Franchise 500

The Minimum Wage Battle Is Here to Stay

This story appears in the January 2016 issue of Entrepreneur. Subscribe »

Last April, the city of Seattle began rolling out an incremental minimum-wage increase. Employers with 500 workers or fewer would bump hourly wages up to $15 over the course of seven years; larger businesses would have to reach the mark in three years, with an immediate raise to $11 per hour. (The federal minimum wage is $7.25.) It has been a controversial law on many fronts, but no more so than in the franchise world. For the purposes of the law, any franchised business is considered a large employer -- even if the local franchisee has only a handful of employees -- because, the city argues, franchisees that are part of a larger system have the financial wherewithal to absorb the pay raise sooner than other small businesses can.

Seattle is not alone in putting pressure on franchisees. In June, the Los Angeles City Council voted to increase the minimum wage there to $15 per hour by 2020. In September, the state of New York raised the minimum wage for fast- food workers to $15 per hour, to be phased in over three years in New York City and six years in the rest of the state. Other municipalities, including Washington, D.C., and Portland, Ore., are looking at similar increases.

Opponents say significant minimum-wage increases will be the death knell of franchise growth, and could lead to unit closures. Proponents argue that increasing the minimum wage will lead to lower employee turnover and better customer service, and will reduce the burden on government programs like food stamps and housing assistance that many low-wage workers depend on. It’s a sticky situation, and one that economists have argued about for decades with no real consensus.

Representatives of the International Franchise Association -- which, along with five franchisees, sued and lost an appeal to amend the Seattle statute -- claim the law is part of an orchestrated effort to get fast-food employees unionized.

“The mayor and head of organized labor said as much,” says Matthew Haller, the IFA’s senior vice president of communications and public affairs, who argues that along with last year’s National Labor Relations Board ruling that franchisors can be treated as joint employers with franchisees, the wage increase is part of a multipronged attack on the franchise model. He says the IFA is working to educate other jurisdictions considering similar ordinances to Seattle’s, pointing out that most of them don’t completely understand the franchise model and don’t realize that franchisees are, in essence, small-business owners.

“What we have been able to do in other states and cities,” Haller says, “is take franchisees to city council meetings, where they’re able to say, ‘Look, I compete for the same pool of labor as everyone else. I’m a small- business person. I set hours and wages for employees like other businesses. Yes, I get benefits from my franchisor, but I also have to pay royalties and marketing fees for those services.’”

Haller argues further that higher minimum wages will force franchisees and other small employers to move more quickly toward automation -- functions like letting customers pay remotely through an app, or using self-service kiosks and check-ins—which will lead to job cuts.

Of course, there are those who disagree. Holly Sklar, CEO of the advocacy group Business for a Fair Minimum Wage, denies that increasing the minimum wage will lead to a franchise apocalypse and says that overall it would be a positive move for workers and businesses. “The minimum wage is currently outdated,” she says. “The $7.25 federal wage has way less buying power than it did in 1968. Workers and consumers aren’t two different species of people. When workers’ buying power is eroded, consumer spending is eroded. And that’s at the heart of the economy. Nothing drives job creation more than consumer demand.”

For franchisees and other small businesses, Sklar adds, paying a higher wage can be transformative. “One of the pleasures of paying more is lower turnover. Strong employees free up a business owner to spend time thinking about the long term instead of training new employees. There’s less waste, more productivity, and it boosts customer satisfaction.”

While President Obama supports an increase in the federal minimum wage to $12, that change is unlikely to get through Congress anytime soon. Which means we’re likely to see this fight drag on, state by state and city by city, over the next few years.