Introduction

In March 2015 the US District Court for the Western District of Washington denied the International Franchise Association's (IFA) motion for a preliminary injunction in IFA v City of Seattle.(1) The IFA has appealed the decision. This news was widely reported in media outlets across the United States and represents a significant legal development in franchising because a federal court agreed to the categorisation of a small business franchisee as a 'large' business simply because it was in a franchise system.

Minimum wage laws through the lens of franchisors and franchisees

Both the federal government and states have enacted minimum wage laws. There has been a federal minimum wage in the United States since the late 1930s, with the most recent increase occurring in 2009.(2) Currently, at the state level, more than half of the states have a minimum wage that is above the federal minimum wage.(3) Looking for other ways to obtain increases in minimum wage, labour groups are changing their strategy and demanding an increase in the minimum wage at the local level in the country's largest cities.

Minimum wage laws matter to franchisees because increased labour costs can put a profitable franchisee out of business. While this issue has been debated by politicians and economists, there has been little controversy regarding the minimum wage in the legal arena until recently. However, the Seattle ordinance adds another major problem, legal in nature, in that it puts franchisees – which are independent businesses – at a distinct competitive disadvantage to their non-franchise competitors.

IFA v City of Seattle

In June 2014 the City of Seattle enacted an ordinance that not only raised the minimum wage to $15 per hour, but also categorised franchisees as 'large' businesses rather than 'small' businesses. The ordinance designates a business as large or small depending on the number of employees and specifically counts all employees of all outlets in a chain – even though, in the franchise model, each franchisee is an independent business entity operating with its own revenue, expenses, profits and losses. The law requires 'large' businesses to implement the minimum wage hike within three years, whereas 'small' businesses have seven years to increase their minimum wage. Thus, a franchisee will have greater labour costs than its direct competitors which are not part of a chain. In IFA v City of Seattle, the IFA and Seattle franchisees challenged this classification, arguing that the ordinance is discriminatory to franchise businesses.(4)

The plaintiffs filed a motion for a preliminary injunction with the goal of "compelling the City [of Seattle] to treat franchisees as 'small' businesses rather than 'large' businesses".(5) One of the franchisee plaintiffs stated that "[t]he ordinance definitely threatens to put our BrightStar Care franchise out of business because, as explained, it will significantly raise our labor costs without doing the same for our direct non-franchise competitors".(6) However, the court did not find this convincing, calling this declaration speculative and "merely anecdotal" because it "does not include any data analysis or empirical evidence that would lead the court to believe that imposing a faster phase-in schedule on franchisees is going to impact interstate commerce".(7) The court denied the requested injunction, concluding that "there is simply no credible evidence in the record that indicates franchisees will close up shop or reduce operations".(8) The plaintiffs filed an appeal with the US Court of Appeals for the Ninth Circuit on March 20 2015.

Broader application

There is reason to be concerned that other local governments could follow the Seattle law. Franchisors and franchisees should be aware of a campaign backed by the Service Employees International Union called 15 Now, which seeks to increase the minimum wage to $15 per hour in New York City, Los Angeles and other American cities.(9) Seattle is the first US city to raise the minimum wage to $15, but – more importantly to franchisors and franchisees – Seattle is the first city to give preferential treatment to non-franchise small businesses by grouping franchisees and a brand together for purposes of counting the number of employees, giving non-franchise small businesses an advantage over franchisees.

Chicago almost took the same approach as Seattle when the Chicago City Council considered a minimum wage draft ordinance that would treat franchisees as large employers.(10) Ultimately, a "Chicago task force… recommended to Mayor Rahm Emanuel that any increase in [Chicago's] minimum wage should be applied uniformly to all types of businesses without regard to their structure"(11) and the city council adopted an ordinance that requires businesses – regardless of the size or type of business – to increase the minimum wage to $13 per hour by 2019.(12)

While the minimum wage issue itself is very important in franchising – especially to franchisees, which will bear increased labour costs – the categorisation of franchisees as large businesses adds a major issue. It misunderstands the franchise model, marks a departure from the status quo in the way that franchises have been recognised and discriminates against franchisees. Not only is there concern that other jurisdictions may follow the Seattle law in this regard, the characterisation of small franchisees as large businesses could also affect franchisees with regard to regulatory issues beyond the minimum wage, including local, state and federal tax regulations, the Affordable Care Act and other healthcare regulations, as well as immigration regulations (eg, E-Verify).

Recommendations for franchisors

  • Communicate with franchisees regarding possible minimum wage increases in relevant markets.
  • Ensure that development and franchise agreements provide franchisees with the power to make human resources decisions, such as the hiring and firing and pay of employees.
  • Be mindful of statements made regarding the minimum wage issue, especially by executives and public relations officers; a franchisor's position matters to franchisees.

Recommendations for franchisees

  • Monitor legal developments on minimum wages and related issues.
  • Prepare for possible labour increases brought on by minimum wage increases from city, state or federal governments.
  • Express to your community that you are a small business owner, not a large corporation.

For further information on this topic, please contact Rebecca Cohenour at Perkins Coie LLP by telephone (+1 469 801 2304) or email (rcohenour@perkinscoie.com). The Perkins Coie LLP website can be accessed at www.perkinscoie.com.

Endnotes

(1) Int'l Franchise Ass'n v City of Seattle, No C14-848 RAJ, 2015 WL 1221490, at *25 (WD Wash March 17 2015).

(2) Eric Morath, Damian Paletta & Carol E Lee, "Wage-Rise Report Sees Fewer Jobs, Less Poverty", Wall Street Journal (February 20 2014), available at www.wsj.com/articles/SB10001424052702304675504579391201355442502.

(3) "State Minimum Wages | 2015 Minimum Wage by State", National Conference of State Legislatures (February 24 2015), available at www.ncsl.org/research/labor-and-employment/state-minimum-wage-chart.aspx.

(4) Complaint at 3, Int'l Franchise Ass'n 2015 WL 1221490.

(5) Int'l Franchise Ass'n, 2015 WL 1221490 at *1.

(6) Declaration of Katherine M Lyons at 4, Int'l Franchise Ass'n 2015 WL 1221490.

(7) Int'l Franchise Ass'n 2015 WL 1221490, at *13.

(8) Id at *13, 25.

(9) Ty Moore, "Major Victories Possible If Labor Launches a National Campaign for a $15/Hour Minimum Wage",15 Now (March 28 2015), available at 15now.org/2015/03/fight-for-15-in-all-50/#more-4715; William Blueher & James Hoff, "The Fight for 15 Comes to New York City", Huffington Post (March 4 2014), available at www.huffingtonpost.com/william-blueher/fight-for-15_b_4893153.html.

(10) "IFA Asks Chicago City Council to Treat Franchisees as the Small Businesses They Are", International Franchise Association (June 17 2014), available at www.franchise.org/ifa-asks-chicago-city-council-to-treat-franchisees-as-the-small-businesses-they-are.

(11) "IFA Commends Chicago Task Force for Even Handed Recommendation on Minimum Wage Increase", International Franchise Association (July 9 2014), available at www.franchise.org/ifa-commends-chicago-task-force-for-even-handed-recommendation-on-minimum-wage-increase.

(12) Katie Lobosco, "Chicago hikes minimum wage to $13", CNN Money (December 2 2014), available at money.cnn.com/2014/12/02/news/economy/chicago-minimum-wage-hike.

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