonald’s is responsible for the employment actions of its franchisees is fair warning.

            The NLRB’s General Counsel has “found merit” in charges that McDonald’s and some of its franchisees “violated the rights of employees,” according to a NLRB press release.  “If the parties cannot reach settlement in these cases, complaints will issue and McDonald’s USA LLC will be named as a joint employer respondent.”

            Another warning comes in the NLRB’s current consideration of the relationship between companies and on-site contractors.  The case involves a company and its on-site service contractor.  A union is trying to have the company declared a joint employer who must participate in the collective bargaining between the contractor and the union.  The case is pending. 

             If these views stand, it isn’t a far reach to see how an organization could be held responsible for the employment actions of food service and other contractors on its premises.

             The U.S. Department of Labor, other regulators and labor unions have long tried to tie the host company or institutions to its service companies’ employees as a joint employer.  Sometimes, the host has made it easy to be linked – and held responsible financially – for actions over which it has, at best, only indirect control.

            The NLRB defines joint employment as when “two entities . . . share or co-determine those matters governing the essential terms and conditions of employment [including] matters relating to the employment relationship such as hiring, firing, discipline, supervision and direction.”

            When an organization requires its onsite food service contractor to submit candidates for key management positions and makes the selection itself, it’s opening the door to a finding that it is a joint employer.

            Other actions organizations often take that can lead to a finding that it is a joint employer with its on-site contractor include:

            • Negotiating with the contractor over the wage rates, pay raises and benefits the contractor offers its employees working on the premises.

            • Directing the contractor to promote, demote, transfer or take another action affecting one or more of the contractor’s employees.

            • Telling the contractor what hours its employees should work, rather than what hours of service to provide.

            • Paying bonuses or making other payments to the contractor’s employees or authorizing the contractor to make the payments and reimbursing the expense.

            • Treating the contractor’s employees as “members of the family” with privileges the same as, or similar to, those of its own employees – access to the on-site fitness center, for example.

            The basic defense against a claim of a joint employer relationship is a strong, clear statement in the operating contract that the contractor is the sole employer and has sole authority over all aspects of its employment relationships.    But if management interferes, even indirectly, in the actions of its on-site contractor related to the contractor’s employees and their wages, working conditions and the like, then the barrier created in the contract crumbles.

Clarion Group can analyze your dining and hospitality services and contractual relationship with your provider to help you avoid creating a joint employer relationship -- and improve operational and financial performance of you services.  For information, contact Tom Mac Dermott, president (603/642-8011 or TWM@clariongp.com) and visit our website, www.clariongp.com.

         

Ensure Your Food Service Operating Contract Protects Your Interests

The managers of corporate and campus food services and related hospitality services often make a mistake when they outsource these services by accepting the vendor’s "standard contract." Based on our experience, we recommend that you don’t accept this contract. It’s one-sided and not in your favor.

This isn’t the same situation as renting a car or buying a computer program where your options are take it or leave it. A food service contract, worth from several hundred thousand to many millions of dollars in sales, is much more important to the vendor than an individual customer is to a car rental company.

When we’re helping a Clarion Group client select a food service operator, we turn the tables and present the vendor with our "standard contract." We draft the contract in collaboration with our client’s attorney to ensure it’s fair to the vendor, but clearly delineates the vendor’s responsibilities and fully protects our client’s interests.

We’ve developed our contract format over two decades of food service consulting and adapt it to each client’s specific circumstances. Then we negotiate the final terms and conditions with the vendor, with our client’s participation and final approval.

Food service operating agreements used to be simple two- or three-page documents, but changing times and circumstances in the food service industry, government regulations and other factors have dictated that these agreements be much more detailed.

Important points to be included in a food service management contract, often omitted in the contractor’s proposed form:

• The vendor’s responsibilities should be clearly defined and the vendor should agree to perform its services to a high standard, defined as clearly as possible.
• The vendor should be an independent contractor, solely responsible for its employees and for its actions and not able to act as an agent for the client company. (If the vendor makes purchases or other commitments as the client’s agent, the client can be held liable for the vendor’s unpaid debts or other commitments.)
• The vendor has sole responsibility for the food it serves, from the farm field to the diner’s plate. Its program for ensuring the food it serves is wholesome, healthy and safe for consumption should be clearly described in the operating contract.
• Financial terms should be unambiguous, including the contractor’s responsibility for producing accurate operating statements promptly and providing satisfactory supporting material for its claims for reimbursement of costs. A contractor can produce financial statements within 10 days of an accounting period’s end date.
• Contractors receive rebate payments from their vendors, which they keep as additional income and do not disclose to clients. We have negotiated for our clients to receive a share of these rebates.
• The contract should be enforceable in your home state, not the vendor’s.

These are just highlights of the terms a food service contract should include. In our role as consultants, we level the playing field for our clients in their dealings with food service contractors because we know the players, their tactics and objectives. We ensure our clients have comprehensive, fair and enforceable contracts to guide their relations with their on-site service operators.

To learn how Clarion Group can ensure the operating agreement with your current or future food service contractor can be both fair to both you and the operator and fully protect your interests, contact us at info@clariongp.com or call Tom Mac Dermott, president, at 603/642-8011. 

Proposed OT Regulations Will Upset Management Structures

Proposed OT Regulations Will Upset Management Structures

April 14, 2014

Food service operators who are worrying about a possible increase in the minimum wage are looking in the wrong direction.

The federal government’s proposal to tighten regulations on exemptions from overtime pay has received little attention, but if implemented, will have a far greater and more immediate impact on corporate and campus food service operations that an increase in the minimum wage.

Operators will have to rethink and restructure their on-site food service management teams.

In March, President Obama directed the Department of Labor to revise the regulations covering the minimum salary level that exempts an employee with some supervisory responsibility from receiving time-and-a-half pay for work performed over 40 hours in a week. Currently, the minimum is $455 a week or $23,660 a year. Proposals for the new minimum are as high as $984 a week or $51,168 a year.

In contrast, the impact of a raise in the federal minimum wage from the current $7.25 to a proposed $10.10 an hour – when it happens – will be minimal. The minimum wage increase will be phased in over two or three years, cushioning its impact. Many states have already raised their minimum wages and federal contractors must pay at least $10.10 an hour. Few food service employees are paid less than $8.00 an hour now.

Federal law permits an employer to pay employees who have some supervisory responsibilities, such as overseeing two or three other employees and exercising some independent judgment in the performance of their duties, on a salaried basis. They aren’t compensated for hours worked beyond 40 in a week.

In a food service operation, these would be chef-managers, chefs who oversee other food preparation workers, assistant managers and many supervisor positions, such as shift leaders. Many of these positions don’t pay much more than the $23,660 minimum to qualify. When that minimum is raised, even to $35,000 or $40,000 a year, persons in those positions will no longer be exempt from time-and-a-half pay. Operators will have to raise salaries, redefine salaried positions or begin paying for overtime work on an hourly basis.

What ever course operators choose, their labor cost will rise, much more than it will when the minimum wage is increased.

Latest Dining Insights Issue Published

The Spring issue of Dining Insights is at the printer and ready to go, featuring . . .

Trends to watch, from sales and food cost to distributor mergers, technology and greener greenness.

Proposed OT regs will hit food services, changing the rules for lower-paid managers.

Fresh, local foods, how they get from farm to your fork.

Miss Dancing Waters' diamond toenail and your food service vendor.

. . . and more

For the current issue and a complimentary subscription, send your name, position and address for the paper edition or your name, position and e-mail address for the electronic edition to: info@clariongp.com

How to Increase Sales and Profits in Corporate Food Service

The signs are pointing upward for corporate food services, according to two recent surveys of the industry, but not for everyone. The story’s a little different at every company.

 Overall, customer counts and the average sales per customers increased in 2012, compared to 2009 at the depth of the recession, according to the 2013 Industry Standards and Benchmark Comparison study conduced by the Society for Hospitality and Foodservice Management.  The study found customer counts increased by10.6% and customers were spending 16.5% more for breakfast and 9% more for lunch than in 2009.

 The unevenness of the improvement is illustrated in the findings of a separate survey by FoodService Director magazine, where 59% of corporate food service operators reported a 10% increase in sales this year over last, but 29% reported a 10% decrease in sales.

The results reflected the findings of a survey of corporate food service managers conducted earlier in the year by Clarion Group and Food Management magazine, where half of respondents reported sales increased by 5% or more in 2012 over 2011. The other half said sales were flat or declined.

 Corporate food service operators have to work harder to achieve these favorable results. Increased employment and price increases alone won’t do it.  Operators have to do more to entice recession-conditioned customers back to purchasing their meals in the company café. Every survey on the subject says people are more attuned to the value of their purchases than to just price.

 Here are a few suggestions  corporate food service operators can use to increase sales and the bottom line:

• Sell the sizzle. Active marketing and promotions via the company intranet, posters and fliers can emphasize periodic "specials." They needn’t be reduced prices, just greater perceived value.

• Special events, promoting a holiday or a new food offering every few weeks will help bring in customers who usually go out for lunch or bring their own to work. If you get them once, you may be able to convert them to regulars.

• Make good use of social media to promote the café. A small restaurant chain in California is using an app to communicate with customers in its limited territory. The same would work for a corporate food service operation.

• A visiting chef from a popular local restaurant almost always attracts a bigger crowd. You can keep them coming by offering your version of the restaurant’s most popular dishes on succeeding days.

• An "action station" where a chef prepares meals to order at the counter as the customer watches is the surest way to convey "fresh" and "healthy" to you customers.

 Above all make sure the food you offer is good, service is warm, friendly and prompt and the café is clean and attractive. Combine all these elements and sales and profitability are bound to rise.

About Clarion Group
Clarion Group is an consulting firm that advises companies, professional firms, colleges and universities, independent schools and institutions in the management, operation and improvement of their in-house employee/student food services, catering, conference, lodging and related hospitality services throughout the U.S. and Canada.

For information, contact:
Tom Mac Dermott, FCSI, President
Clarion Group
PO Box 158, Kingston, NH 03848-0158
603/642-8011 or TWM@clariongp.com
Website: www.clariongp.com

Texas A&M Got Big Money for Outsourcing Dining Services. What's Their Risk?

Article revised December 2, 2013

Be careful what you ask for.  You might get it, and a lot more in the bargain.

 We're talking about the large investments major food service contractors are offering colleges for the opportunity to operate their campus food services. The dollars certainly are enticing, but not quite so attractive when you look at the long strings – really thick cords – attached to them.

The biggest recent example is Texas A&M University, College Station, TX, which outsourced its food service operations to the Chartwells Division of Compass Group last year.  A separate Compass division also was awarded landscaping and maintenance contracts.

 With an enrollment of 56,000 students including 8,000 campus residents, Texas A&M certainly isn’t a typical university, but the rewards the administration hopes to receive and the risks they're taking, scaled down, are the same for any college or university that accepts a contractor's "investments."

The financial commitments Chartwells made to the university to gain control of the campus food services are enormous, yet it has already caused problems, maybe more problems than it cured.

According to the local newspaper, The Eagle, the company paid the university a "signing bonus" of some $45 million upon being awarded a five-year contract, with an option for another five years. It paid another $6.5 million this year and spent some $5 million in dining facility renovations, with additional payments to come throughout the contract’s life.  The total cost to Chartwells over the 10 years -- if the contract runs that long -- is the $45 million signing bonus, plus a total of $25 .5 million in facilities improvements, a 5 percent commission on sales in the first year and a 10 percent commission on sales in the remaining years, about $2.5 million,  for a potential total of around $73 million.

The administration apparently sees that as a real bargain, since it reported losing $1 million a year running the food service on its own 

 That’s the good news.  But here’s the other side:  Meal plans for resident freshmen and sophomores have been made mandatory. By the 2016 academic year, all 8,000 resident students will be required to joint the meal plans at prices that currently range from $1,236 to $2,096 per semester and will increase by up to 3% a year. When all resident students are required to belong to a meal plan, Chartwells’ revenue from the plans will be about $27 million a year; potentially $270 million if the contract runs for the full ten years, not counting revenue from retail outlets, catering and other sources.

Of the total $270 million in potential meal plan revenue, the $73 million in payments and commissions equal some 27%.  Chartwells has to generate a profit on top of that big enough to justify the payments, probably 8 to 10 percent of sales, leaving about 65% or less of total revenue for food, labor and operating expenses.

But what if all doesn’t go well?  The Eagle reports a great deal of student unhappiness and agitation over the mandatory meals plans, price increases and new restrictions on meal plan options.  Already,  Chartwells has had to replace the campus general manager, a sure sign of trouble.

 A college or university has only one good option when its food services become unsatisfactory and the contractor cannot improve them.  It must replace the contractor. But wait, what about those dollars the contractor provided? The institution has to reimburse all the money the contractor provided, prorated by the number of years left in the contract. Not many institutions can afford that – the money has been spent – so it may have to go along with the unsatisfactory food service operation and hope the contractor can improve its performance.

 Of course, the money isn’t really an investment, it's an advance or loan.  Repayment comes from higher meal plan charges and other prices and maybe reduced services. The college never knows how much return the contractor is making on the loan. It’s buried in the cost structure of the financial reports it sends to the client. A college would do better to borrow the money at a known interest rate and let the contractor operate at a known rate of profit.  

 College and university administrators should carefully look the gift horse in the mouth and think about the possible long-term consequences to the campus food services and the institution of accepting immediate money in exchange for a long-term commitment to a single provider.

About Clarion Group   
Clarion Group is a consulting firm that advises colleges and universities, companies, professional firms and institutions in the management, operation and improvement of their in-house employee/student food services, catering, conference, lodging and related hospitality services throughout the U.S. and Canada.

For information, contact:
Tom Mac Dermott, FCSI, President
Clarion Group
PO Box 158, Kingston, NH 03848-0158
603/642-8011 or TWM@clariongp.com
Website: www.clariongp.com