So You Want to Open a Restaurant

Things Gone Awry for Restaurant Clients

Restaurants are some of the most complicated small businesses around.  In fact, just today, while talking with another business advisor about a client in dire straits, she asked, “what industry?”  I said “restaur…”  and before I could even complete the word, she was nodding in understanding.  Running a restaurant is a complex undertaking, and requires, no pun intended, intestinal fortitude.

While many business owners can run lean companies by leveraging technology and working virtually, often with no employees, restaurant owners don’t have that option.  As a matter of course, you’re dealing with commercial space, health department regulations, employees, vendors, customers, insurance concerns, volatile cash flow, seasonality, the list goes on.  With so many variables, many of which you can’t control, what can you do to keep yourself out of trouble?

Let’s start with employees. I have yet to encounter a restaurant without employees.  Computer kiosks and Boston Dynamics might get us there, with their increasingly agile robots, but until that day comes, we’ll assume your restaurant has employees.  After all, it’d be pretty tough for the business owner to be the host, the server, the cook, the busser, and the dishwasher.  I mean, I can multi-task, but that’s a bit much.  The trick with avoiding trouble with employees is to document, document, document, from the interview process all the way through to termination.  Buy a filing cabinet or a good scanner.  You’ll need it.

Horror stories always get people’s attention, so I’ll retell some here, changing names to protect the innocent, of course.

Hiring Horror Stories

Horror Story #1 – Failure to Hire: Fast food restaurant job applicant lacks the proper qualifications, so she isn’t hired.  She also happens to belong to a couple of protected classes.  When she doesn’t receive an offer of employment, she files a lawsuit for “failure to hire” based on discrimination. Yes, that’s a thing. The employer wasn’t discriminating against her; she just wasn’t a fit.  However, because the employer had kept no records or notes on the fact that the candidate wasn’t hired because she simply fell short of the required qualifications, the employer wasn’t able to prove a lack of discrimination, and now the lawsuit is almost TWO YEARS in process.  Luckily, the restaurant owner had a good insurance policy and turned the lawsuit over to insurance counsel.  Still, TWO YEARS.

How to Avoid: Create job descriptions for each position in your company, and applications for your prospective hires.  Make notes about, but not on, these applications and, if you decide not to hire someone, record the (non-discriminatory) reason and keep that in a file.  If you have written proof of the posted qualifications necessary for the job, and an application that shows the person simply lacked the minimum qualifications, you have a better chance of nipping a frivolous lawsuit in the bud.

Horror Story #2 – Hiring Friends and Wage Claims: Restaurant owner hires a childhood friend to fill a management position, without insisting on a signed employment agreement, or providing an employee handbook which would have set some expectations.  “We don’t need that, he’s a dear friend.”  Of course he is.

The manager is also not required to track time.  As a friend of the owner, he takes some liberties with his role, eventually crossing the line into severe insubordination and his negative attitude begins to adversely affect the rest of the team.  When the manager, who, by the way is supposed to set a good example, tells off an owner in front of an entire shift of his direct reports, he’s fired.  In short order, he files a wage claim, insisting he was not paid what he was due, and threatens to submit photos of health code violations to the health department.  Never mind that the manager was (at least verbally) put in charge of making sure these violations didn’t happen, and never mind that the other employees witnessed the manager creating those violations, snapping pictures, then returning the misplaced item to its proper place in the kitchen.  The allegations in the wage claim are presumed true unless the employer can provide written documentation to disprove them.  Without a handbook or contract to point to, and without timesheets, the employer was forced to pay the claim.

How to Avoid: Make sure all employees have signed employment agreements and agree in writing to the terms in your employee handbook.  Make sure the handbook outlines the disciplinary process (e.g., verbal warning, written warning, termination) and document every step of the process, ideally having the employee sign off to acknowledge all discipline.  Make sure you keep timesheets on all employees and that discipline is associated with their failure to clock in and out.  When employees file wage claims, the burden then shifts to the employer to disprove the allegations in the wage claim.  The only proof the investigator will often accept is written proof, created contemporaneously with the event. “Contemporaneously” means you can’t cook up records once you receive notice of the wage claim; those records have to be made as soon after the event as possible to bolster their credibility.

Horror Story – Workers’ Comp:  A back-of-the-house employee strains his back while lifting a heavy box, likely not following proper lifting procedures.  The employer dutifully sends the employee to a quick care, where the physician confirms a lower back injury and recommends ten days of light duty.  The employer rearranges schedules and roles in order to accommodate the injury, but the injured employee returns to work and continues to lift the heavy boxes against doctor’s orders and against the employer’s insistence that he comply with the light duty recommendation.  Employee exacerbates his injury and appeals the workers’ comp claim, seeking coverage for additional injuries to his upper back, which employer’s insurance carrier denies.  The employee then threatens to sue the employer for his injuries.  Even though workers’ comp is normally an exclusive remedy in Nevada, meaning the injured employee is entitled to care under the insurance policy but can’t additionally sue the employer, there are other states in the US and also other circumstances under which a Nevada employee could sue.  Better safe than sorry.

How to Avoid:  Ensure that your employee handbook addresses the proper procedure to follow in the event of an on-the-job accident.  Also make sure the handbook provides that failure to adhere to doctor’s orders following a workplace injury is grounds for discipline, up to and including termination.  Anytime someone is injured on the job, take written statements from any witnesses, ensure the injured employee seeks medical attention, and discipline the employee for any failure to follow proper protocol.

Horror Story – Don’t Sign Anything without Doing Your Homework:  When buying a restaurant, make sure your commercial space complies with all licensing requirements, before you sign anything.  A client, we’ll call him Joe, was so excited to open his restaurant that he signed his lease agreement without having a lawyer review it, without having an inspection done on the property, and without ensuring the space was suitable for the type of restaurant he wanted to open.  He called us in a panic when the health inspector told him he couldn’t open his business until he upgraded the grease trap, to the tune of about $25,000.  He contacted his landlord who, almost gleefully, pointed out a section in the lease agreement the client had overlooked which placed the responsibility for upgrading the grease trap squarely on the tenant. Joe was stuck. He couldn’t open his restaurant without the upgrade, and he couldn’t get out of his lease agreement.  The landlord, all too happy to have someone improve his property for free, refused to share in the expense.  Finally, because the lease was an “as is” lease, it was wholly Joe’s responsibility to make sure the space fit his needs.

Success Story #1 – But wait, it’s not all bad news: An employee who had walked off the job filed for unemployment.  His initial application was denied, and he appealed, claiming he was fired without cause and was therefore entitled to unemployment benefits.  Luckily, the employer had saved all the text messages exchanged with the employee which showed that he had simply abandoned his job, after sending the employer a series of volatile and insubordinate text messages.

In his appeal hearing, he claimed that the employer had asked him to do things that weren’t “his job.”  Luckily again, the employer had both an employment contract and handbook that very clearly outlined the employee’s duties, which included the tasks he refused to perform.  I found it particularly amusing when the straight-laced investigator from the state unemployment division read into the record the most damning of the text messages, which contained an expletive that begins with “F” and was followed by “I’m not doing this anymore.”  I did somehow manage to keep a straight face.

Success Story #2 – Stop Being Nice.  A very generous client knew one of her employees would need time off work to care for her mother after surgery. Generously, though certainly not wisely, the employer offered to continue paying the employee even while she wasn’t working so the employee had a steady paycheck. The employee agreed that, once mom was on the mend, she would work an extra hour each shift to make up for it.  How sweet, right?  Well, no good deed goes unpunished.  The employee took the time off, collected her paychecks, then returned to work only to quit her job, having earned weeks of wages for not even showing up.  Shame on the employer, right?  Lesson learned.  But wait, there’s more.

This employee had the AUDACITY to file a wage claim for unpaid wages dating back THREE YEARS.  Now, I haven’t been an employee since 2007 but I’m pretty sure I wouldn’t wait three years to complain that my paycheck was shorted.  So, to overcome the burden on the employer, we assembled 3 years x 12 months per year x 2 pay periods each month…it was a tedious task.  Luckily, this employer required each employee to submit a timesheet for each week of work.  The employer reviewed and signed it, then the employee reviewed and signed. That timesheet information was sent to the payroll service. I somewhat passive-aggressively used the Drawing feature in Adobe to notate the hours worked and connect them to the paychecks cut in THICK RED LINES.

When we got to the not-a-hearing (the Labor Commissioner assured us it wasn’t a “hearing,” just an “interview” which made the hair on the back of my neck stand up), the employee’s sister insisted on being in the room. I objected but the investigators – yes, there were TWO investigators in attendance – said it wasn’t a “hearing” and the employee could have her sister in the room.

In short order, it became abundantly clear that the employee’s sister was the brains behind this whole operation.  She kept interrupting me, the investigators, and banging her fist on the table while her sister – the employee – sat quietly.  After about an hour, the employee pulled out one of those cute laminated pocket calendars they used to sell at Scholastic Book Fairs.  Remember those?  They usually had a kitten or puppy on the cover?  The investigator who was doing less of the talking asked if she could look through the calendar.  “Sure” said the employee.  So the investigator began thumbing through the calendar.

Investigator: You wrote “W” on some days – what does that mean?

Employee: It means I worked.

Investigator: You wrote “OW” on other days – what does that mean?

Employee: That means “off work.”

I watched the quiet investigator compare the OW days with the days the employee claimed to have worked and not been paid.  Whaddya know, the days didn’t line up.  I know you’re shocked…SHOCKED.

To make matters worse, the sister had taken blank timesheets and fabricated them.  How did I and everyone else in the room know they were fabricated?  Because the employer’s signature wasn’t on them and because in my giant stack of documentation, we had the countersigned ones.  She was sneaky enough to try to game the system, but wasn’t smart enough to 1) forge the signature or 2) tell her sister to leave her damn cat calendar at home.

After a good three hours of this hearing-not-a-hearing, the investigators concluded that the wage claim was falsified, but STILL INSISTED the employer pay the employee for the hour she spent at work waiting to quit her job.  I looked at the sister and invited her to sue for it.

While that story has a somewhat happy ending, it was a huge distraction in terms of time and money spent.

I’ve got about a dozen more of these, so stay tuned for more stories!