Minimum Wage, Obamacare and Franchises

This is Part 3 of our three-part series around the future of the franchise industry in 2015. As previously stated and predicted in the International Franchise Association’s annual report, the future of franchising looks rosy for 2015, if you overlook a few key issues that could potentially turn the industry on its ear. Along with the NLRB’s recent decision to classify McDonald’s as a “joint employer” in a number of cases involving franchisees of the fast food giant, the franchise industry also faces serious issues involving employee minimum wages and the definition of a full time employee under the Affordable Care Act.

Raising the Minimum Wage Bar

Any proposals to raise the federal minimum wage are generally met with a great gnashing of teeth and tempestuous political firefights. Consequently, a number of states have elected to raise the minimum wage state-wide — 29 of them, to be precise, to something higher than the federally mandated hourly rate of $7.25, last set in 2009.

With many franchise operations depending on low-cost, entry-level labor, minimum wage rate increases can arguably put a strain on their margins, after paying hefty franchise fees in addition to general operating and overhead costs. One case in particular, though, has served to pit the IFA against the Service Employees International Union (SEIU) and certain civic leaders in the City of Seattle.

Seattle’s new minimum wage law requires small businesses to raise their minimum wage to $15 within the next seven years, and large businesses with 300 employees or more to do so within three. Although the legislation itself is not popular with Seattle’s franchise owners, the real slap in the face is that the law treats all franchise operations, regardless of the number of employees, as large businesses, giving them just three years to comply.

Economically Extractive, Civically Corrosive and Culturally Dilutive

The IFA claims that the new legislation is a blatant move on the part of anti-franchise members of the Mayor’s minimum wage committee to drive franchises out of town. In an injunction filed to block portions of the bill, the IFA argued that the legislation was part of a move by the SEIU and Seattle city leaders to “break the franchise model.” Billionaire venture capitalist and minimum wage committee member Nick Hanauer was quoted in an email as saying, “The truth is that franchises like subway [sic] and McDonalds really are not very good for our local economy. They are economically extractive, civically corrosive and culturally dilutive.”

IFA President Steve Caldeira, however, focuses blame on the SEIU, saying, “The SEIU’s concern is not for the employees working at franchise businesses, but the union’s real mission is to force these hard-working employees to join the SEIU’s dwindling membership ranks in order to get dues deducted from their paychecks.”

In any case, it appears that current and prospective franchise owners will have to budget for higher labor costs in 2015 and beyond.

Defining a Full Time Employee

Equally controversial as the issue of minimum wage is the definition of full time worker, especially when it comes to requiring employers to provide benefits like health care insurance to their workers. Thus when the Affordable Care Act (ACA) redefined the concept of full time from the industry standard of 40 hours per week to a lower standard of 30, it understandably caused quite a lot of consternation amongst employers, including those in the franchise industry.

The new definition appears to have hurt part-time employees, the most vulnerable Americans, many of whom have had their hours cut in order to avoid the 30-hour threshold. In response, the House recently passed the Save American Workers Act, to reform the definition of full time employee in the ACA to 40 hours per week. Companion legislation has also been introduced in the Senate with bipartisan support.

Calling it “one of the year’s key votes,” IFA President Steve Caldeira said, “We applaud the House for passing legislation that is a win-win for both employees and employers. Restoring the 40-hour work week definition is a common-sense legislative fix to the Affordable Care Act that will put more money in the pockets of hard-working Americans and allow small businesses the flexibility they need to manage their workforce.”

Whether the legislation will make it past a presidential veto, however, remains to be seen.

How these issues will affect anyone starting a franchise or owning a franchise in 2015 are anyone’s guess. They could result in anything from minor setbacks to serious repercussions. The variables are many and the arguments fierce on both sides of the coin. All we can do is wait and watch.

If you missed the overview, you can read part 1 here of the forecast of the franchise industry in 2015, and if you would like more in-depth information regarding the ‘Joint Employer’ ruling, you can read part 2 here.