How could changes to wage laws potentially impact Benihana's costs?
Benihana Franchise · 2024 FDDAnswer from 2024 FDD Document
[Item 22: CONTRACTS]
Labor and Supplies
Changes to wage, immigration and labor laws could increase our costs substantially.
Under the minimum wage laws in most domestic jurisdictions, we are permitted to pay certain hourly employees a wage that is less than the base minimum wage because these employees receive tips as a substantial part of their income. As of December 31, 2023, approximately 33% of our employees earn this lower minimum wage in their respective locations since tips constitute a substantial part of their income. If cities, states or the federal government change their laws to require all employees to be paid the general employee minimum base wage regardless of supplemental tip income, our labor costs would increase substantially. Certain states in which we operate restaurants also have adopted or are considering adopting minimum wage statutes that exceed the federal minimum wage. We may be unable or
unwilling to increase our prices to pass these increased labor costs on to our customers, in which case, our business and results of operations could be adversely affected.
A restaurant company employer may claim a credit against the company's federal income taxes for FICA taxes paid on certain tip wages (the "FICA tip credit"). We utilize the federal FICA tip credit to reduce our federal income tax expense. Changes in the tax law could reduce or eliminate the FICA tip credit, which could negatively impact our results of operations and cash flows in future periods.
Source: Item 22 — CONTRACTS (FDD pages 73–74)
What This Means (2024 FDD)
According to Benihana's 2024 Franchise Disclosure Document, changes to wage laws could substantially increase their costs. Benihana, like many restaurant businesses, benefits from being able to pay certain hourly employees a lower minimum wage because they receive tips. As of December 31, 2023, approximately 33% of Benihana's employees were paid this lower minimum wage. If laws change at the city, state, or federal level to require that all employees be paid the general minimum wage regardless of tip income, Benihana's labor costs would increase significantly.
Several states where Benihana operates restaurants have already adopted or are considering minimum wage statutes that exceed the federal minimum wage. Benihana may not be able or willing to increase prices to offset these increased labor costs, which could adversely affect their business and results of operations. This situation presents a risk for franchisees, as increased labor costs could reduce profitability if they cannot be passed on to customers through higher prices.
Furthermore, the document states that changes in tax law could reduce or eliminate the FICA tip credit, which Benihana utilizes to reduce its federal income tax expense. The loss of this credit could negatively impact Benihana's results of operations and cash flows in future periods. Potential franchisees should consider these factors when evaluating the financial viability of a Benihana franchise, as changes in wage and tax laws could significantly impact their operating costs and profitability.