April Fool’s Day will take on a new meaning for New York City’s businesses this year, when a paid sick leave law goes into effect. NYC is following the lead of other American cities like San Francisco, Seattle, and Washington DC by making it mandatory to pay employees for sick days. A bill was passed by the City Council last year requiring NYC employers with 20 or more employees to provide at least 40 hours of paid sick leave annually. However, after Mayor de Blasio took office this year, he proposed, and the city council passed, legislation changing the law to apply to all employers with 5 or more employees being required to give paid leave.
When the new law takes effect, employers will be required to accrue 1 hour of sick leave for every 30 hours of work with a maximum annual amount of 40 hours. At the end of each year, an employer can either pay out all accrued sick pay or permit an employee to carry it over to the following year. For those employees who receive some of their compensation in the form of tips, it appears that the sick pay they receive will only consist of the wage portion.
I appreciate the obvious benefits of this law which certainly promotes public health. However, I have several problems with it. First of all, it was passed last year and was supposed to impact only employers with 20 or more employees. The de Blasio administration is forcing these new changes on small establishments with no time for them to prepare. In addition, this new law undermines businesses that already give paid sick days to their employees. This law may make sense for some types of businesses that don’t have to replace a worker who does not show up for work on a given day. However, in a business like a restaurant you normally have to replace a worker who calls in sick. This results in the establishment paying one employee to work and one to stay home, increasing labor costs. Because, for the most part, there is no requirement for an employee to verify that he was sick, this law is really not a sick pay law, but rather a paid time off law. There seems to be a lot of debate about whether this law will have a negative impact on the city’s economy. No one knows for sure but we should be realistic and accept the fact that if labor costs increase, that added cost will be passed on to consumers!
A major investigation tipped of employees by the Department of Labor has Philadelphia sports bar and restaurant chain, Chickie’s & Pete’s, looking at a whopping $6.8 million in back wages and damages.
Chickie’s & Pete’s was found to have improperly taken tips from servers and to have violated federal overtime, minimum wage, and record-keeping requirements. Investigators from the Department of Labor’s Wage and Hour Division determined that Chickie’s & Pete’s required servers to contribute between 2 and 4 percent of their daily table sales to an illegal “tip pool.” Sixty percent of that money went directly into the pockets of Chickie’s & Pete’s sole owner, Peter Ciarrocchi, Jr. The illegally pooled tips – known to Chickie’s & Pete’s employees as “Pete’s Tax” – were paid directly to management in cash at the end of each shift.
In addition to confiscating tips, Chickie’s & Pete’s paid servers and bartenders a shift rate that often did not cover hourly minimum cash wage requirements for tipped employees. Other violations included: insufficient overtime pay for employees working more than 40 hours a week, unpaid mandatory meetings and training, and requiring employees to pay for uniforms.
“Restaurant servers are among the lowest paid workers in this country,” said U.S. Secretary of Labor Thomas E. Perez. “Tipped workers deserve better and this action shows that the Department of Labor is ready to stand up for them.”
The $6.8 million dollar consent judgment will be divided between 1,159 employees at nine Chickie’s & Pete’s locations. Additional penalties and requirements include: a $50,000 civil money penalty, enhanced external and internal compliance monitoring, education for employees regarding their rights under the FLSA, and mandatory statements disclosing the details of all company tip pools.
We’re calling 2013 a “ho-hum” year for merger and acquisition activity in the guarding and electronics security industry; not only here in the United States, but around the world as well.
Last year, we reported robust acquisition activity for 2012 with an increase of world-wide transactions of 52% over the 2011 year and 74% over 2010. However, in 2013, the overall acquisition activity slipped almost 25% over the 2012 year, yet still somewhat ahead of 2011 and 2010.
HOW WE FIND THE COMPLETED TRANSACTIONS
As a way of staying abreast of what’s happening in the buying and selling of security companies throughout the world, our firm is constantly searching the internet, reviewing security publications and pouring over annual reports looking for announcements relating to completed sale transactions. We also subscribe to several news release services that e-mail us when a transaction has occurred or is about to close; and we are constantly talking with owners of companies who have their pulse on what’s happening in the industry. This year we found hundreds of transactions for security related companies, however, we only tracked (and posted to our website) the ANNOUNCED activity in the contract security (guarding), central station alarm, “plain vanilla” systems integration and certain other sectors such as armored car company sale transactions. Also, we recognize that there are many smaller “silent” transactions that were not revealed to us because they were not announced or announced on some obscure reporting service, therefore will not be included in the charts that follow.
We invite you to view the details of these ANNOUNCED transactions in the “World Transactions” section of our website at www.roberthperry.com; then visit the site often to find out what’s currently going on in mergers & acquisitions for 2014.
THE TOP STORIES IN THE MERGER AND ACQUISITION ACTIVITY AROUND THE WORLD, AND PARTICULARLY IN THE U.S.
There were only three large transactions (revenues over $50 million – U.S.) in the guarding and cash-in-transit space, with the rest of the transactions in the electronic security space:
GUARDING & CASH-IN-TRANSIT:
• November 26, 2013- Universal Protection Service, a division of Universal Services of America and one of the largest providers of security services in the U.S., announced that they have acquired IPC International
• August 28, 2013 – G4S, the leading global security and outsourcing group, announces that it has reached an agreement with Garda World, to sell G4S Cash Solutions (Canada) Limited. (On January 17,2014, G4S announced the completed acquisition)
• April 02, 2013 – Universal Protection Service, a division of Universal Services of America and one of the largest providers of security services in the U.S., announced that they have acquired Allegiance Security Group from Trivest Partners, LP
Pinnacle Accounts Acquired by SAFE Security (in 3 transactions)
• October 09, 2013 – SAFE president and CEO Paul Sargenti reports that the company has more than doubled in size within the last year and recently acquired 6,000 additional accounts from Pinnacle Security
• March 11, 2013 – SAFE security has acquired approximately 11,000 security alarm monitoring accounts from Utah-based Pinnacle Security
• February 06, 2013 – SAFE Security announced this week that it has acquired about 24,000 alarm-monitoring accounts from Orem, Utah-based Pinnacle Security
• July 10, 2013 – Ascent Capital Group, Inc. announced today that its primary operating subsidiary, Monitronics International, Inc. has signed a definitive agreement to acquire Security Networks, LLC. (On August 16, 2013 Ascent Capital Group announced the completed acquisition)
OVERVIEW OF WORLDWIDE ANNOUNCED COMPLETED TRANSACTIONS
There were 93 ANNOUNCED transactions for 2013, compared to 113 in 2012 and 74 in 2011. The international companies, who were the active buyers in previous years, were again mostly on the sidelines for guarding company transactions. Securitas bought a few very small companies in Europe, with G4S not making any acquisition announcements in the guarding industry anywhere in the world for 2013. In fact, G4S was in the divesting mode for 2013, as evidenced by the sale of its Canadian cash-in-transit business described in the overview of large transactions above. As for the guarding industry in the United States, Universal Protection was, once again, very active and accounted for most of the 15 total transactions.
(2010 – 2013 Industry Acquisition Overview by Sectors)
(2013 Industry Acquisitions by Country)
(2010 – 2013 Guard Transactions Only – Comparing U.S. to Worldwide Totals)
(2013 U.S. Guarding Acquisitions by Quarter)
WHY THE SLOWDOWN IN ACQUISITION ACTIVITY FOR 2013?
For guarding and electronic security company owners, 2012 was the ideal year to sell in order to take advantage of the lower capital gains tax rates. The Federal long term capital gains tax rate was 15% for 2012, but increased to 20% in 2013, with an additional 3.8% investment income tax some tax advisers are saying might apply to the sale of a business. This made the owners that were thinking about selling in the near future (maybe 2013?) decide to accelerate their plans and sell in 2012. This mindset to sell sooner rather than later was enhanced by the proposed legislation and ongoing discussions in Washington to increase taxes in order to deal with the huge national debt.
As explained in the following section – “PREDICTIONS FOR 2014″, the mega companies like Securitas and G4S dramatically curtailed their acquisition activity in order to implement an organic growth strategy.
Also, the year 2012 was when many owners started to become more aware of the perils of the Affordable Care Act (“Obamacare”) and how it negatively affected the security industry – especially the labor intensive contract guarding sector. The attempt to repeal the ACA did not go through, which made many concerned owners accelerate the sale of their companies.
WHAT WILL 2014 BRING TO THE MERGER AND ACQUISITION MARKETPLACE?
As for the public international security companies, we don’t see much activity in buying plain vanilla guarding companies from these mega conglomerates in 2014 anywhere in the world. They are drastically curtailing, or stopping altogether, their buying activities. Here’s what the CEO’s of Securitas and G4S are saying about their acquisition plans:
• Excerpt from Securitas press release December 05, 2013 CEO, Alf Goransson stated “…Securitas is well positioned to take advantage of the paradigm shift taking place in the security industry. Given the current market dynamics and a gradual increase in the use of technology in security solutions, the security markets in Europe and North America have been growing at the same pace as GDP for the past few years” He goes on to say, “… the capital expenditure needed to increase the Group’s sales of security solutions will be offset by a slower rate of acquisitions …”.
• Ashley Almanza, G4S’s new CEO, made several similar statements in 2013 as he leads G4S away from growing through acquisitions and concentrating on planned organic growth.
As the large international companies take a breather from acquisitions and focus on organic growth, the Private Equity Groups (PEG’s) ramp up their efforts to grow through buying more companies. The security companies owned in the majority by the PEG’s are getting pressured to grow so they can put their huge stash of idle cash to work. They’re hungry for acquisitions, but are not letting their quest to grow through acquisitions get ahead of their good judgment on the multiples they are willing to pay. Although the multiples have increased over the last couple of years, the gap between what owners are expecting in a sale and what buyers are willing to pay is still keeping many owners from putting their company on the market. They don’t have to sell and the return on what they would get from the sale proceeds is still at an all time low. However, based on some activity we’re seeing, the 2014 year may prove to be a lot more active than 2013 with these groups. One large transaction was closed in the first week of February and there are a lot of “serious sale discussions” taking place between these buyers and mid-market size companies, which will likely materialize into a sale transaction by the end of the first quarter of 2014. Much more serious activity than what we were seeing this time last year.
Stay tuned and be sure to keep a watch for the transactions as they get announced on our website at www.roberthperry.com!
What is it and how can it be controlled?
Unemployment Insurance is a joint program financed through federal and state employer payroll taxes. The Federal Unemployment Tax Act authorizes the Internal Revenue Service to collect a federal employer tax used to fund state workforce agencies. FUTA specifically covers the costs of administering the UI and extended unemployment benefits during periods of high unemployment. In addition it provides for a fund from which states may borrow, if necessary, to pay benefits. Generally, you can take a credit against your FUTA tax for amounts you paid into state unemployment funds. The credit may be as much as 5.4% of FUTA taxable wages. If you are entitled to the maximum 5.4% credit, the FUTA tax rate after credit is 0.6%. This tax is calculated on the first $7,000 of annual compensation making the maximum tax per employee $42.00.
Across the country, Labor unions are organizing workers to increase the minimum wage for fast-food and other employees. Meanwhile, business owners and lobbying groups such as the National Restaurant Association (NRA) argue that an increased minimum wage cold wreak havoc on the economy and lead to an increase in the country’s unemployment rate.
Don Fox, CEO of Firehouse Subs and a vocal opponent of an increased minimum wage, stated the following: “I don’t support raising the national minimum wage. The average restaurant company can’t do that without some very serious price-raising. It… has a ripple effect throughout the entire economy,”
The NRA agrees with Mr. Fox. According to Scott DeFife, executive vice president of policy and government affairs for the NRA, raising the federal minimum wage could cripple the job market. In the words of DeFife, “Labor costs are estimated to be about a third of a typical restaurant’s operating budget. If the minimum wage doubles, that is going to have a significant impact on the price of dining out and food costs, and a decrease in jobs.”
On the other side of the issue, you find pay raise advocates such as Saru Jayaraman, the co¬director of the Restaurant Opportunities Centers United and director of the Food Labor Research Center at the University of California. According to Ms. Jayaraman, “all restaurant workers should receive a stable base wage that allows them to feed themselves and their families… With over 10 million workers,” she continues, “the restaurant industry is one of the largest- and fastest-growing sectors of the United States economy. But it also provides the lowest paying jobs. This is largely because the federal minimum wage for all workers is $7.25, and $2.13 for tipped workers.”
Ms. Jayaraman is not the only pay raise advocate to point out the disparity between quick-service chain profits and corresponding wage increases. According to Tsedeye Gebreselassie, an attorney with the National Employment Law Project, “…the line that they (quick-service restaurants) cannot afford to pay higher wages does not hold water, when you look at the profits they are making…. McDonald’s posted $5.5 billion in profits last year and Yum! Brands had $1.6 billion in profits.” She points to limited-service restaurant chains that pay higher than the national minimum wage and says, “they are doing just fine.”
At the very least, The Great Restaurant Pay Debate has led us to question more deeply how to best determine the ‘sweet spot’ for restaurant pay. As it stands, store operators are largely opposed to minimum wage hikes, believing that they themselves are best suited to determine how much they can pay workers while remaining profitable. On the other side of the debate, labor unions and pay raise advocates argue that the private sector should not be wholly responsible for determining worker compensation, and that state and federal governments have a significant role to play.
Where do you stand on the The Great Restaurant Pay Debate?
Ever since the “Returning Heroes Tax Credit” was signed into law in November of 2011, former members of the military have seen their job opportunities improve. According to the Bureau of Labor Statistics, 6.5% of veterans were unemployed in September, significantly less than the larger 7.2% figure for all Americans. Only a few years previous, the unemployment rate for veterans stood at a whopping 8.6%.
1. Wage and Hour Lawsuits Have Restaurant Owners Thinking Outside the Tip Box
Wage and hour lawsuits are currently the largest type of workplace class action lawsuit in the industry. Restaurant owners are being sued for failure to pay tipped employees for overtime, spread-of-hours-pay, “off-the-clock” work, and more.” In light of these lawsuits and government audits, some owners have started eliminating tipping altogether in favor of paying a straight salary to servers.
2. New Local Laws Affect Sick Leave and Pregnancy Accommodations
Beginning April 1, 2014, NYC will be required to cover sick leave. The new law – which passed over the veto of Mayor Michael Bloomberg – will be enforced by New York’s Dept. of Consumer Affairs.
On September 24, 2013, the Pregnant Workers Fairness Act was passed by the NYC Council. The law requires employers with four or more employees to provide accommodation for pregnancy, childbirth and related medical conditions.
3. The Crackdown Begins on Hiring Illegal Workers
According the Wall Street Journal, U.S. Immigration and Customs Enforcement (ICE) has stepped up its audits of companies hiring
undocumented workers – most notably in the restaurant industry.
4. Supervisors Can Share Tips. Sometimes.
The New York State Court of Appeals recently determined that Starbucks’ shift supervisors are entitled to share in baristas’ tip pools. Assistant managers, on the other hand, are not.
5. ObamaCare Making An Impact
The Affordable Care Act (ACA) is now the law and employers must notify employees about healthcare exchanges and federal subsidies for private health plans. In addition, by 2015, employers with 50 “full time employees” must offer health coverage to employees and their dependent children.
Labor and Employment Developments are making this a very busy season for the Restaurant Industry! Stay informed by reading the full report.
On September 16, 2013, the IRS ruled that legally married same-sex couples will be treated the same as legally married heterosexual couples for federal tax purposes. The ruling applies to all married same-sex couples living it states that recognize same sex marriages. It also recognizes those couples married in states that recognize same-sex marriage that now reside in states that do not.
Most diners have learned to check their bill closely when it comes time to pay. That’s partly because automatic gratuities are the norm in many restaurants, especially for larger parties. The idea of an automatic gratuity can be problematic for diners – shouldn’t we decide how much to tip our server based on the quality of their service? Now, it’s going to get even more complicated for both servers and restaurant owners.
A new IRS ruling will treat automatic gratuities as service charges, rather than as tips. Servers will no longer have to report these tips as income, as they will show up instead as part of a server’s wages. The money will be subject to payroll tax withholding and it will show up on servers’ subsequent paychecks, rather than be distributed as cash on the day they were received.
For restaurant owners, the new rules present added challenges, most notably in the form of additional accounting hours required to properly keep track of every server’s tips and wages. Larger restaurant groups and those with more sophisticated accounting departments may be able to incorporate the changes with few hiccups, but single operators are certain to rue the day the IRS decided to institute the rule change.
Some restaurants have already begun looking at new ways to handle automatic gratuities in order to avoid accounting headaches. Darden Restaurants, the mega group who owns Red Lobster, Olive Garden, Capital Grille and four more dining concepts, is experimenting with “tip suggestions” in 100 of its restaurants across the country. They intend to make a decision by the end of the year, as the new rule goes into effect on January 1, 2014.
How the restaurant industry reacts to the new ruling remains to be seen. It could potentially be a dramatic change to the profitability of restaurants and leave them open to more legal and staffing challenges. It’s already very clear that the issue of automatic gratuities is a taxing one for servers and restaurant owners alike.
In two recent federal court decisions, restaurants were compelled to pay a total of $2.7 million in back wages and damages after it was ruled that they had violated the Fair Labor Standards Act.
According to the U.S. Justice Department, a Wage and Hour Division investigation found that Qing Xing Inc. had violated the Fair Labor Standards Act’s minimum wage, overtime and recordkeeping provisions during a three-year period. It was found that the restaurant owed 44 employees a total $430,824 in back wages and $524,706 in overtime pay. In a second review it was determined that Super Buffet will be required to pay $259,286 in back wages to 16 workers and $156,975 in overtime to 14 workers.
The court ordered damages are equivalent to the total amount of unpaid wages and overtime pay, demonstrating once again that the best way to avoid the wrath of labor law is to follow it to the letter!