Human Events Blog

ObamaCare brings franchise expansion to a halt

There is nothing mysterious about the job-killing powers of ObamaCare.  It imposes huge new costs on employers, particularly if their staff reaches a specific level of 50 employees.  It is a powerful incentive against hiring full-time workers.  Some businesses will conclude they need the help anyway, and proceed with the hire.  Others will find themselves unable to make the cost/benefit formula work out.  Add in the slow growth and permanent high unemployment of Obama’s economy, and the result is stasis: there is no compelling reason to expand, and a buyer’s market of labor standing by, if management changes its mind.

Fox News carried a sobering report today about franchise owners scaling back expansion plans and entering a “holding pattern” for exactly this reason:

Dan Drennen says his franchisees are sitting on their hands. According to the  general manager of Visiting Angels Living Assistance Services, multi-unit  franchisees are withholding expansion in the face of the Affordable Care Act’s  employer mandate.

“The cost becomes exponentially greater,” Drennen said. “They are subject to  the ACA and it’s a law of diminishing returns.”

Drennen said single owner deals continue to come in, as Visiting Angels has  437 franchise locations, and near 420 individual franchisees. But for many of  those nearing the 50-employee level, where the employer mandate kicks in and  health-care is a requirement or a $2,000 annual penalty per employee is due,  they’re staying put.

“Everyone is in a holding pattern,” he said. “In the last year, we have  between 30 and 40 [multi-franchise] deals that have been held off, because it’s  not a perfectly clear picture.”

Another CEO put the situation even more bluntly:

Don Fox, CEO of Firehouse of America, a restaurant franchise, said he plans  to bring his franchisees together next month for a health-care summit. His  multi-location franchisees, those with five or more restaurants, will discuss  how the law impacts their businesses.

“If [a franchisee] is in a five-store agreement, for our brand, opening  restaurant number five means the mandate will apply. In essence, what I have  done is put my entire investment for restaurant number five toward offering  paying for health care. So why open it?” he said.

Forbes recently ran a cheery little article called “4 Business Options to Manage the Increased Costs of ObamaCare.”  The options were, in a nutshell: give your employees incentives to stay healthy, cut their benefits, make them pay more for benefits, and don’t hire anybody.  Here’s how they put that last bit of helpful advice: “Under the PPAHCA, small businesses with 50 or more employees are mandated to buy health insurance for their employees or pay a fine, or tax, according to Justice Roberts. This may force some employers to get creative by possibly switching many of their full-time employees into part-time roles or splitting their companies into two separate businesses in order to control headcount.”

And that’s exactly what business owners are doing.  It’s the path of least resistance.  Employee wellness programs can only accomplish so much, and in any event the health of a company’s workforce doesn’t really have that much of an impact on their ObamaCare-mandated costs.  As Forbes noted, slashing benefits and “sharing the increased cost of the health plan with your employees” tend to depress employee morale.  It’s much easier to avoid the ObamaCare nightmare as much as possible, by keeping staff small.  When a different Forbes article in December sized up “the five biggest issues facing small business in 2013,” ObamaCare was Number One.

The level of prospective return on expansion investments must be high, to overcome these disincentives.  Visiting Angels CEO Dan Drennen said he was “hopeful the franchise and small-business community will be able to weather the challenges the ACA presents,” adding that he didn’t think ObamaCare is an “insurmountable” obstacle.  But why are we giving business owners obstacles they can only hope they will be able to surmount?  And why is anyone surprised by the result?

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