The National Restaurant Association recently released a new guide for restaurant operators looking for more information on how to increase their cybersecurity efforts.

In 2015, the National Restaurant Association released its first manual for restaurant owners called “Cybersecurity 101: A Toolkit for Restaurant Operators” [PDF] which outlined best practices on five core areas of cybersecurity planning. This past month, the National Restaurant Association built on this manual with the release of “Cybersecurity 201: The Next Step,” [PDF]  which provides restaurant-specific type guidance. The National Restaurant Association utilized the expertise of technology personnel from top multi-unit restaurant companies. The guide is a must-read for any franchise system in the food service space.

The guide takes the cybersecurity framework prepared by the National Institute of Standards and Technology (NIST) and adapts it for use in the restaurant hospitality industry. Restaurant franchise systems can learn how to apply the NIST standards by reviewing the real world hypotheticals.

18538865 – thief steals credit card and money. illustration in cartoon style

For example, there is “Sam” whose restaurant experiences a data compromise of customer credit cards. After a forensic team descends on his business, Sam quickly realizes how little he understands about who has access to his computer software, which vendors service his POS Systems and how often he upgrades hardware. The result? Sam lost loyal customers and was slapped with a hefty fine from his credit card processors.

In addition to three other nicely detailed case studies, the guide shows how almost 100 different NIST categories can be applied in a restaurant setting, grades cybersecurity action items from most to least urgent and provides a glossary of cybersecurity terms.  Even the most cyber savvy restaurant systems should find the guide full of useful information.

Michelle Webster, a franchise financial legal examiner with the State of Washington Department of Financial Institutions, took a few minutes at the start of the ABA Forum on Franchising’s Annual Meeting seminar on disclosures to discuss the registration of franchise brokers in Washington. The main takeaway? If you sell franchises in Washington, then there is a good chance you need to register.

27168210 – vintage stamp with text the evergreen state written inside and map of washington, vector illustration

Third parties selling franchises on behalf of a franchisor must register as franchise brokers. The Washington Franchise Investment Practice Act prohibits a franchise broker from offering or selling franchises in Washington unless the seller is registered separately with the Washington Securities Division.    Franchisors, subfranchisors and their respective officers, managers, members, directors and employees are excluded from the broker registration requirements.   However, Ms. Webster reminded attendees that employees of an affiliate “no matter now integrated the franchisor and its affiliated companies may be.”  She explained the common example of where a franchise system offers multiple brands operated under separate legal entities, then employees of an affiliate, subsidiary or parent of the franchisor must be registered with the Washington Securities Division as a broker for all of the brands where the seller is not employed.

Remember that if you, as a franchisor, engage franchise brokers in the State of Washington, then make sure they are separately registered or else you will receive a comment letter.  The Revised Washington Code declares it unlawful for any franchisor, subfranchisor, or franchisee to employ a franchise broker unless the franchise broker is registered.  Therefore, it is important to make sure that anyone selling on behalf of your franchise system is registered or exemption.  The initial application fee is $50 and there is a $25 annual renewal fee.  The standard form can be accessed here [PDF] or you can apply online here.

International franchisors inbound into the U.S. face a complex set of business decisions and legal regulations.  Even seemingly simple tasks–like properly executing a franchise registration application–can become a time-consuming and expensive endeavor (especially where the franchisor does not have an authorized signatory in the U.S.).  Knowing how and when to request waivers can save time and money.

Notary public working on a document with stamp and padsFranchise registration applications must be signed by the franchisor’s authorized representative. In addition, some of the signatures must be notarized.  Generally speaking, satisfying this requirement requires having the signature notarized at a U.S. embassy or obtaining an apostille. U.S. embassies will have policies regarding scheduling appointments, what documents to bring, and how to prepare documents to be notarized. In addition, notarial services can be significantly more expensive at the embassy than stateside. Finally, embassy representatives are not used to seeing standard franchise applications and disclosure documents, which can cause confusion and delays.

Alternatively, the franchisor can obtain an apostille, a specialized certificate that verifies that a document is legitimate and authentic. Apostilles are only effective between countries that are parties to the Hague Apostille Convention (which is many). First, the franchisor must translate the documents into the local language so they can be notarized under local law. Then the franchisor must obtain an apostille, which ensures the documents and signature are accepted by the U.S. examiner.

Unfortunately, both options can be costly and time-consuming. Therefore, inbound international franchisors and their counsel should inquire whether the U.S. examiner will grant a waiver if obtaining an apostille or notarization will create a financial hardship and undue delay. Examiners understand there are specific difficulties to international franchising and may waive the notary requirement or permit the signatory to obtain notarization when he or she is next in the U.S.  Franchisors or counsel should contact examiners to determine how to properly make the request.  Some examiners will accept requests made in a cover letter to the application or in a preliminary email exchange.

International franchising inbound to the U.S. can be very complex. Obtaining a waiver of the notarization requirement is one less headache, which allows franchisors and their counsel to focus on the substantive issues.

In December, we wrote that the NLRB had issued a decision overturning Browning-Ferris’ joint employer test and returning to the previous standard for determining joint employment.  That decision in Hy-Brand Industrial Contractors was seen as a return to sanity by employers and pro-business groups.

Unfortunately, the NLRB announced today that it had vacated the Hy-Brand decision due to the fact that one of its members who heard the case had a conflict.  Member William Emmanuel’s law firm had participated in the Browning-Ferris case.  Since Hy-Brand directly addressed the Browning-Ferris standard, the NLRB Inspector said that Emmanuel should not have participated in the Hy-Brand case.

The Browning-Ferriss case set forth a standard for joint employment that noted that businesses could be joint employers simply because they reserved the right to control the actions of the other entity’s employees, even if they never actually exercised that authority.  That, of course, created great consternation in the franchise setting as franchisor agreements may typically have a broad right to address franchisees’ employee issues that may never actually be exercised.  Franchisors, conscious of protecting their brand’s image, usually inserted such clauses to insure that a franchisee’s employees would not denigrate the brand.

It is not clear at this point when Hy-Brand will be reheard or if the issue will come before the Board in another case.  In the meantime, employers are stuck with Browning-Ferriss.  To the extent that employers revised franchise agreements after the Hy-Brand decision was issued, they should have those agreements reviewed by legal counsel.

10560779 – closeup portrait of a businesswoman in shock, isolated on white background

Maybe you are an international company with a successful brand that sold a master franchise or area representative right in California without knowing the robust state franchise registration laws. Maybe you are an up-and-coming pizza joint operating in Los Angeles that decide to sell a business associate the right to operate a location under you brand with your recipes in exchange for a fee without considering if it was a “franchise.”

You did not mean to violate the California Franchise Investment Act but it turns out you did. What can you do? Is there any way to “fix” your violation? The answer is yes. Although, California has a very robust and stringent state registration and disclosure process, it also provides a fair remedy for curing these non-compliance issues. The state wants to encourage self-reporting and rewards a franchisor’s attempt to do so by offering a process to bring finality to an illegal sale.

If you or your franchise system client sold a franchise in California without pre-registering with the California Department of Business Oversight, then you will need to prepare a Notice of Violation.   Instructions on preparing a compliant Notice of Violation can be found here. This is a separate application than the general application for registering the franchise offering.   Once approved, you will submit the Notice of Violation to the franchisee.  The Notice of Violation will describe to the franchisee the nature of the violation and the franchisee’s rights under the law.   However, delivery of the Notice of Violation will also start a 90 day statute of limitations clock running shortening the statute of limitation of 4 years from the illegal act or 1 year from when the franchisee discovers the violation.

In most cases, this is a much better option for a franchise system rather than waiting to see if a franchisee becomes disgruntled and reports the system to the California regulators.

Many franchise agreements contain a provision that restricts a franchisee from hiring or soliciting the employees of the franchisor or other franchisees. A class action lawsuit that was recently filed in the Eastern District of Texas could require removal of this type of provision in the future. Though this suit is only at the initial complaint phase, the outcome of this case could help shape the future of franchisee restrictive covenants.

In Ion v. Pizza Hut, LLC, Kristen Ion (“Ion”) filed this complaint on behalf of similarly-situated managers of Pizza Hut restaurants. Ion claims that Pizza Hut, LLC (“Pizza Hut”) has colluded with all of its franchisees to engage in anticompetitive behavior in violation of the Sherman Act. Further, Ion claims that the restrictive provision is a naked restraint on competition and a per se violation of the antitrust laws.

The provision at issue, as seen in many franchise agreements, forbids a franchise owner from hiring or soliciting any employees of the franchisor, its units, or any other franchise. Ion claims that this restraint eliminated a franchisee’s incentive to offer competitive employment packages to management personnel and restricted the mobility of such personnel. Further, Ion argues that this restraint lowered salaries and benefits due to the limited job marketplace available to Pizza Hut personnel. Ion claims that the training she received from Pizza Hut is only transferable to other Pizza Hut units.

While Ion consistently refers to the fact that each Pizza Hut franchise is its own independent business that has the right to set its own wages for staff, in the same sentence, she argues that the franchisor and franchisees were “co-conspirators” in the endeavor to suppress those wages and mobility. Further, Ion cites to the continued practice of Pizza Hut and its franchisees to cut employee wages and hours through various policies and argues that this restriction is in furtherance of this purpose (as outlined in various news articles). Lastly, Ion claims that executive compensation and franchisee profit increased at the expense of its low-paid management personnel.

However, based on the facts in the complaint, it seems that Ion never attempted to find another job outside of the Pizza Hut franchise system to support her proposition. Further, the citations to commentary by scholars and professors on the topic logically leads one to assume that there is not yet a basis in prior case law for the requested remedy.

The outcome of this case could substantially and materially alter the scope of franchisee restrictive covenants. Any outcome in favor of Ion would trigger an immediate need for revisions to a franchise agreement that contains this restriction and it is important to keep watch of this case.

Fox Rothschild LLP has deployed a new mobile app to assist companies, including franchisors, as they rush to comply with the European Union’s General Data Protection Regulation (GDPR) – a complex set of new data privacy rules with major implications for businesses.  The app – GDPR Check – helps businesses catalog their data management practices and policies to determine necessary steps to comply with GDPR when it takes effect in May.

“The pending implementation of GDPR will impact all companies that process or control the personal data of any EU citizen,” said Mark G. McCreary, chief privacy officer at Fox Rothschild and co-creator of GDPR Check.  “Every business, regardless of where it is headquartered, will be responsible for complying with these sweeping new data privacy rules when collecting or processing Personal Data,” said Daniel L. Farris, co-chair of the Fox’s Technology Group and co-creator of GDPR Check.

Even if a business does not collect personal data from EU citizens, the GDPR requirements apply to that business if it provides services to another business that must comply with GDPR.  Failure to comply with the regulations can result in fines of up to €20 million (approx. US$24.7 million) or 4 percent of global annual revenue in the prior year.

GDPR Check maps an organization’s data management practices in 17 areas that are key to determining compliance, including:

  • Types of data collected
  • Privacy policies (external and internal)
  • Consent
  • Data retention
  • Breach readiness

The app produces a report for each key area that a company can share with its attorneys and compliance team.

GDPR is intended to protect the rights of EU citizens to control the use of their personal data, including customer data such as birthdates, mailing addresses, IP addresses, product purchases and payment information, as well as supplier data, employee data and “sensitive data” such as health information, race, and sexual orientation.

This is the second app Fox Rothschild has launched in the data privacy space. The firm also maintains Data Breach 411, which provides easy access to applicable state statutes and breach notification rules to enable in-house counsel and compliance professionals, in the midst of a data breach crisis, to quickly identify controlling law and relevant guidance.

GDPR Check is available for free download in the Apple App Store and Google Play stores.

As we head into Tuesday night’s State of the Union Address, our thoughts at Fox Rothschild return to last year at the ABA Forum on Franchising Annual Meeting in Palm Desert, California.  One of the most interesting seminars was entitled “What’s New and What’s Next: The New Administration and Beyond.” In addition to reviewing updates on joint employer issues, SBA lending rules and changes to accounting rules, the session provided an interesting update on whether the FTC Franchise Rule will succumb to the Trump administration’s mandated review of all regulations.

70035381 – president holding shredded federal regulations isolated on white.

The short answer (drumroll please) is probably not, at least not anytime soon. The Federal Trade Commission was scheduled to review its 66 rules and regulations (including the FTC Franchise Rule) to determine whether they should be modified, expanded or repealed in 2018. However, the FTC decided it will not proceed with the review. Further, the administration clarified that the FTC is not subject to the Executive Order requiring that two regulations be discarded for every new regulation.   For now, it appears there may not be any immediate changes to the FTC Rule.

However, the NASAA’s Franchise Project Group chaired by Dale Cantone, Maryland Deputy Attorney General, is forging ahead with a number of initiatives. According to the session presenters, such projects include:

  1. Working with state franchise regulators to implement the new FPR Commentary [PDF];
  2. Revising the NASAA state cover page;
  3. Revising the 2008 Franchise Registration and Disclosure Guidelines [PDF];
  4. Making Risk Factors requirements uniform among states; and
  5. Developing one electronic filing system for all states to use.

Although, there may be little action on the federal level, it appears that the NASAA Franchise Project Group will continue to make strides to eliminate conflicting applications of franchise disclosures among the states and work towards standardization.  An action plan that all franchise regulatory attorneys likely endorse.

The New York State Department of Labor published proposed regulations to the Miscellaneous Industries and Occupations Wage Order in the New York State Register addressing so-called “just in time,” “call-in” or “on-call” scheduling demands facing employees. The proposed regulations, published on November 22, are subject to a 45-day comment period.

According to Governor Andrew M. Cuomo and the NYSDOL, employers sometimes schedule or cancel a worker’s shift a few hours before the shift begins, or just after it starts, which “often leave[s] workers scrambling to find child care and forces them to miss appointments, classes or important family commitments.” The proposed regulations aim to create fairness for employee pay and flexibility for employers scheduling unpredicted shifts by modifying only the Minimum Wage Order for Miscellaneous Industries and Occupations (the “Miscellaneous Wage Order”) for non-exempt employees at for-profit and certain nonprofit institutions. Importantly, the proposed regulations would not affect businesses subject to the Wage Orders for the hospitality industry, building services industry or agricultural industry. That said, they will still affect many franchised businesses.

The proposed regulations would revise the Miscellaneous Wage Order’s call-in pay requirement to create the following circumstances where non-exempt employees will be eligible to receive call-in pay:

  • Reporting to work– an employee who reports for work on any shift shall be paid for at least four (4) hours of call-in pay.
  • Unscheduled shift– an employee who reports to work for any hours that have not been scheduled at least 14 days in advance of the shift shall be paid an additional two (2) hours of call-in pay.
  • Cancelled shift– an employee whose shift is cancelled within 72 hours of the shift’s beginning shall be paid for at least (4) hours of call-in pay.
  • On-call– an employee who is required to be available to report to work for any shift shall be paid for at least four (4) hours of call-in pay.
  • Call for schedule– an employee who is required to be in contact with the employer within 72 hours of the shift’s beginning to confirm whether to report to work shall be paid for at least four (4) hours of call-in pay.

Calculation of Call-In Pay

Under the proposed regulations, call-in pay for actual hours worked (i.e. when an employee reports to work for a scheduled or unscheduled shift) shall be calculated at the employee’s regular or overtime rate of pay, whichever is applicable, less any allowances (i.e. credits) permitted by law. However, call-in pay for hours not actually worked (i.e. when an employee’s shift is cancelled or the employee is on-call or must call in for his/her schedule) shall be calculated at the basic minimum wage (based on the employer’s geographic area and size). Call-in pay for hours not actually worked will not count as payments for time worked or work performed and, therefore, need not be included in the regular rate of pay for purposes of calculating overtime. The proposed regulations also include a provision eliminating the offset amount that is currently permitted for pay exceeding the minimum wage, and also prohibiting any offset to pay from the required use of leave time.

In certain situations, the four (4) hours of call-in pay normally owed to an employee for reporting to work or for a cancelled shift may be reduced to the lesser number of hours that the employee normally works for the regular shift, as long as the employee’s total hours worked—or scheduled to work—for that shift do not change from week-to-week. The proposed regulations also contain four exceptions to the call-in pay requirements, details of which can be viewed in the accompanying Alert.

The NYSDOL insists these proposed regulations help protect minimum wage employees from unpredictable work schedule practices. For employers, the regulations offer flexibility with scheduling new shifts without a premium during the first two weeks of a worker’s employment, permit worker shift swaps and substitutions without penalty and allow for weather-related cancellations without penalty at long as 24-hours’ notice is given. As long as employers are diligent in giving employees advance notice of any schedule changes, they can avoid the call-in pay requirements imposed by the regulations.

If employers would like to submit a comment during the remainder of the 45-day comment period, they may do so by submitting any such comments to

Employers should anticipate that the proposed regulations will be finalized without any substantial changes and plan accordingly. All managers responsible for scheduling should become familiar with the regulations’ requirements and exceptions, and employers should re-examine their scheduling practices. Employers should inform employees that scheduling changes will likely be made at least 14 days in advance in order to comply with the new regulations.

The content for this post was contributed by Fox Rothschild attorneys Glenn S. Grindlinger and Matthew C. Berger.

Restaurant operators and their financiers often need to predict the future. The operators, mostly from franchised brands, need to adapt to changing tastes and fashion. The financiers need to assess risk before making commitments or investments. Experts in these fields met together in November 2017 to test their assumptions.

Kevin Burke, Managing Director of Trinity Capital LLC, delivered a report which he summarized the economy for restaurants “As Good as it Gets.” The formal title was a very analytical “A Reversion to the Mean: What Happens When Industry Tailwinds End?” Burke’s basic conclusion is that things are great now, but the analytics show eventually the metrics will return to baseline, and this reversion to the mean predicts a slowdown of business and a tightening of credit.

You should in no way conclude that the credit punch bowl will be removed soon. Bankers are still enthusiastic about restaurants, and the chains are doing well. Current valuations of multiples of cash flow for merger and acquisitions average near historical highs of 10.6, and growing franchisors have multiples of double that. Leverage is at near historical highs of 5.3. These are multiples not seen nor sustained since 2007.  Private equity investment has slowed this year, and so have exits from their investments. Everyone looks fat and happy.

While there is still room for growth, current market conditions cannot last forever, and changes are coming via changing demographics. The discretionary spenders driving the restaurant renaissance are now the millennials. Millennials constitute the majority of the U.S. population. Their student loan debt is at all time highs. Less than half of the millennials make as much or more than their parents at the same age. The maturity cycle of millennials will have profound effects on the economy.

Millennials dine-in on delivery, according to Andrew Charles, Senior Analyst, Cowen & Co. Millennials are driving 30% of restaurant industry sales growth based on their delivery predilections. The largest demographic with the most demand for delivery is the 18-34 year-old, living in a major metropolitan area earning in excess of $100,000.00. Demand for delivery is less frequent in the suburbs and mid-size metro areas among 35-44 year-olds earning over $50,000 a year. Demand for delivery is lowest among those in small metro areas or small cities over the age of 45 years old earning less than $50,000.00 per year. Delivery users clearly prioritize convenience and time over the specific restaurant’s food. Based on the data, Charles predicts that the better a restaurant can meet the delivery demands of its customers, the more delivery will drive sales.

Looking at the data alone, this would suggest that restaurants have a great opportunity to expand their business by catering to millennials and providing delivery. However, the world is not that simple. When looking at the buying habits of millennials, they are now saving for houses and having children. For the past two years their restaurant spending as a group has trended down, and is predicted to fall as they invest in housing and their families. This will put a cap on growth and an emphasis on catering more to the millennial lifestyle of automation, convenience, delivery, healthful choices, as well as “foodie” choices.

Expect new entries in the artisan breads, foods and pizza categories. The “better pizza” will follow the “better burger” trend, with state of the art menu, delivery and payment systems. Expect menu changes in the casual dining sector to accommodate millennial tastes and the tastes of their children. Look for brands to tout their autonomous car, drone and other novel promises of delivery. Look for slumps in steak houses and casual dining as these brands need to adjust. Because of these trends, we are seeing a lot of activity in the mergers and acquisitions by strategic buyers ready to upgrade the brands to millennial friendly.

The millennials are the future, and the rest of us are merely tenants.