Some parts of the relief bill just don't seem to work for hospitality companies.
The CARES Act promises to deliver $349 billion in aid to small businesses across the country crippled by COVID-19. As the National Restaurant Association pointed out in a letter to Treasury Secretary Steven T. Mnuchin last week, the industry faced “the brunt of the government response to coronavirus,” and has requested relief for several weeks now as social-distancing mandates darken dining rooms across the country.
But the question continues to surface whether or not the CARES Act goes far enough. Or, to this case specifically, is it designed to truly help restaurants in the way they need?
Andrew Rigie, the executive director at the NYC Hospitality Alliance, recently explored this topic in a Forbes article. He brought up several points that operators, especially independents, continue to circulate regarding the main element of the relief bill—the Paycheck Protection Program.
Rigie said restaurants wanted to latch onto the biggest lifeline: the fact the PPP, while initially a loan, can be converted into a grant. This is a critical detail, more so for restaurants than the majority of industries, because business has basically ground to a halt since COVID-19. More loan debt would simply sink operators down the line considering what’s happening today. It’s the type of thing that would encourage restaurants to shutter for good instead of try to hang tight.
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This is where the heart of the hospitality issue lies with the CARES Act. To Rigie’s explanation, in order to obtain the full benefits of the PPP (to get it as a grant instead of a low-interest loan), a businesses’ employee headcount has to be about the same two months after the loan is originated as it was before the pandemic hit.
Meaning, restaurants and bars forced to close by the government’s March mandate, those that furloughed or laid off employees, must retain or hire back at staffing levels on par before the pandemic. The date for this: June 20.
So, what is the problem at hand exactly? It’s a multi-pronged issue. Firstly, Rigie wrote, this poses significant—and maybe unrealistic—challenges because restaurants and bars don’t have a clear timeline. Will they even be allowed to reopen in June? Will they be open long enough (if that optimistic outlook does indeed happen) to know what staffing levels will be?
It’s something the CARES Act failed to take into account for restaurants—life after COVID-19. Operators have no clear idea of what the industry will look like or what it will take to actually run restaurants. As Rigie said, “There are too many variables that will impact staffing in the hospitality industry beyond when we may fully reopen.”
The hope, naturally, is people rush back into restaurants when the crisis clears. Yet trying to assume that takes place on day one is like wishing to strike gold in a silver mine. It’s highly unlikely sales jump back to pre-coronavirus levels at the outset. Getting there by late June sounds like a risky proposition, too.
The Independent Restaurant Coalition sent a letter to congressional leaders Monday sharing some of the aforementioned concerns, among others.
No. 1 on the list: Fix the PPP by extending the maximum loan amount to three months after restaurants can legally reopen to full capacity, reinstating the $500 million gross revenue cap, and increasing the length of time restaurant owners have to repay their loans to 10 years from two years.
"Unforgiven loans will result in restaurants being saddled with debt at a time when we can least afford it," the Coalition said. "The original Senate bill language set a 10-year term to repay a PPP loan that was not fully forgiven. Treasury then provided guidance setting the term to two years. This is unworkable and could cause the very problem this bill seeks to prevent—the large-scale failure of small businesses."
Rigie said there will be significant costs tied to getting physical sites open and ready to serve guests again. The Coalition suggested officials launch a “Restaurant Stabilization Fund” that provides up to $100 billion in grants to independent restaurants that will give them the upfront capital they need to reopen.
It's something that extends beyond paying employees during the crisis. "If we do not have funds to pay our vendors and the associated reopening costs, this will prove an insurmountable barrier to reopening our restaurants," the Coalition said. "A dedicated restaurant recovery fund is critical to the recovery of our independent restaurants. With a $50-$100 billion reinvestment, independent restaurants would be able to navigate local and state closure mandates, hire back our employees, and survive for the future as patrons return to dining out in restaurants again."
Kwame Onwuachi, a 2019 James Beard 2019 Rising Star and founding member of the Coalition, said Monday in a release, “Even if our doors open tomorrow, business will be slow. We just lost several months of revenue, and will need to purchase new supplies, retrain a new staff, and pay any outstanding supplier bills and our rent. The CARES Act just isn’t enough to ensure we’re able to serve our communities and build our local economies.”
You also have to consider we might in a recession when COVID-19 clears.
Before all of this, restaurants were already grappling with declining guest counts. Most pundits credited soft traffic trends to an oversaturated landscape born out of the Great Recession, when restaurants flooded into affordable real estate. And a way many brands navigated this in recent years was to raise check and leverage a more willing consumer.
Black Box Intelligence said in its latest report, however, guest check growth, year-over-year, slowed considerably to 0.5 percent during the week ending March 22. It averaged 2.5 percent for the previous four weeks. That was a pretty steady trend throughout 2019 that might not carry through post-coronavirus. At least not initially.
A record-breaking 6.6 million Americans filed for unemployment in the week ending March 28. That doubled the previous high mark set during the prior week. The top number before that: 695,000 in October 1982.
The Bureau of Labor Statistics reported that nearly 60 percent of payroll jobs lost in March were in the food and beverage industry, which eliminated two years of gains in employment.
This unfortunate reality, Rigie said, means millions of consumers are not going to have the same disposable income when the recovery begins. People and companies might hesitate to host parties and private events, as well as gatherings in large groups at restaurants, he added.
To put it plainly, nobody really knows what consumer behavior is going to look like on the other side. We can try to predict mid- to long-term possibilities, but we definitely have no clue about June.
That brings us to a painful truth: The PPP loan to grant program is not tailored for hospitality companies.
Rigie said this rests on the seemingly overlooked fact restaurants and bars are not going to be prepared, or even permitted, to reopen in June, and they won’t require pre-pandemic staffing levels once they do.
The provisions of the PPP program are written to provide an incentive to employers to not lay off workers (or rehire them) and instead use the loan amounts to pay payroll and other expenses.
But what it doesn’t factor in, for companies like restaurants, is whether or not staffing levels are going to change dramatically. Even in the interim, brands would be forced to hold onto employees they can’t find work for.
Without dining-room service, there are less tasks to go around for restaurants. And that’s an understatement really.
Darden CEO Gene Lee said in mid-March the company needs, on average, six to 10 employees to run to-go only restaurants. Typically, it takes 60–120 hourly team members to staff an Olive Garden, must of whom are part-time workers. Each unit also has a GM and three to five additional managers.
So the option for most restaurants is to keep all these employees on payroll, hope the grant comes in and covers the costs before you run too deep into the red, or furlough them. If the company takes the second option, they’ll need to rehire all employees laid off (going back to February 15, 2020), or increase their previously reduced wages. And do so no later than June 20.
Otherwise they’ll face the possibility of the amount of the forgiveness of the loan being significantly reduced. That will also happen if the company drops its workforce during the eight-week period compared to prior period or reduces salary or wages paid to employees by more than 25 percent during the eight-week period (compared to the most recent quarter).
Another element to toss in, as a fast-casual operator shared with QSR in this piece, is the notion that keeping employees on staff just to collect the grant might sound heroic at first glance, but it’s a more complicated matter for restaurants. Basically, with expanded unemployment benefits—$600 per week for four months on top of what states provide as a base unemployment compensation, as well as the maximum entitlement expanded to 39 weeks rather than the 26 weeks typical of most states—people are going to make a lot more money unemployed than they were working at restaurants.
The Illinois-based fast casual pegged this at $490 per week (for an employee working 35 hours per week at $14 per hour), jumping to $830 per week on unemployment under the stimulus package.
This is even more pronounced in low-wage states and with part-time workers.
You have to then ask whether or not keeping employees on payroll is actually in the best interest of the worker. Or is it, in fact, holding them hostage, if they can be furloughed and make significantly more money on unemployment?
This isn’t even a question for most small businesses, where employees will nearly always take long-term job security over four-month bumps. But restaurants run turnover in the triple digits without a crisis at hand, and are a cyclical business where the vast majority of people look at restaurants as a way to enter the workforce. It’s a stepping-stone business with a heavy seasonal focus, for the most part. According to the BLS, 55 percent of 16- to 24-year-olds were employed as of July 2018. Hospitality (including foodservice) amassed the largest portion of teen and young adult workers at 26 percent. Last year, 1.7 million teenagers worked in restaurants. Also per the BLS, about 40 percent of employees in restaurants and bars work part time, which is more than twice the proportion for all other industries.
Thinking all these people would rather stay on a restaurant’s payroll for four months rather than receive a significant pay raise is asking a lot to require loan forgiveness. Four months can mean multiple jobs to restaurant folks. Or the window they planned to get back to school, etc. It’s an eternity in hospitality.
Rigie said the PPP program should be amended for restaurants to have a much longer period of time to staff up. Eight weeks after the loan is originated is just insufficient.
He suggests the loan can convert to a grant at least six months after the industry is permitted to fully reopen.
The Coalition said officials should extend the maximum loan amounts to three months after restaurants are allowed to reopen and operate at full capacity. "The intention of the CARES Act is to make sure independent restaurants can survive as engines of our economy. Yet, the current structure of loan forgiveness does not help the tens of thousands of restaurants who are prohibited from opening their doors," it said. "After the eight-week clock runs out, independent restaurants will still be closed and we will be forced to lay off our entire staffs again. Relief is needed until independent restaurants are allowed to reopen and operate at full capacity."
It added officials should increase the size of the PPP beyond the $350 billion and reinstate the $500 million gross revenue cap (as noted before). “There is a real fear that the funding set aside in the CARES Act for small businesses will run out before we are allowed to reopen. In fact, it is estimated that demand for forgivable loans could exceed $1 trillion,” the Colation said. “Moreover, Congress should re-establish the $500 million gross revenue cap that was included in an earlier version of the CARES Act. This cap was meant to separate the small, independent restaurants from other large, well-capitalized businesses that have infinitely more resources. Reinstalling the cap would mean that more funds would be available for small, independent restaurants.”
The Colation is also pushing for officials to create create new tax rebates that incentivize employment so restaurants continue to employ full staff and pay rent when business is slow.
“Assuming we have enough resources to reopen, business will likely be down by at least 30 percent through 2021, which could mean running out of cash and forcing massive layoffs and possible closures,” the Coalition said.
It suggested two:
A “jobs provider rebate” that would give tax relief to restaurants and reward them based on how many people they employ. “With 11 million workers, we are one of the largest employers in the nation. We also have some of the smallest margins of any sector. We should be incentivized for keeping millions of Americans employed during a difficult time,” the coalition said.
Secondly, a “rent rebate” that would make landlords whole when revenue is inevitably down. Going forward, a “rent rebate” ensures restaurants can maintain their lease through this recovery, the Coalition noted.
It's also asking for the bill to ensure business interruption insurance covers COVID-19. Right now, restaurants aren’t receiving the benefits they deserve from insurance companies, the Coalition said.
"Every restaurant across the country pays premiums for business interruption insurance to safeguard their businesses and the livelihoods of their employees in the case of natural disaster or Civil Authority Shutdown," the Coalition said. "Unfortunately, these very firms we rely on to protect us are avoiding coverage during this disaster by falsely claiming that the virus does not cause a dangerous condition to property. The entire restaurant sector and all connected industries are crippled by a nationwide public health shutdown impacting all of our livelihoods. Whether policies have virus exclusions or not, we need Congress to mandate that insurance companies fulfill their obligations."
“It’s simple: Without help, many of your favorite restaurants are not going to be there once this crisis is over,” Tom Colicchio, chef and owner of Crafted Hospitality, added in Monday's release. “The longer restaurants remain closed, the larger the risk to the nearly $1 trillion economy they create through their supply chain of farmers, fisherman, linen services, and so many others. Over two million waiters and waitresses need a job when this crisis ends, and we need assurances from Congress that they will listen to the specific needs of independently-run restaurants during the next round of discussions. “
Bret Cohen and Suhail Seth, partners of law firm Nelson Mullins, explained the employee concern further in an email to FSR. “If a restaurant decided to furlough employees before the PPP loan and then decided to rehire these employees after getting the loan a few weeks later in order to obtain forgiveness of the loan, those re-hired employees will likely be making significantly more on unemployment than what they were with the restaurant and they are eligible to receive their unemployment insurance for up to four months.
“Because an applicant has until June 30, 2020 to restore its full-time employment, assuming that the restaurant is ready to reopen by then [they may be subject to shelter in place/business restrictions in their respective jurisdiction], the restaurant’s employees will have to decide between coming back to work at the restaurant or remain ‘unemployed’ for a few more months and receive the higher unemployment insurance.”
Typically, many states require people to prove they’re actively looking for work to receive unemployment benefits. In other words, can restaurants get to June and simply offer people their jobs back? And if they don’t take it, unemployment will cut off? “In terms of state unemployment benefits, while the law is developing almost daily in response to COVID-19, a furloughed worker who refuses to return to work may be ineligible for state benefits,” Cohen and Seth said.
“To the extent these former employees don’t return, it would essentially disqualify the restaurant from the loan forgiveness portion of the PPP,” they added. “Conversely, a restaurant may decide to retain its employees and apply for a loan under the PPP. Of course, the gamble with that approach is that any delays or a lengthy approval process for the loan could cripple, perhaps permanently, any restaurant that is already under extreme financial burden from COVID-19.”
While there remains some uncertainty whether not states are going to require people prove they’re looking to work, or instead waive the work search, as this story in Money explored, it still doesn’t change the fact restaurants would be asked to essentially force their employees back to work to receive loan forgiveness.
“Whether or not an employee will need to prove that they are actively looking for work to receive unemployment benefits will depend on the applicable state,” Cohen and Seth said. “While that requirement was generally the norm for most states prior to COVID-19, many states have relaxed, or in some cases even eliminated, these job search requirements with respect to eligibility for unemployment benefits arising out of the COVID-19 pandemic.”
“In fact, the CARES Act requires states to be flexible in their requirements that workers be able and available to work, where they are unable to search for work because of COVID-19, including because they are sick, quarantined or are subject to movement restrictions,” they added. “Once the pandemic is over, it would be reasonable to assume that these states will revert back to the pre-existing eligibility requirements for unemployment, but the uncertainty around the pandemic and when it will end could alter this assumption.”
Rigie added the PPP left out another serious consideration. Just like the low-wage states having issues with the expanded unemployment benefits, major metropolitan areas are going to get buried by rent costs. The PPP requires 75 percent of a businesses’ loan be allocated to labor costs for it to be converted into a grant. In turn, there’s only 25 percent left on the table for rent and related utility costs, unless you want to be saddled with debt later on.
As Rigie noted, that’s nowhere near enough money to help restaurants and bars in places like New York City where rent is the venue’s biggest fixed cost.
It will do little to help restaurants pay back rent, and other expenditures, during mandatory business closures. Trying to picture that for multiple months isn’t a winning proposition.
Therefore, Rigie said, the PPP also needs to be amended to allow hospitality businesses greater flexibility in how they use loan-to-grant funds.
This goes back to the payroll issue as well. Do restaurants really need 75 percent of the grant to pay for workers who have nothing to do under a takeout and delivery-only model? Would that employee rather just go collect expanded unemployment? And if you bring them back in June to collect on the grant, did you “force” the back to work? What are the ramifications of that?
While it’s a nice gesture to pay for workers who should have never lost their jobs in the first place, it becomes a fool’s errand to do so when rent and other costs are going to sink the restaurant anyway. A nice concept, but one that won’t matter if there’s no restaurant left in four months.
“The national economy will not recover if the restaurant and nightlife industry is not at the core of the recovery,” Rigie wrote. “We urge our elected leaders to enact our recommendations immediately.”