With the recent enactment of a $15 per hour minimum wage ordinance, the City of Seattle has positioned itself as ground zero for the ongoing struggle over income inequality and wages. In adopting the ordinance, the City explicitly recognized that it would pose a hardship on small businesses, and therefore implemented a tiered structure that raises minimum wages for large employers (defined as those having more than five hundred employees) in only three years, while providing for a longer phase-in period for small employers.
As franchises are independently owned businesses, they would have been subject to the longer phase-in period applicable to small employers under the plan originally proposed by Mayor Ed Murray’s select Income Inequality Advisory Committee. But in recognition of the role played by quick service restaurant workers in kick-starting the national debate over wages and income inequality, the ordinance that was actually introduced and ultimately adopted defined most franchisees as large employers subject to the shorter phase-in period.
On August 5, 2014, the International Franchise Association filed a motion for a preliminary injunction against the City in the IFA’s pending lawsuit against Seattle over the ordinance. Specifically, the IFA seeks to enjoin Seattle from implementing the portion of the ordinance that would lump small local franchisees in with large employers like Boeing. While the IFA’s motion was expected, it was accompanied by several evidentiary bombshells that cast the City’s actions in a very poor light.
For example, in support of its motion, the IFA submits a May 3, 2014 email sent by Nick Hanauer (a member of the mayor’s advisory committee) to Seattle City Council Chairman Tim Burgess explaining the reasons why the committee’s original proposed ordinance was changed to lump franchisees in with large companies:
“The truth is that franchises like subway and McDonalds really are not very good for our local economy. They are economically extractive, civically corrosive and culturally dilutive. Can you think of anytime people got excited about the addition of one of these franchises to their neighborhood???
These companies have optimized their business models around paying workers poverty wages while corporate racks up huge profits and tax payers make up the difference. Our new ordinance may force them to change their practices and business models, something which I think is a great contribution to our nations [sic] economy and democracy.
To be clear, the net amount of food people in Seattle will consume will not change if we have fewer franchises. What will change is what they consume and from whom. A city dominated by independent, locally owned, unique sandwich and hamburger restaurants will be more economically, civically, and culturally rich than one dominated by extractive national chains.”
It is not surprising that Mr. Hanauer advocated for favoring local businesses over national chains given that he is in the business of investing in start-up companies as a member of Second Avenue Partners, a Seattle-based private equity firm. What is surprising is that internal emails submitted by the IFA show that although members of the Mayor’s staff expressed some concerns over the impact that the changes would have on individual franchise business owners in Seattle, even noting that it might force some into personal bankruptcy, staff members nonetheless appeared to agree with Mr. Hanauer’s expression of the protectionist intent of the ordinance.
The IFA’s briefing also highlights that there was a pervasive misunderstanding of the facts of franchising by the relevant decision-makers. For example, during a June 16, 2014 television interview on MSNBC, Mayor Murray acknowledged that many franchisees in Seattle might struggle as a result of the ordinance, but downplayed the remark noting that “there are not many franchises in this City.” But according to the IFA’s submissions, there are currently 850 franchise establishments in Seattle, most of which will be subject to the large business designation in the ordinance.
Similarly, during the public debate over the legislation, Seattle City Councilmember Kshama Sawant stated on the record that “in order to be a franchisee, you have to be very, very wealthy. Just a small business person of color from Rainier Beach is not going to be able to afford to open a franchise outlet.” But Councilmember Sawant’s broad generalizations about the franchise industry were based on the terms and conditions of three cherry-picked quick service restaurant franchise agreements. Franchised quick service restaurants make up only a small fraction of the franchised locations in Seattle. And Councilmember Sawant’s comments regarding opportunities for minorities is also inconsistent with the most recent data from the United States Census Bureau (2007), which shows that minorities are more likely to own a franchised business (20.5% of franchised businesses owned by minorities) than they are to own a non-franchised business (14.2%).
The IFA’s motion is noted for consideration by the Court on September 5, 2014, but the Court likely will not resolve the issue without holding oral argument. A copy of the IFA’s motion for preliminary injunction, and the evidence supporting the motion, can be downloaded here.