Shake Shack 2016 Annual Report Download - page 101

Table of Contents
Legal Contingencies
In November 2015, we met with a law firm representing two former Shake Shack managers who alleged that Shake Shack improperly classified its restaurant
managers as exempt. Although we have always believed that our managers are properly classified as exempt under both federal and state laws, and have always
intended to defend any such lawsuits vigorously, we agreed to mediate the matter. At the conclusion of the meeting, the parties entered into a Memorandum of
Understanding, and the Company agreed to create a fund of $750 to settle the matter. In exchange, all participating managers (former and current), including the
two former managers, will release Shake Shack from all federal and/or state wage and hour claims that may exist through the settlement date. As part of the
settlement process, the law firm filed a Complaint on March 17, 2016 with the Supreme Court of the State of New York (the “Court”), and within the coming
weeks will file the final settlement agreement with the Court as well as a motion seeking the Court’s preliminary approval of the settlement. As of December 30,
2015, we recognized a liability of $770 for this matter and related expenses.
We are subject to various legal proceedings, claims and liabilities, such as employment-related claims and slip and fall cases, which arise in the ordinary course of
business and are generally covered by insurance. As of December 30, 2015, the amount of ultimate liability with respect to these matters was not material.
Liabilities under Tax Receivable Agreement
As described in Note 14, we are a party to the Tax Receivable Agreement under which we are contractually committed to pay the Continuing SSE Equity Owners
85% of the amount of any tax benefits that we actually realize, or in some cases are deemed to realize, as a result of certain transactions. We are not obligated to
make any payments under the Tax Receivable Agreement until the tax benefits associated the transaction that gave rise to the payment are realized. Amounts
payable under the Tax Receivable Agreement are contingent upon, among other things, (i) generation of future taxable income over the term of the Tax Receivable
Agreement and (ii) future changes in tax laws. If we do not generate sufficient taxable income in the aggregate over the term of the Tax Receivable Agreement to
utilize the tax benefits, then we would not be required to make the related TRA Payments. During fiscal 2015 , as a result of the Special Distribution and
redemptions of LLC Interests, we recognized liabilities totaling $173,090 relating to our obligations under the Tax Receivable Agreement, after concluding that it
was probable that we would have sufficient future taxable income to utilize the related tax benefits. There were no transactions subject to the Tax Receivable
Agreement for which we did not recognize the related liability, as we concluded that we would have sufficient future taxable income to utilize all of the related tax
benefits generated by all transactions that occurred in fiscal 2015.
NOTE 18 : RELATED PARTY TRANSACTIONS
Union Square Hospitality Group
Union Square Hospitality Group, LLC is a stockholder and a party to the Stockholders Agreement we entered into in connection with our IPO. The Chairman of
our Board of Directors serves as the Chief Executive Officer of Union Square Hospitality Group, LLC. As a result, Union Square Hospitality Group, LLC and its
subsidiaries (collectively, "USHG") are considered related parties.
Under the terms of the management agreement with USHG, as amended, in fiscal 2014, we paid a 2.5% management fee to USHG based on Shack sales and
licensing revenue generated from license agreements with unaffiliated entities. Total management fees, which are included in general and administrative expenses,
amounted to $2,927 and $2,455 for fiscal 2014 and 2013 , respectively. Effective January 1, 2015, the management agreement was amended and restated. As a
result, we are no longer obligated to pay management fees to USHG. Therefore, no management fees were paid to USHG for fiscal 2015 .
Previously, we sub-leased office space from USHG on a month-to-month basis. Amounts paid to USHG as rent totaled $38 and $236 for fiscal 2014 and 2013 ,
respectively. These amounts are included in general and administrative expense on the Consolidated Statements of Income (Loss). No amounts were paid during
fiscal 2015 .
Previously, our employees were included in USHG's self-insurance health plan and we paid our portion of the plan costs on a monthly basis to USHG. Amounts
paid to the USHG for these health insurance costs were $1,306 and $865 for fiscal 2014 and 2013 ,
99 | Shake Shack Inc. Form 10-K