Food and Beverage Law Update: August 2016

Data Security

Cyber Liability in the Food and Beverage World

By Shannon Hartsfield

When food and beverage companies think of their largest risks, data breaches have not historically come to mind, but this is changing because of reports in the past few months of major breaches by companies such as Noodles & Company, Albertsons, Supervalu and Cicis Pizza that have impacted hundreds of stores. The vast majority of states have laws that require notification to individuals and government entities if personal information in electronic form, such as bank account numbers, credit card data, Social Security numbers, and email addresses and passwords, are acquired by unauthorized individuals. The federal government is also actively enforcing data privacy and security laws. For example, the Federal Trade Commission (FTC) is committed to protecting consumer privacy. The FTC brings enforcement actions against businesses that do not comply with statements made to customers about how their data will be used and disclosed. The FTC has advised businesses to collect only the data they need, maintain it safely and dispose of it in a secure manner. Restaurants and other companies that maintain websites that may collect information from children must also conform to the Children's Online Privacy Protection Act (COPPA), which is also enforced by the FTC.

Businesses can take a number of measures to protect the data they hold. A thorough and accurate analysis of the information an organization maintains, how it is used and disclosed, and the potential risks to that data is a good first step. To preserve confidences and privileges to the extent feasible, your counsel should be involved early in this process. Once risks are identified, it will be important to take proactive measures to mitigate those risks and protect against security incidents and data breaches. Mitigation should include policies and procedures, as well as training of those who have access to personal data. Responding to data breaches can be extremely expensive, so preventive measures, as well as appropriate cyber liability insurance, can be invaluable for protecting a business. Cyber liability insurance varies radically in scope of coverage and value; therefore, it is wise for organizations to have their coverages reviewed by a specialist. Taking reasonable steps to protect personal data is critical for any business that handles this type of personal information.

Food Safety

How to Avoid the "Front Page"

By Colin L. Barnacle

Over the past several years, being on the "front page" has taken on a new meaning. It used to signify being the next Wall Street pundit and foodie darling – the up-and-coming food rage or a successful initial public offering (IPO). Today, however, it can just as easily signify a national food safety crisis.

With food consumers demanding more fresh, natural, organic and farm-to-fork options, the risks of pathogen infiltration and food-borne illness grow exponentially. As demand skyrockets, the onus falls squarely on food retailers and restaurateurs to up their food safety game. With the legal and regulatory changes brought by the new Food Safety Modernization Act (FSMA), the legal risks and consequences associated with a pathogenic outbreak (e.g., salmonella, E. coli and listeria) are severe. In fact, anyone who handles, buys or sells food, and certainly anyone who prepares and serves food to consumers, needs to know a great deal about FSMA. FSMA is the greatest expansion of food safety requirements and the U.S. Food and Drug Administration's (FDA) powers over food safety issues in the agency's history.

So, what steps should food retailers and restaurateurs of all sizes take to avoid being on the "front page" for all the wrong reasons? Start with an internal audit of the current food safety program in order to identify the strengths, weaknesses, priorities and gaps. Some key features ought to include a) understanding FSMA and the requirements for operations, b) developing supplier testing and auditing programs, c) utilizing an appropriate level of pathogen testing for uncooked, fresh food products, and d) employing appropriate food storage, preparation and handling requirements.

There are no "one-size-fits-all" food safety programs. Each program ought to be tailored to the particular food-related organization. However, all food retailers and restaurateurs need to take a long, hard look at their programs and make the necessary changes to be safe for consumers and FSMA compliant. If not, the chances of making it to the "front page" are all too real.

Labor and Employment

If You Are Considering Selling Your Business, Have You Considered an ESOP?

By Renee P. Lewis

Baby boomers are retiring, and for many, that means they are selling their businesses, including businesses in the food and beverage industry. The first quarter of 2016 saw the most sales of small businesses in seven years, according to an annual survey conducted by Bizbuysell.com, an internet marketplace for sales of businesses. If you are a business owner thinking about selling your business, you should consider whether selling to an employee stock ownership plan (ESOP) is an option. There are close to 7,000 ESOP companies in the U.S., according to the National Center of Employee Ownership, and many ESOP companies are in the food and beverage industry, including King Arthur Flour, New Belgium Brewing, Left Hand Brewing Company, Harpoon Brewery, Harp's Food Stores, RAM Restaurant and Brewery, KeHE Distributors, Brookshire Brothers and WinCo Foods.

An ESOP is a tax-qualified, defined-contribution employee benefit plan designed to give employees an ownership stake in their employer by investing primarily in the stock of the employer. As a tax-qualified plan, an ESOP provides meaningful tax benefits to the employer and its owners. ESOPs also can help achieve multiple corporate ownership goals and can play a unique role in employee compensation and corporate succession not achievable in traditional merger and acquisition exits.

Business owners are using ESOP for many purposes, such as:

• to create a market for owners of closely held companies who wish to sell their shares on a tax-deferred basis and allow the companies to use tax-deductible dollars to pay for those shares
• to allow shareholders with management responsibilities in closely held companies to sell gradually on a tax-deferred basis and ease out of the business over a planned period
• to affect ownership transition and provide liquidity to shareholders, in a structure that enables the company to operate free of federal income taxes, resulting in increased cash flow to service debt and grow the value of the business
• to enhance corporate performance and job satisfaction by creating a corporate "ownership" culture
• to reward employees with a benefit tied to corporate performance while affording the company substantial benefits

New DOL Overtime Exemption Rules Serve Uncertainty with Side of Trepidation for the Restaurant Industry

By Colin L. Barnacle

The U.S. Department of Labor (DOL), on May 18, 2016, released its rule updating overtime regulations for executive, administrative and professional employees (commonly referred to as white collar employees) under the Fair Labor Standards Act (FLSA). The new rule more than doubles the salary threshold (from at least $455 per week/$23,660 per year to $913 per week/$47,476 per year) to equal the 40th percentile of weekly earnings for full-time, salaried employees in the lowest income region of the country (the South), as reported in the U.S. Census. The DOL rule is expected to expand overtime coverage to roughly 4.2 million employees. The new rule is set to take effect on Dec. 1, 2016.

Restaurants are one of the industries most affected by this new ruling that increases the overtime threshold limit. The change will affect existing exempt salaried workers, such as entry and mid-level management, chefs, bakers and supervisors. According to the Bureau of Labor Statistics (BLS), there are 696,730 "first-line supervisors/managers of food preparation and serving workers," most of whom are exempt. A significant portion of these workers will be impacted, given their average annual income is $32,410.

Restaurant owners/operators will need to decide how to effectively and legally manage the new regulation if existing exempt employees who fall under the new pay threshold are working more than 40 hours in a workweek. In practice, compliance with the new overtime standards will involve a variety of approaches to labor management as well as other creative adjustments.

For example, options may include cutting hours, creating multiple positions, job sharing, paying eligible employees overtime, raising salaries above the threshold and/or reverting existing exempt salaried employees to "non-exempt" hourly employees. Each of these alternatives has different consequences to consider. In instances where employees are not far from the threshold, it could make sense to increase their salaries, but this option may not be feasible for small, independent operations with small profit margins. There is also the issue of communicating changes to the employees and being cognizant of resulting morale and performance issues.

In any event, employers who have not yet planned for the change in the overtime exemption rules should begin doing so immediately to minimize the disruption to their operations and bottom lines.

Mandatory Gratuities and the Law

By Nathan A. Adams IV

State and local minimum wage laws in several parts of the county and other factors have led some restaurants around the country to require mandatory tipping as a way to manage rising labor costs and to ensure equity between the front and back of the house. A mandatory or automatic gratuity is an automatic tip added to a customer's bill by management. Before you take this step, there are several repercussions to consider. First, some localities such as New York City have prohibited restaurants from assessing a surcharge on listed menu prices. 6 RCNY §5-59. Although there may not be a related private right of action, local government obviously has the authority to file claims under these laws. In these jurisdictions, mandatory gratuities raise an enforcement threat.

Second, in 2014, the Internal Revenue Service (IRS) began enforcing its mandatory gratuity rules, which classify an automatic gratuity as a service charge instead of a tip. The IRS treats service charges as regular wages, subject to payroll tax withholding. The IRS has identified the following four factors that must be present in order for a customer's extra payment to be treated as a tip, and not as a service charge: 1) the customer's payment must be made free from compulsion, 2) the customer must have the unrestricted right to determine the amount, 3) the payment should not be the subject of negotiation or dictated by the employer policy and 4) the customer has the right to determine who receives the payment.

Lastly, some enterprising plaintiffs have begun claiming that mandatory gratuities are a type of deceptive trade practice. Requiring customers to pay a price for an item above the price advertised, without first informing the consumer of the total cost, may be a basis to claim violation of deceptive trade and practice law. Specifically informing customers of any mandatory gratuity is an important defense to such a claim.

Regulation and Legislation

The FDA, on July 13, 2016, released the Final Rule on Amendments to Registration of Food Facilities, which are applicable to food facilities that manufacture and process, pack or hold food for consumption in the U.S. Registrations now must occur every two years and contain additional information such as the email address for the contact person for the facility and an assurance that FDA will be permitted to inspect the facility. The new rules also provide that in determining the primary function of a retail food establishment, the sale of food directly to consumers by such an establishment counts the following: 1) the sale of food products or food directly to consumers by the establishment at a roadside stand or farmers' market when such stand or market is located other than where the food was manufactured or processed, 2) the sale and distribution of such food through a community supported agriculture program, and 3) the sale and distribution of such food at any other such direct sales platform as determined by the FDA secretary.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.