El Pollo Loco 2015 Annual Report Download - page 28

Table of Contents
Restaurant companies have been the targets of class action lawsuits and other proceedings alleging, among other things, violations of federal
and state workplace and employment laws. Proceedings of this nature are costly, divert management attention, and, if successful, can result
in payment of substantial damages or settlement costs.
Our business is subject to the risk of litigation by employees, consumers, suppliers, stockholders, and others through private actions, class
actions, administrative proceedings, regulatory actions, and other litigation. The outcome of litigations, particularly class and regulatory actions,
is difficult to assess or quantify. In recent years, restaurant companies, including us, have been subject to lawsuits, including class action
lawsuits, alleging violations of federal and state laws regarding workplace and employment conditions, discrimination, and similar matters. A
number of these lawsuits have resulted in payments of substantial damages by the defendants. Similar lawsuits have been instituted from time to
time alleging violations of various federal and state wage and hour laws regarding, among other things, employee meal deductions, overtime
eligibility of managers, and failure to pay for all hours worked. In the past, we have been a party to wage and hour class action lawsuits and are
currently a party to such a lawsuit on behalf of a purported class. See Item 3, “Legal Proceedings.”
Occasionally, our customers file complaints or lawsuits against us alleging that we are responsible for some illnesses or injuries that they
suffered at or after a visit to one of our restaurants, including actions seeking damages resulting from food-borne illnesses or accidents in our
restaurants. We are also subject to a variety of other claims from third parties arising in the ordinary course of our business, including contract
claims. The restaurant industry has also been subject to a growing number of claims that the menus and actions of restaurant chains have led to
the obesity of certain of their customers. We may also be subject to lawsuits from our employees, the U.S. Equal Employment Opportunity
Commission, or others, alleging violations of federal or state laws regarding workplace and employment conditions, discrimination, and similar
matters.
Regardless of whether any claims against us are valid and whether we are liable, claims may be expensive to defend against and divert time and
money away from operations. In addition, claims may generate negative publicity, which could reduce customer traffic and sales. Although we
maintain what we believe to be adequate levels of insurance, insurance may not be available at all or in sufficient amounts to cover any liabilities
with respect to these or other matters. A judgment or other liability in excess of our insurance coverage for any claims, or any adverse publicity
resulting from claims, could adversely affect our business and results of operations.
If we or our franchisees face labor shortages or increased labor costs, our results of operations and growth could be adversely affected.
Labor is a primary component in the cost of operating our company-operated and franchised restaurants. If we or our franchisees face labor
shortages or increased labor costs, because of increased competition for employees, higher employee-turnover rates, unionization of restaurant
workers, or increases in the federally-mandated or state-
mandated minimum wage or in other employee benefits costs (including costs associated
with health insurance coverage or workers’ compensation insurance), our and our franchisees’ operating expenses could increase, and our
growth could be adversely affected.
We have a substantial number of hourly employees who are paid wage rates at or based on the applicable federal or state minimum wage, and
increases in the minimum wage will increase our labor costs and the labor costs of our franchisees. Since July 1, 2014, the State of California
(where most of our restaurants are located) has had a minimum wage of $9.00 per hour. From January 1, 2008, to June 30, 2014, it had been
$8.00 per hour. It is scheduled to rise to $10.00 per hour on January 1, 2016. The federal minimum wage has been $7.25 per hour since July 24,
2009. Federally-mandated, state-mandated, or locally-mandated minimum wages may be raised in the future. We may be unable to increase our
menu prices in order to pass future increased labor costs on to our customers, in which case our margins would be negatively affected. Also,
reduced margins of franchisees could make it more difficult to sell franchises. And if menu prices were increased by us and our franchisees to
cover increased labor costs, the higher prices could adversely affect sales and thereby reduce our margins and the royalties that we receive from
franchisees.
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