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Nasir and Matt discuss the IRS looking into taxing free lunches provided by Silicon Valley companies. The two then answer, "I'm a franchisor, can I be held responsible for labor law violations of my franchisees if I don't know about it?"

Full Podcast Transcript

NASIR: Welcome to Legally Sound Smart Business. You’re listening to Nasir Pasha.

MATT: And this is Matt Staub.

NASIR: That’s correct. Welcome to the business podcast where we cover business in the news and also answer some of your business legal questions that you, the listener, can send in to and also ask us on Twitter @AskBizLaw and that’s our Twitter handle and you can also follow us and we may respond but we probably won’t.

MATT: At least we’re honest.

NASIR: No, we will respond. I’m just joking.

MATT: I might not. I don’t think I have enough control of it.

NASIR: Someone will respond out there. I’m not even in control of it either. It’s just some random guy.

MATT: Just hoping that we convinced him to put the logo from the podcast up.

NASIR: Exactly.

MATT: It could be a fan, I guess. Maybe that’s what it is.

NASIR: Super fan.

MATT: Yeah. If you really want to tweet at us, go to @TheRealAskBizLaw on Twitter.

NASIR: Verified account.

MATT: Yeah, I think that’s kind of gone by the wayside. That was pretty big at the beginning because so many people were jumping on celebrity and athlete names but I think, at this point, it’s all kind of been sorted out, interestingly enough.

NASIR: Yeah, you’re right. Now, it seems like it used to take a while to get a verified account but, apparently, now it’s pretty streamline and so forth.

MATT: The only one I can still think of is Shaq but I don’t think he’s even @TheReal Shaq anymore. I think it’s just @Shaq.

NASIR: That I don’t know.

MATT: Well, we’ll get into the story because I know everyone wants to listen to people talk about tax issues.

NASIR: That’s my favorite!

MATT: I don’t want to deprive them of that.

NASIR: Well, there’s no such thing as a free lunch. I had to say that.

MATT: Aww, man.

NASIR: Were you going to say that?

MATT: That’s pretty good. I was going to say, “It’s two topics I like talking about – lunch and tax.” It’s a good story for me.

NASIR: Wait, wait, you like talking about lunch? Who talks about lunch? Not dinner but lunch?

MATT: Well, any meal, really. It doesn’t matter, yeah.

NASIR: Oh, okay. I think you like food. I think it’s called food.

MATT: Yeah, I would say that’s accurate. Free meals are always good, too. That’s what we’re getting into here. Google I think was the company that was really known for this. I didn’t realize that other companies too. I guess a lot of them and some of the bigger ones in Silicon Valley do this but they offer free meals to their employees. If you’ve seen the movie The Internship with Owen Wilson and Vince Vaughn, they talk about it in there and Vince Vaughn kind of abuses the system. But that’s not the issue here. It’s that the IRS is looking at this and saying, “You know what? I think we can actually tax this somehow and so we’re going to look into possibly saying these meals are actually income of the employees and we’re going to start taxing it as income.” Obviously, that’d be bad for the employees but, on the employer’s side, guess what, that means you have to pay half of that for payroll taxes.

NASIR: Yeah.

MATT: Basically, this boils down to this, and there are rules in place. To summarize it, employers are allowed to provide free meals for their employees but it has to be for the convenience of the employer. I think a very easy example would be if you had a business and there wasn’t any places to eat close to the business and you provided a free lunch for your employees. You know, you’d be fine with that. That’s a convenience of the employer because the employees would have to leave for a long period of time. Another classic example is bank tellers. If you need someone to be at the front, you can provide some of that sort of thing. But what about all these people that are working at Google, Facebook, Twitter, et cetera. Is this for the convenience of the employer? That’s kind of what the IRS is looking into and, right now, they haven’t taken any action. They’ve just put it on a list of items to look into which I think is at 300 different items so who knows whether this actually will ever get looked at.

NASIR: Well, it is kind of annoying though, right? I mean, why make it so complicated? You know, “Hey, look, I just want to provide meals to my employees. Just make it nice and simple.” I mean, they’ve already pretty much well-established that free coffee, soda, and snacks which is always a great benefit of working in an office, I think. I think that’s something that employers should all provide – nice little benefit. That’s considered not taxable. That’s pretty well-established. But then, where does the line stop, you know? I guess, if you’re buying them lavish dinners or lunches and things like that in lieu of payment, and I think in a way they’re trying to say, “Okay, well, if you’re basically providing these lunches in lieu of increasing their wage that would otherwise be taxable, then that should be taxed,” and that’s their argument. But, again, it’s like, out of all things, I think there are so many other ways the IRS can work on their collections than finding more ways to tax these small things. I mean, every year, they have quite a bit of problems just collecting the taxes that are owed in the first place.

MATT: I will say one thing. I don’t like to advocate. I don’t like to be pro-IRS but I think another thing they’re looking at is these employers are allowed to deduct the full cost of the meals.

NASIR: That’s true.

MATT: Typically, if you have a business lunch or a business meal, it’s only 50 percent of what you can deduct. But, in these cases, they’re able to deduct full cost. That’s just less net income that’s available and, thus, less tax money. But, I mean, you’re right, why should the IRS even get involved in this? The age where 90 percent of the stories we talk about are employers doing bad things for their employees, like, the one time that someone’s actually doing something nice, the IRS are like, “Ah, we’re actually going to crack down on this because we don’t want employees to be happy about anything.”

NASIR: At the same time, these guys are being fed well. I mean, I’m looking at a picture from Google being served, oh, you have a choice with a tri-tip, white bass, or shallot-seared chicken breast. Quite a choice selection; it looks almost like a Las Vegas buffet.

MATT: Yeah. Well, you hear the stories about people when they start working for Google gain, like, 15 pounds the first month or something.

NASIR: Is that right?

MATT: Something crazy. Well, because, if it’s just unlimited food that’s available all the time, you’re bound to.

NASIR: Especially if they’re sitting down coding all day or something like that. They’re a bunch of programmers. If that’s the case, you know…

MATT: Yeah, I don’t know. I’d probably get fired if I worked there just because I would just sit in the cafeteria all day and never get up and leave. At some point, you have to do your job. Oh, that’s unfortunate. It would be pretty cool, though.

NASIR: Except, Matt, you don’t eat desserts so that’s one aspect of it.

MATT: That’s fine. More entrees, I don’t need dessert.

NASIR: I’m actually getting hungry. Can we just stop the episode and get something to eat?

MATT: Take a break. Well, we’re going to eat during the question of the day here.

NASIR: Oh, okay. Yeah, let’s talk about pizza.

MATT: Question of the day. There’s a lot of restaurants that probably run into this issue.
“I am a franchisor. Can I be held responsible for labor law violations of my franchisees if I don’t know about the violations that they’re making or committing?”

NASIR: Yeah, very good topical question, actually. Pretty interesting because there was actually a case – and I assume that’s where the question came from because they probably heard about this case – there was Domino’s Pizza. California Supreme Court ruled on this issue because I believe a Domino’s hired an employee and there was some kind of sexual harassment of the employee by obviously a manager of some sort by the franchisee. You know, keep in mind, the employment relationship is usually directly with the franchisee – not the franchisor. And so, the court was looking to see what kind of control the franchisor has over the franchisee which, typically – and I’m going to go on a tangent here but I think it’s important to talk about – a lot of times, when you’re growing your business and you’re starting to scale and you want to start replicating it in different locations, the question of whether you want to go through the franchising process or not is always a difficult one because, when you go through that, it requires quite a bit of regulatory filing with both on a state and possibly a federal level. And so, accordingly, a lot of times, people say, “Well, why don’t I just license out my brand and logo and so forth and do it that way?” That’s definitely a possibility but, when it comes to licensing, you have to make sure that you maintain very limited control over that licensee whereas a franchisor can maintain quite a bit of control. And so, that’s why, in the Supreme Court, they actually did that analysis.

MATT: Yeah. You keep mentioning control, it’s not necessarily the same sort of analysis as an independent contractor relationship with that sort of control because you’re exactly right. If it’s a franchise, obviously, they’re going to have to follow some pretty prescribed standards here and I think, even in this case, they said that the fact that the franchisor followed certain standards that were essential to the nature of the franchise does not mean that they’re automatically liable for the conduct of the franchisee. I mean, in this case, there were some facts that might have tipped it a little bit to possibly make the franchisor liable. There was an allegation that a Domino’s rep told the franchisee to fire the alleged – it’s a sexual harassment case, by the way – fire the alleged harasser and the franchisee felt it had to do so or be terminated. That’s obviously not following the standards that are essential to the nature of the franchise but it’s a consideration.

NASIR: Yeah, and I think, at the end of the day, they just did an analysis of who the employer is – going through the traditional employer principle analysis. Instead of really expanding this right of control as a factor, it kind of reminds me of having a management company help me make the decisions or maybe making the day-to-day decisions but ultimately on behalf of the employer. And so, in this case, I could definitely see a court going the other way as well but this is how it came down.
You know, speaking of Domino’s, we’ve talked about pizza many times on this podcast but I don’t think you’ve ever told me what is your favorite franchise pizza place. You know, with the big ones. We’ve talking about Domino’s, Papa John’s, Pizza Hut, even I guess the Pizza Pizza one? I forget the name.

MATT: Oh, Little Caesars.

NASIR: Little Caesars, yeah.

MATT: Well, I really don’t frequent those too often because I prefer the independent pizzerias having come from one myself but – disclaimer – I haven’t had a Domino’s pizza since they apparently re-did everything. It actually looks a lot better than it used to so it could be good but I don’t mind Papa John’s. I kind of like it but there’s so many independent pizza places these days that I’d probably never go there. I’d probably never eat it unless I went to something and it was just there. Then I would eat it, of course, but there’s just too many good options to pass up nowadays.

NASIR: Basically, your favorite pizza place ever is Papa John’s. Okay. Well, thank you for joining us and that is our show!

MATT: I will say that I did hate when they have “vote on the best pizza place for this city” and Pizza Hut is number three or something ridiculous.

NASIR: In San Diego? No way!

MATT: No, it’d be like top pizza places. I used to like to look at the rankings for each city just to see but there’d be stuff like that. I do like the buffets, though. Pizza Hut buffet salad. CiCi’s pizza buffet which I don’t know if they even have in California is pretty good, super cheap.

NASIR: Okay. Well, how about this? For our San Diego listeners and those that are visiting San Diego, our nation’s finest city, what’s the top pizza place in San Diego? Name it.

MATT: My favorite pizza is at a place called Manolo in Little Italy. It’s the best I’ve had.

NASIR: Wow. Nice.

MATT: But there’s a lot of good spots.

NASIR: I’m so sorry, Bronx Pizza.

MATT: Bronx Pizza is good. You and I went there.

NASIR: Yeah, it’s good. It’s a classic. All right! Thanks for joining us, everyone.

MATT: Yeah, and keep it sound and keep it smart.

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Legally Sound | Smart Business covers the top business stories with a legal twist. Hosted by attorneys Nasir N. Pasha and Matt Staub of Pasha Law, Legally Sound | Smart Business is a podcast geared towards small business owners.

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