Taco Bell Franchise Management Advisory Council 2010 Legislative Conference

Taco Bell Franchise Management Advisory Council
                             2010 Legislative Conference
Introduction

     The Taco Bell Franchise Management Advisory Council (FRANMAC) was founded in 1985. The association consists
of approximately 400 franchisees that own and operate over 4100 Taco Bell restaurants. Most franchisees are family-
owned or are closely held small businesses that combined employ more than 126,000 people consisting of all ages and
skills. These employees are provided excellent training and advancement opportunities within a positive, customer-
oriented working environment.

Legislative Focus

    Since its formation over 20 years ago, FRANMAC and its Taco Bell franchisee members have worked diligently to
promote a healthy, safe and prosperous quick service restaurant industry. It is important for us to make sure that our
crucial role in the economy is not adversely affected by changes to federal law or public policy. Each year we convene in
Washington, D.C. to discuss our legislative priorities. For the 2010 Legislative Conference, Taco Bell franchisees have
identified the following issues as their most pressing concerns in Washington:

    •   Implementation of Health Care Reform – The recently enacted health care reform bill could end up costing the
        average Taco Bell Franchisee over $20,000 per restaurant each year in increased health care costs. Those costs
        will make it extremely difficult to operate our restaurants without laying-off workers, increasing prices and
        shuttering underperforming locations. As a result, we will be closely monitoring the Department of Health and
        Human Services’ rule-making process and supporting legislation to ensure the new law’s requirements are as least
        costly on our businesses as possible.

    •   Employee Free Choice Act - We pride ourselves on treating our valued workers fairly and with the respect they
        deserve. We oppose the Employee Free Choice Act because our employees should be allowed to make an
        informed decision about union organization without coercion or undue influence, including from union
        organizers, fellow employees, or management. Moreover, neither our employees nor our franchisees should be
        required to work or operate under a collective bargaining agreement dictated by the federal government that
        neither side has agreed to.

    •   15-Year Restaurant Depreciation –We support tax legislation to depreciate the construction and remodeling costs
        of restaurant facilities over a 15-year period rather than the 39 ½ years which generally applies to commercial
        property. The 15-year depreciation schedule expired at the end of 2009. Like most restaurants, our facilities do
        not last anywhere near 39 years without major renovations. Plus, most franchise agreements contain “scrape and
        rebuild” provisions which require restaurants to be rebuilt from the ground up every so often. This legislation
        also puts restaurants on a level playing field with our competitors in the convenience store industry who already
        benefit from such relief and can be a good source of local job creation in the construction industry.

    •   Energy Policy – Energy and commodity costs are two very important variables to the franchise restaurant
        industry. Price hikes in one category or the other can have a tremendous impact on our day-to-day operations as
        well as the profit margin of our restaurants. For this reason, we oppose diverting a higher percentage of the
        nation’s corn supply to energy production without adequate guarantees that doing so would not lead to higher
        commodity costs. Likewise, we oppose the increased taxes that would be the indirect result of cap-and trade
        legislation. Increased energy and commodity costs translate to increased prices for our customers. We oppose
        any legislation or regulation, direct or indirect, that would increase energy and commodity costs on our
        restaurants.

Health Care Reform
Introduction

        Health care insurance has been an effective way for Taco Bell franchisees to attract and retain qualified
employees to operate our restaurants. We want to preserve the availability of employer-provided health care, but are
concerned that the penalties and mandates contained in the recently enacted health care reform legislation will make it
impossible to offer these benefits without closing underperforming locations, eliminating positions, or reducing health
benefits for current workers.

Effect of Health Care Reform on Franchise Restaurants

        Most franchisees employ more than 50 full-time employees and will therefore be subject to the penalties
contained in the new law. We face penalties of $2,000 per year for every full-time employee that is not offered an, as yet,
undefined minimum essential benefits package. The penalty alone will cost the average franchisee about $20,000
annually. For the quick serve restaurant industry, which operates within the lowest profit margin of all major employment
categories, $20,000 represents approximately one-quarter of the average restaurant’s total profit.

        To avoid the penalty, we face several new coverage requirements including that employer plans: 1) include
individual and family coverage; 2) provide a minimum actuarial value of 60%; 3) limit the employee’s share of premiums
to 9.5% of income; 4) limit employees’ out-of-pocket costs ($5,950 for individuals and $11,900 for families); and 5)
provide for a minimum essential benefits package to be determined by the Department of Health and Human Services.

         The new employer penalties and coverage requirements pose a difficult financial challenge - pay the penalty or
offer full-time employees costly new benefits – that cannot be accomplished without drastically raising prices or reducing
labor costs.

What Congress can do to ease compliance burden with new Health Care Reform Law?

        These provisions take effect on January 1, 2014. As Congress monitors implementation of the new law,
consideration should be given to the following concrete steps that Congress can take to alleviate the compliance burden on
businesses such as ours:

    •   Increase the allowable employee premium limit (currently 9.5% of income) when offering family coverage
    •   Treat restaurants as separate entities for purposes of determining employer size and calculating penalties
    •   Provide clarity to the definition of full-time employees. Currently defined as those working 30 hours or more per
        month, the definition should measure the average hours worked over a calendar quarter rather than monthly
    •   Allow for a longer waiting period (currently 90 days) of six months prior to assessment of the employer penalty to
        account for the high degree of employee turnover in our industry

Position

         Taco Bell Franchisees are doing as much as we can to provide employee benefits to our workers. We will closely
follow the rule-making process for the new health care reform law, but believe that additional changes will be necessary
to avoid the closure of restaurants, elimination of jobs, and increase of prices that will directly result from the new health
care reform law.

Oppose the Employee Free Choice Act
Introduction

         The Employee Free Choice Act is unfair and violates one of the fundamental principles of democracy – the right
to cast a ballot based on one’s individual conscience. The Employee Free Choice Act will alter the way workers decide
whether or not to join a union by abolishing employees’ entitlement to a secret ballot in favor of the so-called “card
check” unionization process where organizers can simply convince a majority of employees to sign a card supporting
union organization. Taco Bell Franchisees are concerned that trading federally-supervised secret ballot elections for the
card check process will threaten the privacy of our employees and expose them to undue influence in the union
organization process.

Elimination of Secret Ballots

         Under existing law, employees are given the opportunity to cast secret ballots in elections supervised by the
National Labor Relations Board when voting on whether or not to form a union in their workplace. Under the card check
changes, if more than 50% of the workforce signs a card, the government would have to certify the union, and a private
ballot election would be prohibited, even if employees desired one. The workers’ decision is ultimately made public to
the employers, union organizers, and co-workers.

        In addition, there is no obligation for a labor union to notify employers when launching an organization drive.
Employers may not find out an organizing campaign is underway in their workplace until notified by the federal
government that a union has been certified in their workforce. Once 50%, plus one employee, of a particular workplace
signs authorization cards, the other employees are not guaranteed to know whether an organization is underway either,
and therefore may not ever have the right to vote on forming the union.

        The card check system would also open up our employees to intimidation and coercion, since workers could be
asked to sign an organization card at anywhere union organizers find them, including off the worksite. Union organizers
could go back to any worker who declines to sign over and over again until they get the desired result.

Binding Arbitration

        This legislation also includes a biding arbitration provision that could impose upon both employees and
management a two-year contract if the parties were unable to agree on a collective bargaining agreement within 120 days
of the union certification. Employers and employees alike could be locked into unrealistic and unworkable rules
governing wage and hour procedures, break and vacation time, and working conditions because the federal government
would be unilaterally responsible for implementing the two-year agreement, and neither party could change any provision
they thought was unfair or unmanageable.

Position

        Seventy-five percent of Taco Bell Franchisees are family-owned business. We pride ourselves on treating our
valued workers fairly and with the respect they deserve. We oppose the Employee Free Choice Act because our
employees should be allowed to make an informed decision about union organization without coercion or undue
influence, including from union organizers, fellow employees, or management. Moreover, neither our employees nor our
Franchisees should be required to work or operate under a collective bargaining agreement dictated by the federal
government that neither side has agreed to.

Restaurant Depreciation Relief
Issue

         Taco Bell Franchisees urge your support for legislation to extend and make permanent the restaurant
depreciation relief that expired on December 31, 2009. The restaurant depreciation provision reduced the 39½-
year depreciation period for the cost of construction and improvements made to restaurant facilities to a more
realistic 15-year schedule. It is a temporary provision that must be extended annually via tax extenders
legislation. Taco Bell Franchisees support a permanent reduced depreciation schedule because it would better
account for the high degree of wear and tear that our restaurants receive and create additional jobs both in our
communities and in our industry.

Background

        Nonresidential real property, including franchise restaurants such as ours, are typically depreciated, for
tax deductibility purposes, using a 39½-year recovery period whereby cost of acquiring, constructing, or
renovating the structure can be deducted in equal amounts each year. This nearly 40-year “write-off” period for
restaurant buildings is roughly double the normal use-life of a franchisee’s restaurant building since our
restaurants simply do not last anywhere near 40 years without major renovations.

        In addition, most restaurant franchise agreements contain “scrape and rebuild” provisions that obligate
franchisees to build new facilities from the ground up once their original restaurants reach a certain age. With a
39-year depreciation period, this means franchisees have to build a new restaurant well before they have
recovered the costs of building the original facility.

         In 1996, Congress reduced depreciation schedules for commercial buildings owned or leased by certain
types of businesses, such as gas stations and convenience stores, whose facilities incur unusually high wear and
tear. In many cases, those industries have come into direct competition with the quick-serve industry as they
added food service options to their traditional lines of business. Restaurant depreciation relief levels the playing
field with these competing industries, as it relates to depreciation schedules, and the ability to build and remodel
restaurant property.

          Depreciation relief also serves as a major impetus for job creation when you consider the amount of
labor and materials required for the construction or renovation of a single quick-serve restaurant. There is also a
long-term growth effect associated with the new jobs created in the restaurant industry itself as a result of
increased sales from a new or remodeled facility.

Position

         Taco Bell Franchisees support H.R. 4306 introduced by Reps. Kendrick Meek (D-FL) and Patrick
Tiberi (R-OH), which is a bipartisan bill to reinstitute and make permanent the reduced depreciation schedule
for restaurant construction and improvements, and leasehold and retail improvements. A companion bill has not
yet been introduced in the Senate, but the legislation has enjoyed broad bipartisan Senate support in previous
Congresses.

Energy Policy
Introduction

        Energy costs and commodity prices are two very important variables in the operation of
our restaurants. In recent years, we have found it increasingly difficult to meet our operating
budgets due to price increases related to the cost of our ingredients and the cost to power our
restaurants. We are unable to adjust the price of our menu items or realize cost savings from
other aspects of our business quickly enough to absorb rapid cost increases.

Cap and Trade Legislation

        “Cap and trade” or “carbon tax” legislation is designed to regulate the emission of
greenhouse gases by requiring businesses that emit substantial quantities of such pollution to
purchase tax credits to offset those emissions. Although our restaurants are not significant
sources of greenhouse gas, we are concerned that some of the utilities who supply our power
would be subject to the new tax credit requirement and in turn those costs would be passed on to
us in the form of higher utility bills.

       We cannot afford more energy-related cost increases, and oppose any effort to
incorporate a cap and trade system into climate legislation.

Ethanol Policy

        The cost of ingredients used in the preparation of our menu items are directly tied to the
price of other commodities in the supply chain such as the cost of grain, cheese or meat. Recent
price hikes for these commodities were due, in large part, to the diversion of corn from the food
supply to the energy sector. Increased commodity costs have a direct impact on our cost of
doing business and the price of our food items.

       As a result, we are opposed to any administrative or legislative effort to increase the
current cap on the amount of ethanol permitted to be blended into gasoline unless we can be
assured that such a policy would not lead, directly or indirectly, to increased commodity costs.

Position

        Taco Bell Franchisees realize there are several competing factors responsible for rising
energy prices and commodity costs. To the extent, however, that these factors can be controlled
by more sensible energy policy solutions, we urge our elected officials to take our businesses and
the jobs we create into account when considering energy-related legislation.

Facts About Franchising and Taco Bell Franchisees
•        Franchising is a way of doing business that involves a franchisor – a company that lends
its trademark, trade name, and business system – and a franchisee – an individual or company
that pays a fee for the right to do business under the franchisor’s name and operating system.

•       Most franchises start from a single store, restaurant or particular concept. As a business
becomes more successful, the original owner may look to other individual operators to expand
and “grow” the business in terms of sales, number of stores, geography, etc. These individual
operators, or franchisees, purchase the property, build out the facilities based on the franchisor’s
specifications, hire employees and manage the day-to-day operations of the business.

•      According to the International Franchise Association, by 2001 there were nearly 800,000
business establishments in all domestic franchise systems, which employ almost 10 million
people, with direct output close to $625 billion and a payroll of $230 billion.

•       The Taco Bell System is a franchise of YUM! Brands and is represented by the Taco Bell
Franchise Management Advisory Council (FRANMAC). Founded in 1989, FRANMAC consists
of approximately 400 Franchisees that own and operation over 4100 Taco Bell restaurants.
Seventy-five percent of Franchisees are family-owned businesses while the remaining
franchisees are closely held businesses that, combined, employ more than 126,000 people
consisting of all ages and skills. These employees are provided excellent training and
advancement opportunities within a positive, customer-oriented working environment.

•       Since its formation over 20 years ago, FRANMAC and its Taco Bell Franchisee members
have worked diligently to promote a healthy, safe and prosperous quick service restaurant
industry. In order to protect the crucial role Franchisees play in the economy and to ensure their
businesses are not adversely affected by changes to federal law or public policy, FRANMAC
members convene in Washington, DC to discuss their legislative priorities with their elected
officials. The annual FRANMAC Legislative Conference held each spring brings nearly 100
Taco Bell Franchisees to the nation’s capital and includes an afternoon of speakers to discuss the
current business and political climate in Washington followed by a full day of grassroots
lobbying on Capitol Hill.

•       Taco Bell Franchisees are also active in their communities, including through the Taco
Bell Foundation for Teens. Established in 1992, the Foundation is a public charity committed to
inspiring teenagers to graduate from high school and become caring, educated and productive
adults. Through an exclusive partnership with the Boys & Girls Club of America, the
Foundation has created a national focus to foster educational, career and service opportunities for
teens. More than $20 million has been raised for Taco Bell programs at Boys & Girls Clubs.
This funding comes from Taco Bell customer donations and the support of Taco Bell, its
employees, and Franchisees.