A raw deal

This is the online version of Popular Information, a newsletter about politics and power — written by me, Judd Legum. You can sign up for your own subscription to get independent accountability journalism straight to your inbox:

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The pandemic has been devastating for small businesses, particularly independent restaurants that rely on foot traffic. Congress created a $350 billion lifeline called the Paycheck Protection Program. The Paycheck Protection Program allowed small businesses with 500 or fewer employees to receive a loan equal to 2.5 times their monthly payroll costs, up to a cap of $10 million. If the business uses at least 75% of the loan to cover payroll costs, it will be forgiven by the government. The purpose of this money was to keep people employed.

But by April 16, less than two weeks after the program launched, it ran out of money. Many thousands of small businesses, some of the brink of permanent closure, were not able to secure loans.

Some of these companies shared their stories with Popular Information. Divalicious Custom Cakes in Lake Worth, Florida, which employs four people, applied for funds on April 5. But the cake makers were shut out and were forced to close their business permanently. Holy Grail Pub in Plano, Texas, which has 26 employees, applied for the program as soon as it launched. But the pub received no money, and the owners have been forced to take out a second mortgage on their home and draw down on their retirement savings. 

But, before the money ran out, Ruth's Hospitality Group, the parent company of Ruth’s Chris Steak House, was able to secure a $20 million loan. How did a company with thousands of employees and over $441 million in revenue last year — and $86 million cash reserves — benefit from this fund while thousands of real small businesses received nothing? 

The law contained an exception for restaurant chains as long as the chain didn’t have more than 500 employees at any single location. Ruth’s Hospitality Group exploited that exception by applying through two corporate subsidiaries, obtaining twice the limit for a single company on April 7. Ruth’s Hospitality Group was able to get to the front of the line because JP Morgan Chase, like many banks, gave preference to companies that had a preexisting banking relationship. 

Ruth’s Hospitality Group has extensive banking relationships and, before getting taxpayer money, was able to borrow money from other sources. On March 16, Ruth’s Hospitality Group drew down $56 million from an existing credit line. On March 26, the company tapped $30 million more in cash. 

What happened to last year’s surplus? The company spent some of it on stock buybacks. According to Ruth’s Hospitality Group’s latest SEC filing, it spent $5.2 million buying its own stock in 2019. 

This all might be defensible if Ruth’s Hospitality Group was using the money to keep its hourly restaurant workers, like servers and bartenders, on its payroll until it can reopen. But Popular Information has learned that this is not the case.

Massive furloughs at Ruth’s Chris

The cash infusion has not been used to save the jobs of rank-and-file workers, according to the company’s own statements and furloughed employees who spoke to Popular Information. 

According to the company, it closed “23 restaurants locations where take-out and delivery is not viable” and furloughed “a significant number of field and home office team members.” Ruth’s Hospitality Group did not respond to an inquiry about how many of its 5,195 hourly restaurant staffers have been furloughed. 

But it appears that virtually all of them are out of a job. Ruth’s Chris is only operating take-out and delivery where “sales are sufficient to cover the costs of management staffing those locations.” This suggests that only managers remain employed by the company. Even then, these jobs are not being supported by money from the Payroll Protection Program because Ruth’s Chris is only operating take-out and delivery where sales are robust enough to cover the cost of management at those locations. 

This is consistent with what a furloughed employee told Popular Information. At restaurants in Alabama, Tennessee, and Georgia, “the only people remaining on payroll are managers,” according to the employee. The rest of the staff at these restaurants, with the possible exception of a few chefs, were let go on March 16. “We work really hard to uphold the ideals of Ms. Ruth. We work very hard to give you a great experience. It would just be nice to get something in recognition,” the employee said. 

Another furloughed Ruth’s Chris employee in Indianapolis said that three managers and a few chefs were still working delivery, but approximately 50 hourly employees in the restaurant were out of work. The employee received a check for less than $150 on March 27, which was supposedly equivalent to their average weekly pay from January to March. The $20 million forgivable loan, financed by taxpayers, would be enough to pay all 5,195 hourly restaurant workers $3,850 each.

Taxpayer subsidies for millionaires

Cheryl J. Henry, the CEO of Ruth’s Hospitality Group, was paid $6.1 million in total compensation in fiscal year 2018. Her base pay is $650,000, with the rest comprised of stock and bonuses. Ruth’s Hospitality Group also continues to pay hundreds of thousands of dollars to its former CEO, Michael O’Donnell (base pay $500,000), its Chief Administrative Officer, Susan L. Mirdamadi (base pay $340,000), and its Chief Financial Officer, Arne G. Haak (base pay $300,000). All of these executives are eligible for large bonuses and an “automobile allowance” of $700 to $1000 per month. 

This is how Ruth’s Hospitality Group can spend most of the $20 million on “payroll” while furloughing nearly all of its staff. Under the Payroll Protection Program, salary up to $100,000 counts toward the requirement that 75% of the forgivable loan is used to support payroll. But for a company like Ruth’s Hospitality Group, they could meet that threshold, for example, with just 150 employees that make $100,000 and up.

The company said that “Ms. Henry and the other members of the executive team have elected to reduce their 2020 base salaries effective March 30, 2020.” It did not specify the amount of the reduction, but it is safe to say that Henry and her colleagues will be making in excess of $100,000. Also not mentioned were other forms of compensation for Henry and her executive team, which often significantly exceed their base salary.  

Not an exception

The government is not releasing the names of the companies that obtained Paycheck Protection Program loans. Ruth’s Hospitality Group is a public company and, therefore, was required to report the loan to the SEC.

But it is not the only company that received a “small business” loan with large revenues. According to summary data released by the Small Business Administration, banks approved 67,216‬ loans of $1 million or more. Assuming the rules were followed, that means these companies have a monthly payroll of at least $400,000. Funds distributed to these companies accounted for more than 40% of the available money. 

Congress and the administration are reportedly nearing a deal on a package that would add an additional $300 billion to the program. 

Photo by Sven Brandsma.

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