If you live in or around Seattle, you already know that the City has enacted an Ordinance that will phase in a $15.00 per hour minimum wage; a hefty increase from the current State-wide minimum of $9.32 per hour. What that Ordinance means for employers in explained in greater detail here.

Without question, this will adversely impact lots of small business owners. A $15/hour minimum would increase the labor costs of a small business that employs ten minimum wage employees by approximately $118,000 a year, exclusive of taxes and benefits. I’ve seen a large number of small business owners’ P&Ls over the years, and I don’t know of many that can afford that kind of money. Without question, the new Ordinance will (1) cause some business failures; (2) reduce small business start-ups in Seattle; (3) shift employment to areas outside the reach of the Ordinance; (4) result in price increases for goods and services in Seattle; (5) reduce wage increases for some employees (that assistant store manager now making more than $15/hour may not get the wage increase that she or she would otherwise have received); and (6) affect service levels, as employers cut costs (and reduce employment) to pay for the new minimums.

Even the City acknowledges that “[s]maller businesses and non-profits [will] face particular challenges in implementing a higher minimum wage.”  This is true with non-franchised businesses, as well as franchised businesses.  And the fact that small business owners in general will be challenged or will likely face difficulty with the new minimum wage rate is the justification for a longer phase-in for small business owners (so-called, Schedule 2 Employers) than large employers (so-called Schedule 1 Employers). For large employers, generally companies that employ more than 500 employees, the new minimum wage rate of $15/hour becomes fully effective as of January 1, 2017. The $15/hour minimum wage does not become fully effective for many small business owners until January 1, 2021, which amounts to an effective hourly wage rate of about $10.66 in 2014 dollars.

So maybe this Ordinance is not so radical after all, at least for small employers. And this may be true except for the fact that the Ordinance defines a large employer as any small business owner operating a franchised business, where the franchisor employees 500 or more employees in the U.S., or all U.S. franchisees combined employ more than 500 employees. Specifically, the Ordinance defines a large employer, a Schedule 1 Employer, as follows:

“Schedule 1 Employer” means all employers that employ more than 500 employees in the United States, regardless of where those employees are employed in the United States, and all franchisees associated with a franchisor or a network of franchises with franchisees that employ more than 500 employees in aggregate in the United States. 

Emphasis added. The Ordinance purposely discriminates against most small business owners who operate their businesses under a franchise agreement in favor of those small business owners who do not, effectively penalizing the owner of a Subway® quick service restaurant who competes with Joe’s Subs a block away.

There is no rational justification for distinguishing franchised businesses from non-franchised business. Even the Seattle Times agreed in an editorial published on May 30, shortly before the Ordinance passed. That editorial urged an amendment to the Ordinance to eliminate this discrimination.

The 1,700-some independent franchisees operating in the City of Seattle. In addition to fast-food franchises, these are businesses offering in-home care to elders and people with disabilities, pet groomers, barbers and the like.

And contrary to the rhetoric from the $15 wage movement, these businesses are not arms of corporations. Franchisees have their own tax ID numbers and payroll — they are independent business units separate from the franchiser (sic). Typical agreements offer franchises a brand, a business model, some marketing and bulk buying power. In exchange, franchisees pay about 4 to 7 percent of their gross profits back to the franchiser (sic).

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City Council members, and the mayor, should stop allowing themselves to be so willingly manipulated by activists, should head-off an inevitable lawsuit and should adopt some rationality. The council should strike the definition of franchises.

And it is this irrational classification of individual franchisees — franchisees that may employ only a handful of employees — as large employers that provides the essential foundation upon which the International Franchise Association and some individual franchisees have filed suit challenging the Ordinance.

We will be keeping an eye on this and will post updates to this blog. Let’s hope that common sense prevails.