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What Are the Implications of Minimum Wage Regulations on Franchising?

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What Are the Implications of Minimum Wage Regulations on Franchising? What Are the Implications of Minimum Wage Regulations on Franchising? Alicia Cofiño Robert Emerson J.D. March 20, 2015 1 Abstract Franchising is often overlooked when people speak about “big business.” However, franchise companies are often those that consumers use almost every day. Franchises include chain restaurants such as McDonald’s and Subway. Additionally, when the legal world and business world intertwine, franchises worldwide are affected. When specific laws about workers are discussed, the effects of these regulations on franchising need to be examined. Specifically, proposed regulations to increase the minimum wage vastly impacts franchisors and franchisees, not just employees and their families. This article examines the positive and negative effects of increasing the minimum wage requirement on United States franchising. 2 Table of Contents OVERVIEW ................................................................................................................................................. 4 HISTORY ................................................................................................................................................... 10 FRANCHISE LAW ...................................................................................................................................... 10 MINIMUM WAGE REGULATION ............................................................................................................... 13 Figure 1: Historical Minimum Wage Prices Adjusted for Inflation ................................................... 14 Figure 2: Enterprise Coverage and Individual Coverage .................................................................. 15 CURRENT MINIMUM WAGE SITUATION IN THE UNITED STATES ....................................... 17 EFFECTS ON UNEMPLOYMENT ................................................................................................................ 19 Figure 3: Shares of all Workers, by States’ Applicable Minimum Wage, 2014 ................................. 20 Figure 4: Real Minimum Wage Rate vs. Unemployment Rates .......................................................... 22 Figure 5: Earned Income Tax Credit by Number of Children and Filing Status, 2014 ..................... 24 AUTOMATION .......................................................................................................................................... 27 INCREASED COSTS ................................................................................................................................... 28 FORMING A UNION .................................................................................................................................. 30 LEGISLATION DISCRIMINATING AGAINST FRANCHISING ....................................................................... 32 CURRENT FRANCHISES AND EXECUTIVES .................................................................................. 37 INTERNATIONAL FRANCHISE ASSOCIATION ........................................................................................... 37 CURRENT FRANCHISE EXECUTIVES ........................................................................................................ 38 PRO MINIMUM WAGE INCREASE ............................................................................................................... 39 ANTI MINIMUM WAGE INCREASE .............................................................................................................. 41 CONSENSUS .............................................................................................................................................. 44 INTERNATIONAL COMMENTS ..................................................................................................................... 47 CONCLUSIONS ........................................................................................................................................ 49 LESSONS LEARNED .................................................................................................................................. 49 PREDICTIONS ........................................................................................................................................... 51 3 OVERVIEW Regulations impact every aspect of life and culture, including business. The franchise world is widely affected as well; franchising includes many prominent companies we use every day, such as McDonald’s, Burger King, Hampton Hotels, Supercuts, and Ace Hardware Corporation.1 Currently, an important debate in Congress concerns whether the United States should raise the minimum wage rate and what other options could be employed to increase workers’ wages: What will be the consequences of these measures, including the increase in minimum wage, and how impactful will these measures be? Franchising and the related regulations have an interesting history. Without many federal regulations governing franchise operations in the United States, regulatory schemes became common practice until the Federal Trade Commission Franchise rule (16 C.F.R. Part 436) was implemented in1979.2 Franchisors have thus been governed by a complex series of regulations that change from the federal to the state level and even more, from state to state.3 The recent push to increase the federal minimum wage could affect franchise businesses disproportionally from other businesses, because local business owners, not large corporations, will have to figure out how to remain successful with higher labor costs. This is largely in part because the burden to pay the higher minimum wage may ultimately fall on business owner and franchises, and consequently the franchisee, rather than the franchisor. 1 2015 Franchise 500 Rankings, ENTREPRENEUR, http://www.entrepreneur.com/franchises/rankings/franchise500-115608/2015,-1.html (last visited Jan. 1, 2015). 2 Kern and Hillman, LLC, An Overview of Franchise Regulation in the United States, PRACTICAL FRANCHISING SOLUTIONS http://www.franchiselawsource.com/overview_franchise_regulation.html (last visited Jan. 2, 2015). 3 Id. 4 Many have historically considered a minimum wage job a “starter job,” not a job as the sole means of income for a family.4 The Bureau of Labor Statistics reports the average fast food worker makes about $9 an hour,5 which equates to about $18,720 a year if the employee works full time.6 The fast food industry, many of whose firms are franchised, has historically attracted teenage workers, who are not just young, but generally inexperienced and relatively uneducated.7 Hence, the minimum wage always seemed acceptable and “fair.”8 However, According to the Center for Economic and Policy Research, headquartered in Washington, DC, the percentage of minimum wage workers between the ages of 16 and 19 decreased from 26% to 12% from 1979 to 2011, and the percentage of workers ages 20 and above increased from 74% to 88%.9 One explanation of the increase in employment of adults over 20 years of age in common low wage paying industries, such as the food service industry, could be the reduction of available manufacturing jobs in the United States.10 One may assume that more of these older employees need higher salaries to support their needs and families.11 With older generations in low paying jobs needing to provide for their families, the pressure to increase the minimum wage is quickly rising. The debate on minimum wage continues when discussing its effects on unemployment. A 1997 study concluded that U.S. unemployment rates increased when minimum wage rates 4 Laura Kiesel, Fast-Food Workers Are Right: Raise the Minimum Wage, THE STREET (Sept. 10, 2013, 7:00 AM), http://www.thestreet.com/story/12029743/1/fast-food-workers-are-right-raise-the-minimum- wage.html. 5 Id. 6 Note the average $9 wage for fast food workers is about 24% higher than the federal minimum wage of $7.25. 7 Supra note 4. 8 Id. 9John Schmitt and Janelle Jones. Low-wage Workers Are Older and Better Educated than Ever, CENTER FOR ECONOMIC AND POLICY RESEARCH (2012), http://www.cepr.net/documents/publications/min-wage3- 2012-04.pdf. 10 Id. 11 Supra note 4. 5 increased because more people who had jobs with the lower minimum wage had trouble finding new jobs due to companies not being able to pay the higher wages;12 some question if this will happen again.13 However, a study conducted by Nick Bunker (the Center for American Progress), David Madland, and T. William Lester (University of North Carolina) concluded that increasing the federal minimum wage actually has no detrimental effect on unemployment rates at a time when unemployment is already high.14 Further research will determine if increasing the minimum wage level will have an effect on general unemployment rates, the economy, and specifically, franchising. Protestors increasingly demand that the minimum hourly wage be raised, often calling for a doubling from $7.25 to $15 per hour. Protestors argue that many businesses large gross profits and should pay their hard working employees higher wages, so they can share in the profits and better support their families.15 Many Americans striving for the “American dream” doubt whether that is possible with such a low wage.16 However, a jump from $7.25 to $15 an hour may not be the right answer or realistic in the short term. 12John M. Abowd, Francis Kramarz, Thomas Lemieux, David N. Margolis, Minimum Wages and Youth Employment in France and the United States, NATIONAL BUREAU OF ECONOMIC RESEARCH (1997), http://www.nber.org/papers/w6111.pdf.
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