Why it matters: Taking the national trend of raising the minimum wage to the next level, the Seattle City Council approved an increase to pay workers from the current $9.32 to $15 per hour, a new record high for the United States. The law phased in the pay hike based on the number of a business’s employees: those with 500 or more employees were given three years to up their pay or four years if the company provides health insurance to its workers; companies with less than 500 workers were given seven years to make the change. Not surprisingly, employers reacted with criticism – and a federal lawsuit. The International Franchise Association filed suit in Washington federal court challenging the law as a violation of the U.S. and Washington Constitutions, federal statutes, and state law.

Detailed Discussion

Last year’s trend of raising the minimum wage has carried over into 2014, with Delaware and Washington, D.C., signing into law new bumps in pay and President Barack Obama issuing an Executive Order to increase the federal minimum wage to $10.10. Even in California – which enacted legislation last year providing for a scaled increase to $10 by January 1, 2016 –state lawmakers are considering a bill that would further increase the state’s rate to $13 in 2017.

But the Seattle City Council topped all other jurisdictions when it passed an ordinance taking the minimum wage to new heights: $15, to be exact. Mayor Ed Murray, who campaigned on a platform including the increase, formed a stakeholder group that drafted a proposal for the Council’s consideration. Council members passed the proposal and Murray signed it into law in early June.

The timeline for the increase varies depending on the size of the employer. The new law draws a line at 500 employees: those with 500 or more workers, considered large enough to handle a quicker rise, will begin paying employees $11 in 2015, $13 in 2016, and will reach $15 in 2017. Larger employers that also provide health insurance were given an additional year to reach $15.

Employers with less than 500 employees were placed on a seven-year plan, jumping to $10 per hour in 2015 and then increasing $0.50 each year until 2021. Once the $15 rate is reached, the minimum wage is tied to the rate of inflation for annual increases.

While proponents of the new law hailed it as historic, employers expressed concern about the impact on Seattle’s businesses, and one group filed a federal lawsuit. The International Franchise Association and four members (including franchisees of Holiday Inn and AlphaGraphics) alleged that the ordinance “unfairly and irrationally discriminates against interstate commerce generally, and small businesses that operate under the franchise business model specifically” with “absurd results.”

The law treats all franchises – regardless of the number of employees in the Seattle location – as a “large” employer, meaning a business with just 20 workers must follow the accelerated pay raise schedule over three years as opposed to seven.

Application of the ordinance constitutes a violation of the Commerce Clause and the Equal Protection Clause of the U.S. Constitution as well as the Washington Constitution and numerous other statutes and legal doctrines, the plaintiffs argue, because small franchises are placed at an unfair competitive disadvantage.

“[T]hey will be forced to raise prices, reduce employees, or lower the quality of their goods and services to comply with the ordinance to a substantially greater extent than their non-franchise counterparts. It is foreseeable that some small franchises in Seattle will not survive this prolonged period of unfair competition,” according to the complaint. “It is also foreseeable that some prospective franchise owners considering whether to open up a franchise location in Seattle will choose to set up shop elsewhere (or refrain from entering the fray altogether). Moreover, the Ordinance will surely adversely impact the value of franchisees’ businesses.”

The plaintiffs request a declaration that the Ordinance is unconstitutional and an injunction enjoining implementation or enforcement of the law.

To read Seattle’s ordinance, click here

To read the complaint in International Franchise Association, Inc. v. City of Seattle, click here.