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. 13 Id. 14Travis Waldron, Studies: Increasing The Minimum Wage During Times Of High Unemployment Doesn’t Hurt Job Growth, THINK PROGRESS (June 20, 2012, 6:00 PM), http://thinkprogress.org/economy/2012/06/20/503112/studies-increasing-the-minimum-wage-during- times-of-high-unemployment-doesnt-hurt-job-growth/. 15 Sharon Cohen, AP, Will Fast-food Protests Spur Higher Minimum Wage?, USA TODAY (Aug. 5, 2013, 6:38 PM) http://www.usatoday.com/story/money/business/2013/08/05/will-fast-food-protests-spur- higher-minimum-wage/2620385/. 16 Lewis Prince, The American Dream Is Built on Fair Wages, U.S. NEWS & WORLD REPORT (Aug. 9 2013, 9:00 AM) http://www.usnews.com/opinion/blogs/economic-intelligence/2013/08/09/a-fair- minimum-wage-helps-workers-and-businesses.

6 Lately, due to this tremendous pressure and the “Fight for $15,”17 progress has been made to increase the minimum wage, more so than other measures, such as tax credits and modifying the federal budget to benefit low wage workers. Several recent attempts to increase the federal minimum wage have failed, but President Obama, through executive order, recently increased the minimum wage paid to contract federal workers to $10.10 per hour.18 This will not have as wide an impact as anticipated because only 2 million Americans work as federal contractors, and this order applies only to new contracts.19 President Obama hopes more productivity from higher paid workers will offset this higher cost.20 However, is raising the minimum wage better for the businesses providing them? There are other avenues the federal government could explore to increase workers’ wages, such as earned income credit or tax breaks, instead of putting the entire burden on employers.

If Congress approves an increase in the federal minimum wage to $10.10 per hour, or to

$15.00 per hour as some groups and workers demand, many in the restaurant industry argue it could lead to business closings and fewer jobs, not only domestically, but also internationally.

Former McDonald’s CEO, Ed Rensi, now the owner of another chain,21 said that a $15 minimum wage would put 15-20% of small businesses out of operation.22 If this happens, more people

17 About Us, FIGHT FOR 15, http://fightfor15.org/en/about-us/, (last visited Mar. 20, 2014). The Fight for 15 campaign aims for a $15 per hour living wage and the right to unionize. This campaign, started in November 2012, is ever growing nationwide and gaining popularity. http://fightfor15.org/en/about-us/ 18Roger Runningen and Kathleen Miller, Obama to Raise Minimum Wage for Contractors to $10.10, BLOOMBERG BUSINESS (Jan. 28, 2014, 3:50 PM), http://www.bloomberg.com/news/articles/2014-01- 28/obama-to-raise-minimum-wage-for-contractors-to-10-10. 19 Goldfarb, Zachary A. "Obama to Raise Minimum Wage for Government Contract Workers." Washington Post. The Washington Post, 28 Jan. 2014. Web. 14 May 2014. 20 Supra note 18. 21 Ed Rensi now owns a chain of barbeque restaurants called Famous Dave’s. 22 Ex-McDonald's CEO: Raising The Minimum Wage To $15 Would 'Absolutely' Kill Jobs, THE HUFFINGTON POST (Aug. 21, 2013, 1:30 PM), http://www.huffingtonpost.com/2013/08/21/mcdonalds- minimum-wage_n_3790745.html.

7 would apply for unemployment benefits and social assistance programs, putting more strain on our already fragile economic recovery.

However, others argue this increase may make millions of workers’ lives much better.

With the increasing number of older people working in these low wage jobs,23 there is an increase in the demand for higher wages to provide for their families.24 With the shift from younger inexperienced workers to more educated older workers, the minimum wage must grow to support lifestyles of adults with families, rather than younger workers living at home.25

Is the government right in enforcing a higher minimum wage requirement to assist those that need extra income because the changing demographic of the work force? From a social standpoint, it is not feasible for a working mother, the sole provider for her children, to live with

$7.25 per hour; this social issue is especially apparent when comparing such workers to more affluent individuals, or high ranking executives working for the same or similar companies.26

This need for higher wages is increasing the demand for a higher minimum wage and pressuring the government to adapt to these changing demographics.

Another reason for increasing the minimum wage requirement in the United States is to adjust to changes in inflation and purchasing power. At a minimum, to be in line with 1979’s rate adjusted for inflation, the federal minimum wage should be within the range of $10.55 to $10.97,

23 Supra note 9. 24 Id. 25 Id. The report issued by the Center for Economic and Policy Research also stated the percentage of workers with some higher education or more has increased from 25.2% to 43.2% from 1979 to 2011. 26 Supra note 9.

8 instead of the $7.25 per hour today.27 This is in addition to the fact that workers are now older, more educated, and possibly more skilled, than they were three decades ago.28

However, why should businesses, rather than the government, be burdened with the cost of increased wages for this change in demographics? Reverting back to why the Fair Labor

Standards Act (FLSA) was enacted, the mission was and still is to ensure employers are treating their employees fairly and with adequate pay; the Wage and Hour Division, established by the

FLSA, aims to protect the welfare and labor standards of the workforce.29 Employers, therefore, are the ones burdened with costs of paying increased wages. The government could pay low wage workers in a different manner, through social welfare programs, such as social security,

Medicare, food assistance, and public education.

By raising the minimum wage, businesses may be forced to lower costs by reducing operational costs, cutting back on product quality (e.g. fewer fresh ingredients in food products) or most importantly, jobs and worker hours.30 A minimum wage increase may also improve the lives of many individuals working to provide for their families.31 Raising the minimum wage will have many consequences, both positive and negative, for employees and employers. This article considers the history of franchise and minimum wage laws, the current situation, the opinions and predictions of current franchise executives, and other measures to increase workers’ wages.

27 Id. Furthermore, while the minimum wage rate should be in the $10.55 to $10.97 range, the 1979 inflation adjusted wage is $8.51 per hour, and the federal minimum wage rate today, as of January 30, 2015, is $7.25 per hour. 28 Id. 29 FY 2015 CONGRESSIONAL BUDGET JUSTIFICATION WAGE AND HOUR DIVISION (2015). 30 Infra note 97. 31 Supra note 4.

9 HISTORY

Franchise Law

To understand how minimum wage regulation may impact franchising, one needs to know the origins and present status of franchise law. Franchising is a large part of the U.S. economy.32 A subset of that economy, the service industry, is comprised of a large number of franchises, including franchise restaurants. These franchises thus must often employ many low wage employees to accommodate the high amount of service in their business; this, in turn, translates to high labor costs. Therefore, these industries, such as franchising, with high labor costs, are linked to the minimum wage laws regulating them, as well as their own franchise regulations.

In 1970, California enacted the first set of franchise disclosure laws in the country.33 The

Franchise Investment Law mandates that franchisors register with the California Department of

Business Oversight before going into business with franchises.34 At that time, an addition to the law required a ten-day period between the date the pre-sale disclosure is given to prospective

32 Information Handling Services Economics, Franchise Business Economic Outlook for 2015, INTERNATIONAL FRANCHISE ASSOCIATION (2015), http://emarket.franchise.org/FranchiseBizOutlook2015.pdf. 4.7% of U.S. GDP was due to franchising in 2014. 33John R. F. Baer, Greensfelder, Hemker and Gale, Overview of Federal and State Laws Regulating Franchises, Distributorships, Dealers, Business Opportunities and Sales Representatives, Greensfelder, Hemker & Gale, P.C. (Mar. 14, 2012), http://www.unidroit.org/english/guides/2007franchising/country/usa.pdf. 34 California Corporations Code § 31110-31125 (California Legislative Information through 1970 legislation).

10 franchisees and the date of the purchase decision.35 Since 1970, the Federal Trade Commission and many states have enacted their own registration laws, varying across the nation.36

The principal franchise law, which still stands as the primary format for disclosure, is the

FTC Franchise Rule, first promulgated in 1978 and then amended in 2007 (the “Amended FTC

Franchise Rule”).37 This rule, as with consumer protection laws, is intended to protect the consumer by ensuring that potential franchisees have all necessary information to make an informed investment decision. This regulation modified the Uniform Franchise Offering Circular

(UFOC) to create the new FTC franchise disclosure format.38 Even though 15 states have their own laws, all states must abide by FTC standards; each state also has its own way of monitoring franchises.39 For example, “filing states,” such as Florida and Maine, require the franchisor to file and pay a fee without having to register or get approval prior to selling franchises.40

In 1960, during the presidential election between John F. Kennedy and Richard Nixon, franchise executives were predicting more governmental regulation on their businesses in their future, thus the International Franchise Association was founded to uphold the principles and standards of franchising.41 Even with the increase of franchising regulations, the relationship between the International Franchise Association and Congress has historically been one of

35 About the Franchise Investment Law, CALIFORNIA DEPARTMENT OF BUSINESS OVERSIGHT, http://www.dbo.ca.gov/Licensees/franchise_investment_law/About.asp (last visited Apr. 8 2014). This time period has since been updated to fourteen days rather than ten days prior to the required date of purchase decision. 36 Id. 37 Supra note 33. 38 Id. 39 Id. 40 Directory of Franchise Registration States, SIGNATURE FRANCHISING, http://www.frandocs.com/franchise-registration-states.htm (last visited Apr. 20, 2014). 41 Timeline of Events, International Franchise Association, http://emarket.franchise.org/Timeline/IFA- Timeline25.html (last visited Feb. 1, 2015).

11 cooperation and enthusiasm.42 In 2006, the Seventh Annual Franchise Appreciation Day was a time for franchisees and franchisors to communicate with lawmakers about changes they wish to see enacted and to show the impact franchises have on the economy.43 One franchisee, George

Zografos, from Donut Co., part of Dunkin’ Brands,44 was able to meet with several Congressmen, including Massachusetts Congressmen Michael Capuano, to speak about how franchisees struggle to provide healthcare to their employees,45 the potential negative effects on the economy and jobs if the minimum wage was increased, and immigration reform.46 Above all, however,

Zografos and the other attendees of Franchise Appreciation Day made their message clear to

Congress that franchising is effective, and United States franchising contributes to “One in 7”47 jobs nationwide.48

Franchise law, first created in 1970, is relatively new compared to other areas of United

States law, such as minimum wage regulations dating back to 1938 through the Fair Labor

Standards Act, over 30 years before the first franchise law was enacted. While franchise precedent is growing, there is still much legal reform needed to make franchise laws more uniform and equitable nationwide. In contrast, the more established history of minimum wage regulation has always been a large part of employment, and franchising.

42 Hilary Strahota, Franchising's Voice Rings Through the Halls of Congress, INTERNATIONAL FRANCHISE ASSOCIATION (2006), http://www.franchise.org/Franchise-News-Detail.aspx?id=40358. 43 Id. 44 Dunkin’ Brands includes Dunkin’ Donuts, Baskin Robbins, and Togo’s. 45 He suggested franchises having a separate requirement for healthcare, but Capuano mentioned he does not want healthcare to be specialized. 46 Supra note 42. 47 The attendees of Franchise Appreciation Day on Capitol Hill all wore yellow buttons with “One to 7” printed on them to raise awareness of the impact franchising has on the economy. 48 Supra note 42.

12 Minimum Wage Regulation

The Fair Labor Standards Act was aimed at establishing not just a minimum wage, but also ethical labor practices, specifically the ban of oppressive child labor.49 The minimum wage regulation’s purpose was to increase fairness among workers and create a minimum standard of living.50 At 25¢ per hour (about $11 per week) originally, accounting for inflation this would be

$165.20 per week in 2014 dollars ($4.13 per hour or $8,590.40 per year).51

In fact, dating back to the early 1900s, the idea of a minimum wage was meant to assist women and teens in competing for the same jobs as men.52 As times changed and the workplace evolved, the minimum wage has expanded, but the mission remains the same: to create a minimum standard of living and fairness among workers.53

Figure 1 below depicts how minimum wage has gradually increased since its inception in

1938. By adjusting for inflation, one sees the purchasing power of historical dollars in terms of today’s value. Note that while the minimum wage has always held steady or increased, the purchasing power has actually decreased about 5.8% due to inflation since its last increase to

$7.25 in 2009.54 Indeed, the minimum wage, in inflation-adjusted dollars, peaked in 1968 at

$10.71 (2013 dollars).55

49 Jonathan Grossman, Fair Labor Standards Act of 1938: Maximum Struggle for a Minimum Wage, UNITED STATES DEPARTMENT OF LABOR, http://www.dol.gov/dol/aboutdol/history/flsa1938.htm (last visited Apr. 12, 2014). 50 Id. 51 CPI Inflation Calculator. UNITED STATES DEPARTMENT OF LABOR BUREAU OF LABOR STATISTICS, http://www.bls.gov/data/inflation_calculator.htm (last visited Apr. 10, 2014). 52 BARBARA MANTEL, ISSUES FOR DEBATE IN AMERICAN PUBLIC POLICY: SELECTIONS FROM CQ RESEARCHER 281-299 (2015). 53 Supra note 49. 54 Drew Desilver, 5 Facts about the Minimum Wage, PEW RESEARCH CENTER (Dec. 4, 2013), http://www.pewresearch.org/fact-tank/2013/12/04/5-facts-about-the-minimum-wage/. 55 Kurtz, Annalyn, and Tal Yellin, Minimum Wage since 1938, CNNMONEY, http://money.cnn.com/interactive/economy/minimum-wage-since-1938/ (last visited Apr. 1, 2014).

13 Figure 1: Historical Minimum Wage Prices Adjusted for Inflation

Source: Kurtz, Annalyn, and Tal Yellin, Minimum Wage since 1938, CNNMoney, http://money.cnn.com/interactive/economy/minimum-wage-since-1938/ (last visited Apr. 1, 2014).

The graph also depicts how the unadjusted minimum wage has steadily increased or remained stagnant since 1940. Increasing the minimum wage from $7.25 to $10.10 would increase the minimum wage by 39%, an increase higher than ever before. Some franchise owners are worried that this increase will be too rapid and costly for businesses to remain prosperous.56

One solution could be to raise the wage gradually over time, for instance two to five years.

The history of minimum wage coverage is complicated. From 1938 to 1961, the federal minimum wage requirement was meant for employees engaged in interstate commerce.57

Amendments were then made to the law. The 1961 Amendments expanded the retail sector coverage and increased wages.58 Specifically, coverage was extended “primarily to employees in large retail and service enterprises as well as to local transit, construction, and gasoline service

56 Infra note 197. 57History of Federal Minimum Wage Rates Under the Fair Labor Standards Act, 1938 – 2009, UNITED STATES DEPARTMENT OF LABOR, http://www.dol.gov/whd/minwage/chart.htm (last visited Apr. 1, 2014). Interstate commerce is trade or business between two states. This applies to business engaging in interstate commerce, producing goods for interstate commerce, or handling or working in any way with interstate commerce. 58 Id.

14 station employees;” at this time, wages were increased from $1.15 to $1.25 effective in 1963.59

The 1966 Amendments extended coverage even further to local and state employees in nursing

homes, hospitals, restaurants, farms, and more; these amendments also extended coverage to

some workers that were previously exempt, such as people in retail and service industries.60

Coverage is two-fold, for both the employee and employer levels. If any of the conditions

depicted in Figure 2 apply, the employee must be paid at the minimum wage.

Figure 2: Enterprise Coverage and Individual Coverage

Enterprise Coverage Individual Coverage At least two employees Involved in interstate commerce: Annual dollar volume of sales of at least $500,000 Producing goods to be sent out of state Certain enterprises: Making telephone calls regularly to people out of state Businesses proving medical or nursing care Traveling out of state Janitorial work in a building in which products to be Hospitals shipped out of state are made Schools Record handling of interstate transactions Preschools Domestic service workers: Government agencies Housekeeper Cook Babysitter (full-time)

Source of Information: United States. U.S. Department of Labor. Wage and Hour Division. Fact Sheet #14: Coverage Under the Fair Labor Standards Act (FLSA).

For example, if the enterprise is a school, the employee must be paid at least at the

minimum wage level. If the employee is involved in any form of interstate commerce, by making

regular calls to people out of state, for example, the employee must be paid at the minimum

wage. By satisfying any of the criteria listed in Figure 2, the employee in entitled, under FLSA,

to receive the minimum wage for his or her services.61

59 Id. 60 Id. 61 FLSA goes further to explain overtime compensation and child labor regulations that are not covered in this analysis.

15 Additionally, there is also an annual dollar volume (ADV) test for companies, in which they must pay minimum wage if their annual dollar volume of sales reaches above that threshold.62 If the employer passes this test, their employees must be paid minimum wage; firms that fall short of the ADV test may not have to pay their employees minimum wage.63 However, in 1990, a grandfather clause was enacted, stating that if the employer was covered under FLSA on March 31, 1990 and if they failed the increased ADV test64 for enterprise coverage, any employee, who does not qualify for minimum wage, must be paid a minimum of $3.35.65 In this way, these employees were assured a minimum wage, regardless of the listed criteria for coverage. In 1997, the subminimum wage requirement was set at $4.25 an hour for employees under 20 years old within their first 90 days of working.66

The United States has made enormous positive strides in fair labor practices and wages since the early 1900s.67 It is important to remember why minimum wage laws were enacted and exactly who is covered under such laws when analyzing the effects of raising such wages.68

When Congress first enacted the minimum wage law, it was to ensure workers were treated fairly, specifically women and teens being able to compete with men. This remains the objective of the

62 Supra note 57. 63 However, if the employee falls satisfies one of the requirements of individual coverage listed in Figure 2, the employee must be paid minimum wage. 64 Kraig J. Martin Esq., Jerrie Martinez, and Nikki Wilk, The Fair Labor Standards Act: Minimum Wage, Overtime and Travel Time, JABURG WILK ATTORNEYS AT LAW, http://www.jaburgwilk.com/news- publications/the-fair-labor-standards-act-minimum-wage-overtime-and-travel-time (last visited May 7, 2014). The annual dollar volume test refers to the $500,000 minimum of business annually. 65 Supra note 57. 66 Id. 67 History of Changes to the Minimum Wage Law, UNITED STATES DEPARTMENT OF LABOR, http://www.dol.gov/whd/minwage/coverage.htm (last visited Mar. 16, 2014). 68 Perhaps, the whole burden of paying higher wages should not fall solely on the businessmen and women.

16 FLSA.69 Moreover, most franchises fall under this enterprise coverage under the FLSA, because they often time have more than two employees or more than $500,000 in annual dollar volume of sales. The level of control70 determines whether the employee is employed by the franchisee or the franchisor.71

The objective of the minimum wage requirement, as stated above, started as and still is to create fairness among workers in our nation and uphold a minimum standard of living. The question today therefore is whether the proposed increased wage for the fair treatment of employees and minimum standard of living will translate into positive or negative consequences for employees and business owners, specifically franchises.

CURRENT MINIMUM WAGE SITUATION IN THE UNITED STATES

The federal minimum wage in the United States is currently $7.25; however, state requirements differ. When there is a discrepancy, the higher of the state and federal wages must be used.72 Currently, four states have minimum wages lower than the federal limit, and five states do not have a minimum wage requirement.73 Twenty states’ requirements are equal to the federal minimum wage, while twenty-one states and the District of Columbia require minimum wages higher than that of the federal minimum wage.74

69 Assistance By Law - The Fair Labor Standards Act (FLSA), UNITED STATES DEPARTMENT OF LABOR, http://www.dol.gov/whd/flsa/ (last visited May 20, 2014). 70 Fact Sheet #13: Employment Relationship Under the Fair Labor Standards Act (FLSA), UNITED STATES DEPARTMENT OF LABOR (May 2014), http://www.dol.gov/whd/regs/compliance/whdfs13.pdf. This level of control is referring to the level of control the franchisor has over the franchisee. The more control the franchisor has will likely indicate classifying the franchisor, rather than the franchisee, as the employer. 71Id. 72 Minimum Wage Laws in the States - January 1, 2015, UNITED STATES DEPARTMENT OF LABOR, http://www.dol.gov/whd/minwage/america.htm (last visited Mar. 13, 2014). 73 Id. 74 Id.

17 Public demonstrations in 2013 and 2014 have increased pressure to raise the minimum wage.75 President Obama mandated, through Executive Order 13658, that all federally funded contract employees have a minimum wage of $10.10.76 This provision will not affect most franchises, as they are not federally funded. However, this bill does affect franchises on military bases.77 Some franchises might be forced to close, possibly causing lost jobs for military dependents that count on this income.78 Additionally, this order is an acceleration of the rise in minimum wage. The wage will only increase from here, which supports his views that people working full-time should not live under the poverty line, even though the poverty line in the

United States is considerably higher than those of other countries.79 If we claim to be the wealthiest country in the world, Obama states, “Americans overwhelmingly agree that no one who works full time should ever have to raise a family in poverty.”80 In summary, President

Obama, the Democratic Party, and many Americans across the nation are arguing the minimum wage should be raised out of fairness, a principle upon which the legislation started in the 1930s.

Some commentators report a different side of the issue. With more and more jobs being automated these days, some commentators argue there is simply no need to pay workers higher wages for less work.81 Furthermore, with more automation, there is less need to hire more workers. Just as many manufacturing jobs have left our country due to increased technology and

75 Laura Shin, Fast Food Worker Protests Over Minimum Wage Spread Across The Globe, FORBES (May 15, 2014, 9:45 AM), http://www.forbes.com/sites/laurashin/2014/05/15/fast-food-worker-protests-over- minimum-wage-spread-across-the-globe/. 76 President Barack Obama's State of the Union Address, THE WHITE HOUSE, (Jan. 28, 2014), http://www.whitehouse.gov/the-press-office/2014/01/28/president-barack-obamas-state-union-address. 77 IFA Statement on Federal Contractor Minimum Wage Rules, INTERNATIONAL FRANCHISE ASSOCIATION (June, 16, 2014), http://www.franchise.org/Franchise-News-Detail.aspx?id=62519. 78 Id. It is not clear whether any franchises have closed after the executive order was passed. 79 Supra note 76. 80 Id. 81 Bulls and Bears (FOX television broadcast May 17, 2014).

18 cheaper labor overseas, many believe restaurant jobs may diminish with increased automation.82

With many supermarkets already having self-checkout lanes, more automation for restaurants is in the near future, e.g. the self-checkout at some restaurants, such as Chili’s. The political right argues the economic angle of the minimum wage debate, stating that raising the minimum wage will harm the economy in terms of jobs, business growth, and disposable income.

John Layfield, a financial analyst from FOX News, estimates that an increase in minimum wage to $15 will cost the United States at least half a million jobs due to business owners not being able to afford to pay their workers such high wages.83 This increase, in his opinion, will hurt franchise owners, workers, and eventually the market.84 The market works to correct itself without government mandates.85

Effects on Unemployment

Before the U.S. government enacts legislation, it needs to analyze how this will affect the country. When discussing minimum wage, the unemployment rate is added to the discussion and whether increasing the minimum wage will have a positive or adverse effect. Both advocates and detractors like to use the unemployment rate as a way to solidify their point for or against increasing the minimum wage.86

Differing state laws add to the complexity of this matter. Each state has the option of having a minimum wage higher, lower, or equal to the federal requirement; the state must then enforce the higher regulation, state or federal.87 States with lower minimum wage laws, may be

82 Id. 83 Id. 84 Id. 85 Id. 86 Advocates for increasing the minimum wage say jobs will increase, while people not in favor say the opposite. 87 Minimum Wage, UNITED STATES DEPARTMENT OF LABOR, http://www.dol.gov/dol/topic/wages/minimumwage.htm (last visited Feb. 3, 2015).

19 able to set a lower standard for those employees not covered under the FLSA and not eligible for the federal minimum wage by setting their own coverage requirements.88 The following figure shows how states compare in terms of their minimum wage requirement.

Figure 3: Shares of All Workers, by States’ Applicable Minimum Wage, 2014

Source: The Effects of Minimum Wage Increase on Employment and Family Income, CONGRESS OF THE UNITED STATES CONGRESSIONAL BUDGET OFFICE (Feb. 2014), http://www.cbo.gov/sites/default/files/44995-MinimumWage.pdf.

88 Supra note 72. This also may be in part to poorer areas of the country having lower wages.

20 The Congressional Budget Office (CBO) further explains that the minimum wage increase could decrease jobs. A wage hike to $10.10 will likely lead to about one million jobs lost; the possible $9.00 wage hike will likely lead to about 200,000 jobs lost.89 Furthermore, the

CBO reports that only about 19 percent of the $31 million from the minimum wage raise would go to families that are below the poverty threshold.90 This enforces that raising the minimum wage will have little significant effect on poverty.

Democratic Party political pollster and strategist, Bernard Whitman, argues that raising the minimum wage will have no effect on unemployment, based on a University of North

Carolina study conducted with 1990-2006 data.91 He, like President Obama, believes raising the minimum wage will better serve workers with a $7.25 wage who cannot support their families.92

Bernard Whitman also argues that a $7.25 minimum wage hurts people’s ability to repay student loans.93 Many conservatives, in response, argue that minimum wage increases harm employment rates, especially in our recovering economy.

After summarizing many research studies and meta-studies conducted (since 2000) on the minimum wage law’s effects on unemployment, the Center for Economic and Policy Research concluded that the minimum wage does not affect unemployment rates.94 This is depicted in the graph below, which compares the minimum wage to the unemployment rate. As shown, there

89 The Effects of Minimum Wage Increase on Employment and Family Income, CONGRESS OF THE UNITED STATES CONGRESSIONAL BUDGET OFFICE (Feb. 2014), http://www.cbo.gov/sites/default/files/44995- MinimumWage.pdf. 90 Id. 91 Supra note 81. 92 Id. 93 The opposing argument to this is that student loans are difficult to pay off anyways. With an already lagging economy, increasing the minimum wage will only make it more difficult for people to find jobs to pay off loans. Many argue that increasing the minimum wage will only further the dependence of handouts from the government. Additionally, this comment is assuming that these workers either need further education or have outstanding debt, which may not always be true. 94 Supra note 9.

21 has been no clear correlation or causation between the minimum wage rate and unemployment rate between 1950 and 2013.95

Figure 4: Real Minimum Wage Rate vs. Unemployment Rates

Source: The Impact of Increasing the Minimum Wage on Unemployment: No Evidence of Harm, AN ECONOMIC SENSE (Mar. 6, 2013, 9:31 PM), http://aneconomicsense.com/2013/03/06/the-impact-of- increasing-the-minimum-wage-on-unemployment-no-evidence-of-it/.

Studies have shown that the lack of or minimal effect on unemployment is due to the variety of methods business owners use to cut costs; when wages increase, they do not simply increase or decrease employment.96 A franchise owner, Rene Prats, from Miami, Florida, believes that it is up to the business owners to develop innovative ways to cut costs, such as

95 The Impact of Increasing the Minimum Wage on Unemployment: No Evidence of Harm, AN ECONOMIC SENSE (Mar. 6, 2013, 9:31 PM), http://aneconomicsense.com/2013/03/06/the-impact-of-increasing-the- minimum-wage-on-unemployment-no-evidence-of-it/. 96Supra note 9.

22 cutting certain benefits, hours, marketing, or advertising.97 Indeed, economists note that businesses can use one or many of these cost-cutting techniques.98 Possible explanations as to why an increased minimum wage may not have an effect on employment include99

• Reducing training, added benefits, or hours • Cutting wages of other higher paid employees • Raise prices for products or services • Simply settle for less profit • Improving efficiency of already established workers • “Efficiency wage” responses from employees without employer intervention100 • Saving money from possible less employee turnover • Increased demand due to higher discretionary income

These other cost cutting strategies businesses can use to adjust for the increased labor costs give business owners other options instead of laying off their workers. Therefore, the correlation between increasing the minimum wage and unemployment is nonexistent or slim due to the other avenues of decreasing costs.101

Just as businesses can use other measures to reduce costs, the government can use other payouts, apart from an increase in minimum wage, to aid low income workers. These other tools may be put into effect in place of higher minimum wages.

97 Telephone Interview with Rene Prats, President/CEO of Miami Restaurant Properties, President/CEO/CMO of Sir Pizza South Florida. Owner of Prats Consulting (Apr. 11, 2014). 98 Brad Plumer, Economists Disagree on Whether the Minimum Wage Kills Jobs. Why?, THE WASHINGTON POST (Feb. 14, 2013), http://www.washingtonpost.com/blogs/wonkblog/wp/2013/02/14/why-economists-are-so-puzzled-by-the- minimum-wage/. 99Supra note 95. 100 Infra note 208. 101 Supra note 95.

23 Figure 5: Earned Income Tax Credit by Number of Children and Filing Status, 2014

Source: Elaine Maag and Adam Carasso, Taxation and the Family: What Is the Earned Income Tax Credit, Tax Policy Center (Feb. 12, 2014), http://www.taxpolicycenter.org/briefing-book/key- elements/family/eitc.cfm.

Earned Income Tax Credit (EITC) is another way for low-income families to obtain extra money from the government.102 Depending on the number of children, the recipient’s marital status, and the amount of income reported, as depicted in Figure 5 above, the amount of credit

102 "EITC, Earned Income Tax Credit, Questions and Answers," IRS (Jan. 6, 2014), http://www.irs.gov/Individuals/EITC,-Earned-Income-Tax-Credit,-Questions-and-Answers. Web. 22 May 2014.

24 awarded can change.103 Some people such as John Layfield and Tracey Byrnes from FOX News state this is a better way for low-income individuals to raise their earnings.104 Raising the minimum wage, in their opinion, is not the answer to solve the unemployment issue in the United

States,105 because unemployment and minimum wage rates do not have a clear causal relationship.106

An anonymous franchise owner surveyed for this analysis stated that, not only should employees receive this EITC if wages increase, but business owners as well.107 Rather than the government raising the minimum wage by 24% (from $7.25 to $9.00 per hour), the business owners, would be able to use this credit for employee benefits.108 In terms of job efficiency, this executive believes that workers will perform at the same efficiency regardless of the wage; “they either have the skills or they don’t,” he says.109

Besides the inconclusive evidence of the effects of raising the minimum wage on unemployment, there is also an argument stating why there is such a demand for increased wages today, when the economy is still recovering even now, many years after the 2008 Financial

Crisis.110 Some argue raising the minimum wage under present circumstances would only stifle efforts to increase employment.111 Even if most research results were inconclusive, many still

103 Maag, Elaine Maag and, and Adam Carasso, "Taxation and the Family: What Is the Earned Income Tax Credit, TAX POLICY CENTER (Feb. 12, 2014), http://www.taxpolicycenter.org/briefing-book/key- elements/family/eitc.cfm. 104 Supra note 81. 105 Id. 106 Supra note 9. 107 Telephone Interview with anonymous franchise owner, Anonymous franchise company (Sept. 2, 2014). This franchise executive wishes to remain anonymous due to his position and business brand. 108 Id. 109 Id. 110 Supra note 55. 111 Steven Greenhouse, $15 Wage in Fast Food Stirs Debate on Effects, NYTIMES, (December 4, 2013). http://www.nytimes.com/2013/12/05/business/15-wage-in-fast-food-stirs-debate-on- effects.html?pagewanted=all&_r=2&.

25 argue that the possibility of negative effects on a still recovering economy is enough to oppose the raise in minimum wage.

Additionally, MinimumWage.com states the evidence overwhelmingly opposes the minimum wage increase; this group cites job destruction as the number one reason not to raise the minimum wage.112 Furthermore, in a recent study conducted by the Employment Policies

Institute, based on data from the U.S. Census Bureau and the Bureau for Economic Analysis, every 10% increase in a state’s minimum wage corresponded to a 3.6% decrease in low-skilled employment113 (employment among 16-19 year olds).114 With many economists stating the negative effects of raising the minimum wage and others claiming no evidence, the main argument in favor of raising the minimum wage would be out of fairness for workers.

With more and more pressure to increase the minimum wage, legislative action is likely to take place. However, some GOP representatives believe that higher wages can be better addressed through other means rather than raising the minimum wage; they believe the problem lies in the lack of good job opportunities, not their wages.115 Employees are demanding a very unlikely $15 “fair” pay per hour, a minimum wage unrealistic with a Republican-run Congress concerned with possible detrimental economic effects. Increasing the minimum wage will affect

112 There Are Two Sides to the Minimum Wage Debate, MINIMUMWAGE.COM, https://www.minimumwage.com/wp-content/uploads/2014/06/ad21- 2.https://www.minimumwage.com/wp-content/uploads/2014/06/ad21-2.jpg 113 This decrease in employment was not in conjunction with an increase in school enrollment. Thus, this decrease in employment does not equate to a greater contribution to society with increased education and better job prospects later in these individuals’ lives. 114 Dr. Joseph Sabia, Failed Stimulus: Minimum Wage Increases and Their Failure to Boost Gross Domestic Product, EMPLOYMENT POLICIES INSTITUTE (December 2010), https://www.epionline.org/wp-content/uploads/2014/08/sabia_12-2010.pdf. 115 Wesley Lowery, Senate Republicans block minimum wage increase bill, THE WASHINGTON POST (Apr. 3, 2014), http://www.washingtonpost.com/blogs/post-politics/wp/2014/04/30/senate-republicans-block- minimum-wage-increase-bill/.

26 all customers, people in surrounding and competing industries, employers, executives, employees and families.

Automation

A technological development affecting employment in today’s world is the move to automation. As more and more job functions and jobs are transformed into processes that machines can perform, jobs, as we know them today, are being changed forever, and possibly being eliminated.

Even one McDonald’s restaurant is experimenting with tablets at each table in its locations.116 Customers are able to order their food straight from the tablet, improving customization and customer experiences.117 Other restaurants have taken after this example as well. A White Castle restaurant is experimenting with kiosks to order food with more privacy than ordering out loud to a clerk.118 White Castle has stated that this improvement has not decreased the number of workers in their restaurants, as they are just using these kiosks to improve their customer experience.119 Chili’s restaurants are also utilizing tablets for customers to pay their bills. Automation is being used to increase efficiency within restaurants.

Unlike minimum wage, automation is highly linked to the unemployment rate. According to the Pew Research Center, automation should displace a large number of jobs due to robots and digitalized work.120 Experts either talk about how jobs will be completely lost or how even if jobs are lost, businesses will have enough creativity to increase production and jobs through other

116 Christine Blank, Burgers by Design, QSR MAGAZINE (January 2014), http://www.qsrmagazine.com/exclusives/burgers-design. 117 Id. 118 Id. 119 Id. 120 Aaron Smith and Janna Anderson, AI, Robotics, and the Future of Jobs, PEW RESEARCH CENTER (Aug. 6, 2014), http://www.pewinternet.org/2014/08/06/future-of-jobs/.

27 means.121 In fact, there is a 97% probability that typical jobs in fast-food chains, often franchises, will be automated in the next 20 years.122

For example, San Francisco’s Momentum Machines is hoping to replace cooks and workers in fast-food restaurants with more efficient robots.123 Momentum Machines are said to produce one burger approximately every 10 seconds, and with the freshest ingredients possible, slicing tomatoes and lettuce only when needed.124 With such productivity, American workers may have stiff competition.125 The trend towards automation is certainly a factor in the unemployment rate today and that will only increase in the future.126

Increased Costs

With the increase in labor costs, businesses will have to be creative in cutting costs in other areas of their business to remain profitable.127 Attempts to decrease costs could come from a variety of different avenues, such as becoming more efficient, cutting hours, or raising prices.128

Oasis Cafe owner, Craig Beemer of Minnesota, has taken matters into his own hands to add a creative “minimum wage fee” to all receipts, after he calculated what the wage increase

121 Id. 122 Bill Bradley, Restaurant Franchisees, Are There Robots in Your Future?, AMERICA’S BEST FRANCHISES (March 29, 2014), http://www.americasbestfranchises.com/blog/restaurant-franchises/. 123 Richard Lyon, Drive to Unionize Fast Food Workers Runs Into Automation, DAILY KOS (September 21, 2013, 10:23 AM), http://www.dailykos.com/story/2013/09/21/1240399/-Drive-To-Unionize-Fast- Workers-Runs-Into-Automation#. 124 Dylan Love, Here's The Burger-Flipping Robot That Could Put Fast-Food Workers Out Of A Job, BUSINESS INSIDER (August 11, 2014, 10:05 AM), http://www.businessinsider.com/momentum-machines- burger-robot-2014-8. 125 Id. 126 Id. 127 Supra note 95. 128 Id.

28 would cost his business per order.129 Instead of increasing prices on the menu, Beemer has added a $.35 charge to each ticket, explaining that this is a better option for his business.130 Some reactions from customers have been positive he adds; some have even been tipping more to support the minimum wage raise.131 However, most of the feedback he has received has been overwhelmingly negative; many have given bad reviews on the restaurant’s Facebook page, such as “Unless you like being manipulated as a customer to promote the owner's political views, this restaurant is not for you.”132 In Beemer’s case, an added minimum wage fee has not brought good publicity to his company.

This increase in wages may force businesses to still increase prices, regardless of creative efforts business owners try to make.133 A study by the Heritage Foundation found that restaurants would have to increase prices by as much as 38%.134 A typical customer’s meal would be changed drastically, with a Subway turkey foot long sandwich increasing in price from $6.50 to

$8.49 and a Big Mac Meal from $5.69 to $7.82.135 By increasing the prices of meals, people in all income brackets would be affected.136 Contrary to popular belief,137 more affluent families do not frequent fast food restaurants less often than low income families.138 This is because the

129 Controversy Brews Over MN Cafe's 35-Cent ‘Minimum Wage Fee,’ FOX NEWS INSIDER (Aug 9, 2014, 11:46 AM), http://insider.foxnews.com/2014/08/09/controversy-brews-over-mn-cafes-35-cent- ‘minimum-wage-fee’. 130 Id. 131 Id. 132 Glynnii Nal'Shae, Review to The Oasis Cafe Family Style Restaurant, FACEBOOK (Aug. 14, 2014), https://www.facebook.com/glynnii.nalshae/posts/820390224661126:0. 133 Kelsey Harris, Melissa Quinn, Here’s How the Price of Your Favorite Fast Food Would Change With a $15 Minimum Wage, THE DAILY SIGNAL (September 4, 2014), http://dailysignal.com/2014/09/04/wage- hike-fast-food-prices-infographic/. 134 Id. 135 Id. 136 Sam Oches, Meet Your Customer, QSR MAGAZINE (November 2012), http://www.qsrmagazine.com/consumer-trends/meet-your-consumer?page=3. 137 With low prices and value options, fast food restaurants seem like they would be attractive dining options for low-income families. 138 Supra note 136.

29 appeal of fast food restaurants is not just the low price point, but also the convenience; these facts can actually favor the minimum wage increase because more affluent families can afford a price increase.139 Increases in prices could affect the whole nation, affluent and lower-income families alike.140 Why raise wages if that increase will just raise the price of the food those workers will pay for anyway?

Forming a Union

With no official union set in place for fast food workers, some low wage workers are fighting hard, acting as if they have union backing.141 Having a union supporting their efforts would likely increase their influence in Washington D.C. As the old saying goes, “there is strength in numbers.” The movement, beginning in New York City on November 2012, has not slowed down.142

The “Fight for $15” campaign has intensified with walkouts and protests.143 Hundreds of workers from McDonald’s, Burger King, and Wendy’s have been arrested.144 Although peaceful and respectful, workers were taken to police facilities and later released.145 Workers are quoted as

139 Low wage workers still frequent these establishments. A cycle starts with increased wages transferring to increased cash for workers and increased prices for businesses, and continues with these workers purchasing these goods at a higher price with this increased income. 140 The money spent on a value meal will be a greater percentage of a low-income family’s paycheck than a more affluent family’s paycheck. 141 Fred S. Wessler, ‘We’re a Movement Now’: Fast Food Workers Strike in 150 Cities, NBC NEWS (September 4, 2014, 4:46 AM), http://www.nbcnews.com/feature/in-plain-sight/were-movement-now- fast-food-workers-strike-150-cities-n195256. 142 Id. 143 50 Chicago Fast Food Workers Arrested as Fight for $15 and Union Rights Intensifies, FIGHT FOR $15, http://fightfor15.org/en/50-chicago-fast-food-workers-arrested-as-fight-for-15-and-union-rights- intensifies/ (last visited Feb. 1, 2015). 144 Id. 145 Id.

30 saying, “We are doing whatever it takes.”146 These workers are also fighting for the right to form a union without retaliation; this fight has spread to more than 150 cities147 in the United States.148

Service Employees International Union (SEIU) is a big proponent of raising the minimum wage, supporting a recent Seattle ordinance; SEIU is also supporting a group named

Working Washington, pushing for higher wages.149 A union motivation for increased wages is clear: more dues, more money for them. By classifying franchises as part of their “big business” franchisor company, a union is more likely to form than if franchises were treated as the small

146 Id. 147 Id. Protests have happened in the following cities throughout the United States: Alameda, CA; Atlanta, GA; Auburn Hills, MI; Aurora, CO; Baton Rouge, LA; Bellevue, PA; Bellfontaine, MO; Berkeley, CA; Bloomfield, CT; Boston, MA; Brookfield, WI; Burton, MI; Cambridge, MA; Central Falls, RI; Chapel Hill, NC; Charleston, SC; Charlotte, NC; Chicago, IL; Claymont, DE; Dearborn Heights, MI; Decatur, GA; Denver, CO; Detroit, MI; Dublin, CA; Durham, NC; East Greenwich, RI; Eastpointe, MI; El Cerrito, CA; El Monte, CA; Elsmere, DE; Fairfield, CA; Farmington Hills, MI; Farmville, NC; Ferguson, MO; Ferndale, MI; Fitchburg, WI; Flint, MI; Flint Township, MI; Florissant, MO; Forsynth, MO; Fremont, CA; Germantown, WI; Glendale, CA; Glendale, WI; Goldsboro, NC; Grandview, MO; Greendale, WI; Greenfield, WI; Greensboro, NC; Greenville, NC; Hamden, CT; Hamtramck, MI; Harper Woods, MI; Hartford, CT; Harvey, LA; Hayward, CA; Henderson, NV; Henrico, VA; High Point, NC; Highland Park, MI; Hillsborough, NC; Houston, TX; Huntington Park, CA; Independence, MO; Indianapolis, IN; Inglewood, CA; Jacksonville, AR; James Island, SC; Jennings, MO; Kansas City, KS; Kansas City, MO; Kirkwood, MO; Knightdale, NC; Lakewood, CO; Lansing, MI; Las Vegas, NV; Lee’s Summit, MO; Lincoln Park, MI; Little Rock, AR; Littleton, CO; Livonia, MI; Los Angeles, CA; Luling, LA; Madison, WI; Maryland Heights, MO; Melvindale, MI; Memphis, TN; Miami, FL; Miami Beach, FL; Miami Gardens, FL; Milwaukee, WI; Minneapolis, MN; Monona, WI; Nashville, TN; New Castle, DE; New Haven, CT; New York, NY; New Orleans, LA; North Charleston, SC; North Kansas City, MO; North Las Vegas, NV; North Little Rock, AR; Oak Park, MI; Oakland, CA; Opelika, AL; Orlando, FL; Overland Park, KS; Peoria, IL; Philadelphia, PA; Phoenix, AZ; Pine Bluf, AR; Pittsburgh, PA; Pleasanton, CA; Plymouth, NC; Pontiac, MI; Raleigh, NC; Raytown, MO; Redford, MI; Redford Township, MI; Richmond, CA; Richmond, VA; River Rouge, MI; Rochester, NY; Rock Hill, MO; Rockford, IL; Sacramento, CA; Saint Rose, LA; San Diego, CA; San Leandro, CA; San Lorenzo, CA; Slidell, LA; Somerset, MA; Southfield, MI; Southaven, MS; Spanish Lake, MO; Springfield, MO; St. Louis, MO; Tampa, FL; Taylor, CA; Taylor, MI; Temple Terrace, FL; Tucson, AZ; Union City, CA; Union City, GA; University City, MO; Warren, MI; Warwick, RI; Waterford, MI; Wausau, WI; Wauwatosa, WI; Wayne, MI; West Allis, WI; West Milwaukee, WI; Westin, WI; Westview, PA; Wilkinsburg, PA; Williamston, NC; Wilmington, DE; Windsor Locks, CT. 148 Supra note 143. 149 Hector Barreto, The Real Reason For The Seattle Minimum Wage Fight, FORBES (July 24, 2014, 1:44 PM), http://www.forbes.com/sites/realspin/2014/07/24/the-real-reason-for-the-seattle-minimum-wage- fight/.

31 businesses they are.150 Additionally, more union members at higher minimum wage translate into more money for unions.151 Hence, SEIU, a major union with over 2 million members, is supporting ordinances, which propose an increase in minimum wage, and groups like Working

Washington.152

Legislation Discriminating Against Franchises

With varied minimum wage requirements across states and federal levels, various cities and states have raised their own minimum wage requirements on their own accord.153 However, recent regulation has sparked legal action.154

In Seattle, Washington,155 legislation was passed increasing the city’s minimum wage to

$15 per hour, effective on April 1, 2015.156 Large businesses (500 employees or more), otherwise known as Schedule 1 Employers, must implement this increase within three years, while small businesses, Schedule 2 Employers, have five years to implement this increase.157 This effort escalated when Kshama Sawant, the first Socialist elected in a major city in the United States in recent history, became Councilwoman for the city of Seattle in the fall of 2014.158 As a pioneer to further workers’ rights, she is working hard to ensure the $15 per hour wage is implemented.159

To further explain the difference between the two types of employers being affected by this law, part of the ordinance is shown below:

150 Id. 151 Id. 152 Id. 153 Supra note 72. 154 Infra note 157. 155 To learn more about this case, please visit www.SeattleFranchiseFairness.com. 156 Infra note 157. 157 IFA Files Lawsuit Against Seattle for Equal Treatment, INTERNATIONAL FRANCHISE ASSOCIATION (June 11, 2014), http://www.franchise.org/Franchise-News-Detail.aspx?id=62500. 158 Kshama Sawant Position 2 Biography, SEATTLE CITY COUNCIL, http://www.seattle.gov/council/sawant/bio.htm (last visited Feb. 2, 2015). 159 Id.

32 T. “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;

U. “Schedule 2 Employer” means all employers that employ 500 or fewer employees regardless of where those employees are employed in the United States. Schedule 2 employers do not include franchisees associated with a franchisor or a network of franchises with franchisees that employ more than 500 employees in aggregate in the United States.160

Schedule 1 employers must implement this increase by 2018, with set incremental increases every year while Schedule 2 employers will have to pay their employees the $15 minimum wage by 2021, with incremental increases as well.161 As described in the ordinance, small businesses have more time to adjust to these increased costs than large businesses, including franchises; however, past precedent has stated that a franchise should be treated as an independent company separate from the corporation.162 Consequently, the IFA and five franchises filed a lawsuit against the City of Seattle for the unfair treatment of franchises on the precedent that franchises are indeed independent from their franchisor.163

The International Franchise Association (IFA) and five franchises have filed a lawsuit stating that this legislation unjustly discriminates against franchises, as they should be treated as

160 $15 Minimum Wage, OFFICE OF THE MAYOR, http://murray.seattle.gov/minimumwage/#sthash.TV4mQkEc.lHOvjexH.dpbs, (last visited Feb. 1, 2015). http://murray.seattle.gov/wp-content/uploads/2014/05/Minimum-Wage-2014.pdf 161 Id. 162 International Franchise Association, Inc.; Charles Stempler; Katherine Lyons; Mark Lyons; Michael Park; and Ronald Oh v. City of Seattle, a municipal corporation; and Fred Podesta, Director of the Department of Finance and Administrative Services, No. 14-848 (D. West Wash., filed 2014). 163 Id. The plaintiffs include the International Franchise Association; Charles Stempler, owner of AlphaPrint, Inc.; Katherine Lyons and Mark Lyons, owners and operators of BrightStar Care of North Seattle; Michael Park, the General Manager of a Comfort Inn hotel and President of the Korean American Hotel Owners Association of Washington; and Ronald Oh, the General Manager of a Holiday Inn Express in which he has ownership interest.

33 small businesses.164 The IFA claims that the Seattle ordinance disregards previous legal precedent about franchises being defined as independent local businesses, operating separately from the franchisor, which provides the brand and marketing materials.165 Furthermore, a simple search in the Franchise Registry can show which businesses qualify for Small Business

Association Loans; franchises such as Burger King, Wendy’s and KFC fall under this category.166 The lawsuit contends violation of the Washington Constitution, as well as the Equal

Protection and Commerce Clauses of the U.S. Constitution; it also claims violation of the

Employee Retirement Income Security Act by way of imposing health care changes.167 This case is attempting to show evidence to support how franchises could be considered small businesses.168

Additionally, Dean Heyl, Vice President of the International Franchise Association, wrote a letter to Seattle Mayor Ed Murray and the Seattle City Council.169 The letter stated that franchisors would no longer be able to allow franchisees to open more than one establishment, eradicating many jobs that their current business model creates.170 Specifically, franchising provides for 19,000 jobs171 in Seattle, Washington.172 With franchising providing so many jobs

164 Id. 165 Id. 166 FRANCHISE REGISTRY, http://www.franchiseregistry.com/brand_info/ (last visited Jan. 1, 2015). 167 Id. 168 Supra note 162. 169 Matthew Haller and Jenna Weisbord, IFA Opposes Minimum Wage Proposals in Seattle that Would Destroy the Franchise Business Model, INTERNATIONAL FRANCHISE ASSOCIATION (May 20, 2014), http://www.franchise.org/Franchise-News- Detail.aspx?id=62419.http://emarket.franchise.org/SeattleMinimumWageLetter.pdf 170 Id. 171 Matthew Haller and Jenna Weisbord, IFA to File Lawsuit Against Unfair and Discriminatory Seattle Minimum Wage Plan, INTERNATIONAL FRANCHISE ASSOCIATION (June 2, 2014), http://www.franchise.org/Franchise-News-Detail.aspx?id=62463. In Seattle, Washington, these 19,000 franchise workers work alongside 600 franchisees, in 1,700 different franchise locations in the city. http://www.franchise.org/Franchise-News-Detail.aspx?id=62463 172 Supra note169.

34 for Seattle and the nation, generally, efforts that result in truncated franchise job growth should be eliminated.

From a more personal standpoint, Matthew Holleck, owner of seven Subway restaurants in Seattle, explains how he started his franchising career on a very rocky path, by struggling through $360,000 in debt from financing his home equity to pay for his first two restaurants.173

The idea that most franchise owners are wealthy is simply a myth; many franchise owners such as Mr. Holleck have had to refinance personal assets and work through very narrow profit margins to eventually achieve success.174 Additionally, many franchise owners are not as fortunate as Mr. Holleck to ultimately see such vast return on their investments.175 To classify franchises as large businesses would burden hard workers like Mr. Holleck and many others.

Another group fighting to propose changes to the ordinance is OneSeattle, a coalition representing small and medium businesses.176 This group is in favor of the $15 minimum wage, with the following requirements: a temporary training wage, a phase-in period (length to be determined), and benefits177 such as health care, commissions, bonuses, and tips to be included in wage calculations.178

173 Ashley Stewart, Minimum wage debate: 'I own Subway stores, not the entire chain,’ PUGET SOUND BUSINESS JOURNAL (May 23, 2014 4:29 PM), http://www.bizjournals.com/seattle/news/2014/05/23/minimum-wage-debate-i-own-subway-stores-not- the.html?page=all. 174 Id. 175 Id. 176 Associated Press, Seattle Minimum Wage Increase on Track, but Business Group Weighing In, OREGON LIVE (Apr. 20, 2014, 12:10 PM), http://www.oregonlive.com/pacific-northwest- news/index.ssf/2014/04/seattle_minimum_wage_increase.html. 177 The benefits further mentioned are not including in the $15 minimum wage ordinance. To explain further, employers would have to employees $15 in addition to health care benefits, bonuses, etc. 178 Supra note 176.

35 The 15 Now group’s message to the public, Congress, and Seattle’s mayor is that it wants

$15 per hour immediately.179 OneSeattle’s proposal, 15 Now’s proposal, and what Mayor Murray eventually decided left no need for a poll on November 2014’s ballot.180 15 Now and supporters of the minimum wage increase were happy with the initiative set forth.181

Another city in the United States has taken a different approach to how small businesses and franchises should be differentiated, or not. Chicago, IL’s Mayor Rahm Emanuel, along with his task force, “Minimum Wage Working Group,” has stated that any ordinance pertaining to minimum wage will treat all businesses fairly.182 IFA is pleased that this means the 1,400 franchises that employ 44,000 people in Chicago will be treated the same as their other small business counterparts.183 While the case in Seattle is still ongoing, IFA hopes more cities across the country align with Chicago’s view of franchises as small business units rather than large businesses due to their association to the parent company.184

179 Lynn Thompson, Backers: Pass $15 wage in Seattle or we’ll put it on ballot, THE SEATTLE TIMES (Mar. 12, 2014), http://web.archive.org/web/20141113054339/http://fellowshipoftheminds.com/2014/03/12/backers-pass- 15-wage-in-seattle-or-well-put-it-on-ballot/. 180 Id. 181 Id. 182 Statement from the IFA on Chicago Minimum Wage Working Group’s Recommendation, INTERNATIONAL FRANCHISE ASSOCIATION (July 8, 2014), http://www.franchise.org/Franchise-News- Detail.aspx?id=62593. 183 Id. 184 Reuters, California governor vetoes bill to protect franchisees' investments, CNBC (Sep. 30, 2014, 11:52 AM), http://www.cnbc.com/id/102045755. California Democratic Governor Jerry Brown did the opposite of what IFA would have wanted by vetoing a pro-franchise bill in September 2014.

36 CURRENT FRANCHISES AND EXECUTIVES

To get a good sense of where franchisors publicly stand on this issue, looking directly at the International Franchise Association (IFA) and current franchise executives provide the real perspectives from people in franchising.

International Franchise Association

As many people would suspect, small business franchises are not in favor of increasing costs and further decreasing their already low profit margins. Press releases by the IFA explain why they are not in favor of increasing the minimum wage.185

Since 2006,186 the IFA, as part of the Coalition for Job Opportunities along with the

National Restaurant Association and U.S. Chamber of Commerce, firmly stated its opposition to an increase in the federal minimum wage.187 IFA believes that increasing the minimum wage will be detrimental to small franchises, putting them at a disadvantage to compete with big businesses due to the increased costs.188

As recently as April of 2014, IFA stated that an increase in the federal minimum wage is still something that they are not in favor of due to its possible detrimental economic effects.189

Although much research on the effects of increasing the minimum wage has been inconclusive, a recent study from a nonpartisan Congressional Budget Office states that up to one million jobs could be lost by 2016 with an increase in minimum wage.190 IFA, in a letter to the Senate, stated

185 Infra note 187. 186 Since this press release, President Obama, by executive order, increased the federal minimum wage to $10.10 an hour. 187 Franchised Businesses Urge Congress To Act on Key Issues, INTERNATIONAL FRANCHISE ASSOCIATION (Jan. 11, 2006), http://www.franchise.org/Franchise-News-Detail.aspx?id=18802. 188 Id. 189Matthew Haller and Jenna Weisbord, IFA Opposes Legislation to Raise Federal Minimum Wage, INTERNATIONAL FRANCHISE ASSOCIATION (Apr. 29, 2014), http://www.franchise.org/Franchise-News- Detail.aspx?id=62344. 190 Supra note 89.

37 that the increase could lead to less jobs and hours per week for individuals already employed and slower economic growth for both franchises and consumers from higher prices.191

The IFA is fighting the Service Employees International Union (SEIU) in multiple states in hopes of establishing franchises independently of their franchisor.192 President and CEO of the

IFA, Steve Caldeira, stated SEIU was defeated in Chicago.193 The SEIU is hoping other cities choose to support them, to increase money for their union, just as the Seattle ordinance did; while IFA is urging cities to treat all small businesses,194 including franchises equally.195

Current Franchise Executives

When determining what effects this proposed legislation might have on franchising, I decided to go straight to the heart of this business, by interviewing the executives themselves, the people who know exactly how this will affect their bottom line. The general consensus is that businessmen and women would like to have more profits. After all, a major, if not sole, purpose of a business is to earn a profit. The National Restaurant Association has made it very clear a minimum wage increase would not be in its best interest.196 Hence, it was my hypothesis that executives would hope the minimum wage laws would remain the same. However, I was surprised to receive a variety of opinions when I had the opportunity to speak to several franchise executives.

191 Supra note189. 192 IFA Commends Chicago Task Force for Even Handed Recommendation on Minimum Wage Increase, INTERNATIONAL FRANCHISE ASSOCIATION (July 9, 2014), http://www.franchise.org/Franchise-News- Detail.aspx?id=62594. Supra note149. 193 Id. 194 If the whole chain were a single legal entity, SEIU would be able to unionize it with more ease than with independent businesses. 195 Supra note 192. 196 Minimum Wage, NATIONAL RESTAURANT ASSOCIATION, http://www.restaurant.org/advocacy/Minimum-Wage (last visited Jan. 15, 2015).

38 Pro Minimum Wage Increase

I had the opportunity to speak with Mr. Rene Prats. A former CEO, CMO and President of Pizza Hut, Qdoba Mexican Grill, and Sir Pizza franchises, to name a few, Mr. Prats is not your typical franchise owner. In fact, he is now the President of Prats Consulting and Miami

Restaurant Properties. He has also served as the CEO and President of Prats Enterprises, Inc. since 1987. He is the person to speak to about the restaurant industry, especially franchising.

In regards to raising the minimum wage, Mr. Prats said, “As a businessman, I don’t like it, but I need to learn to deal with it. However, as a human being, I think it’s a must.”197 He then went on to say that the middle class and small businesses make up the backbone of our country.198 Mr. Prats believes in treating his employees with the respect and pay they deserve; raising the minimum wage, in his opinion, is good for a healthy society.199 He believes it would be best put into action in a gradual way, enforcing $8.75 next January, $9.50 the following

January, and $10 by 2017, with a $15 minimum wage being too costly.200

Small businesses are indeed the backbone of this country,201 and large corporations are often times made up of individual businesses. For example, independent local business people own over 80% of McDonald’s restaurants.202 McDonald’s franchises (57% of their operations)

197 Telephone Interview with Rene Prats, President/CEO, Miami Restaurant Properties (April 11, 2014). 198 Id. 199 Id. 200 Id. 201 Secretary Shaun Donovan, Small Businesses, the Backbone of the American Economy, THE HUDDLE U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT’S OFFICIAL BLOG (Nov. 27, 2013), http://blog.hud.gov/index.php/2013/11/27/small-businesses-the-backbone-of-the-american-economy/. 202 Company Profile, ABOUT MCDONALDS, http://www.aboutmcdonalds.com/mcd/investors/company_profile.html (last visited May 25, 2014). The argument that large corporations have enough cash to pay their employees higher wages just does not hold true when corporations are mostly made up of individual businesses.

39 made up only $9.231 billion out of the $28.106 billion203 in revenues from 2013.204 These numbers lead people to believe McDonald’s can afford to pay their employees higher wages.

However, it is the franchise owners that must be creative with how they cut their costs.

Cutting costs creatively is exactly what businesses need to do to survive.205 As it is apparent, the bottom line decreases as labor costs increase; there is no debating that. However,

Mr. Prats believes that money is better spent on employees; costs could be cut from other places such as advertising, which typically takes up a large portion of restaurants’ budgets.206 By comparing two restaurants, one with higher paid employees and one with lower paid employees,

Mr. Prats observed a significant difference in the atmosphere, treatment of both employees and customers, quality, and overall experience.207

Mr. Prats’ contention that higher wages yield higher productivity is supported by a theory called the ‘efficiency wage theory.’ This theory explains that workers’ efficiency is positively correlated with their respective wages.208 Employees with wages higher than the competitive market value will be inclined to be more productive at work because, among other things, they have more to lose.209 This aspect of the theory is based on the fact that competition will drive higher prices, and in this case, higher wages.210 However, if this theory holds true, the minimum wage increase will force restaurant owners to increase their wages even further to be above the federal level, to remain competitive. For example, in restaurant franchises Mr. Prats owns, he

203 MCDONALD'S CORPORATION 2013 ANNUAL REPORT (2013), available at http://www.aboutmcdonalds.com/content/dam/AboutMcDonalds/Investors/McDs2013AnnualReport.pdf. 204 Their franchises operations, though more abundant than their company-owned establishments, do not account for the majority of their revenues. 205 Supra note 197. 206 Id. 207 Id. 208 Lawrence F. Katz, Efficiency Wage Theories: A Partial Evaluation, NBER Macroeconomics Annual 1986, Volume 1, 235-290 (1986), http://www.nber.org/chapters/c4248.pdf. 209 Id. 210 Id.

40 pays his employees well above minimum wage.211 However, if all franchises that are paying minimum wage need to increase their pay, his franchises will also need to increase wages to keep the spread between their wages and those of their competitors.

Increasing the minimum wage could decrease the bottom line by almost 5 points from the previous year’s margin percentage, but by reducing other costs such as marketing and advertising by switching to cheaper forms, such as social media and mobile advertising, Prats believes franchise owners can change an expected 5 point margin decrease to a 1 to 2 point decrease.212 In his opinion, the number of franchises, layoffs, and applications will not change because owners will still need the same number of people to service their customers.213 While business owners may be known to only care about the bottom line, some executives, such as Mr. Prats, pose a very different view about the minimum wage debate happening in the United States.

Anti Minimum Wage Increase

As predicted, many businessmen and women are not in favor of this minimum wage increase, or in their eyes, a decrease to their bottom line. Franchise executives have spoken out, and the world knows where they stand, whether society supports their views or not. Their job is to make a profit, and anything that stops them from doing so is not something that is working in their favor.

One executive in particular has spoken out on this issue lately. Ed Rensi, a former

McDonald’s CEO, states that raising the minimum wage will not increase jobs. He states if the minimum wage is increased, jobs will decrease by 15-20%.214 However, there is little statistical

211 Supra note 197. 212 Supra note 197. 213 Id. 214 Bryce Covert, Former McDonald’s CEO Claims Raising The Minimum Wage Would Kill Jobs, THINK PROGRESS (Aug. 22, 2013, 11:21 AM), http://thinkprogress.org/economy/2013/08/22/2509161/mcdonalds-minimum-wage-kill-jobs/.

41 evidence that explains how raising the minimum wage will decrease jobs.215 On the contrary, studies have found that increased wages can lower turnover rates and increase retention rates.216

Furthermore, as shown in Figure 4,217 minimum wage rates are not directly correlated with unemployment rates.218

Rensi supports his statements with saying that minimum wage jobs are meant as starter jobs and the first steps in climbing the ladder to your eventual career.219 Hopefully these young people can move into managerial and supervisory roles.220 These jobs are meant to teach people only the soft skills that will be able to aid them in obtaining a better job later in their lives.221

However, worker demographics are becoming less educated and older, and consequently, more likely to have families to support than younger workers, making the “starter job” classification not as indicative as it once was.222 Rensi supports his stance that increasing the minimum wage will not have any positive effects on franchising.223

Founder and CEO of Subway, Fred Deluca, is also an opponent of drastically raising the minimum wage. He believes this would increase the prices consumers have to pay for goods.224

If the minimum wage is raised, executives threaten to increase prices to cover not only the new minimum wage increase, but also the additional costs imposed by the Affordable Care Act

215 Id. 216 Id. 217 Supra note 95. 218 Supra note 9. 219 Supra note 214. 220 Id. 221 Id. 222 Supra note 4. 223 Id. 224 Jillian Berman, Subway Founder Fred Deluca: Minimum Wage Increase 'Will Cause Franchisees To Raise Prices,' THE HUFFINGTON POST (Feb. 27, 2013, 5:19 PM), http://www.huffingtonpost.com/2013/02/27/fred-deluca-minimum-wage_n_2776014.html.

42 (Obamacare).225 Minimum wage opinions are not only influenced by the actual prices, but by other factors such as the Obamacare regulation. The government must not increase the minimum wage drastically when the industries affected may not be able to absorb the changes.226 Deluca also states that a small increase in minimum wage will hopefully not have negative effects on his workers; preferably, Deluca would index the minimum wage rate to inflation.227

Mr. Resni and Mr. Deluca are not alone. The National Restaurant Association opposes the minimum wage increase as well. Melvin Sickler, an executive at Auntie Anne’s Pretzels and

Cinnabon brands, believes an increase from $7.25 to $10.10 per hour will cause operators to decrease employee hours, stop hiring new people, and reduce the amount of employees in their restaurants.228 He further states that with food and labor costs being significant factors of production and pre-tax profit margins of only four to six percent, a 39 percent minimum wage increase will severely affect many small businesses.229 In his experience in Oregon, a state with minimum wage above the federal level since 1997, the average number of workers hired by restaurants is 13.8 compared to the 16.9 for the country in 2011.230 Mr. Sickler made his opinions known in his testimony to the U.S. Senate, and the National Restaurant Association will make their voices heard about the diminished job opportunities that result from higher minimum wage.

David Rutigliano, a co-owner of the six-unit Southport Brewing Company (SBC)

Restaurant Group in Connecticut, testified, representing the Connecticut Restaurant

225 Id. 226 Id. 227 Katie Little, Subway CEO: How I'd Solve Minimum Wage Debate, CNBC (May 7, 2014, 2:32 PM), http://www.cnbc.com/id/101647378. 228 Restaurateurs Tell Senate Minimum Wage Hike Will Hurt, NATIONAL RESTAURANT ASSOCIATION (Mar. 15, 2013), http://www.restaurant.org/News-Research/News/Restaurateurs-tell-Senate-minimum- wage-hike-will-h. 229 Id. 230 Id.

43 Association.231 He provided an interesting perspective that combined many of the regulations being put into effect now. With a recovering economy, an increase in minimum wage, enactment of mandatory paid sick leave, and compliance with the new health care law, he questions just how businesses are going to be able to stay successful with such low margins even before all these changes.232 The National Restaurant Association urges Congress to enact policies that will help more people obtain jobs and advance in their careers; they believe higher minimum wage will do the exact opposite.233

The National Restaurant Association, after extensive research, concluded 58 percent of restaurant operators increased menu prices and another 41 percent reduced employee hours after the 2007 minimum wage increase.234 According to the U.S. Bureau of Labor Statistics, 21.6 million Americans are either unemployed, involuntarily working part time, or marginally attached to the workforce.235 The National Restaurant Association and many other executives are not in favor of the increased minimum wage because of the possible negative repercussions on the job market, their bottom lines, and advancement opportunities for low wage employees.

Consensus

Overall, out of the many franchise executives I interviewed, the majority agreed on one issue: franchises and small businesses should be treated in the same manner. The recent case,

International Franchise Association, Inc.; et al. v. City of Seattle et al., shows how some franchises are taking a stand against being treated differently than small businesses.236 Franchises,

231 Id. 232 Id. 233 Id. 234 Supra note 196. 235 Id. The U.S. bureau of Labor Statistics explains ‘marginally attached to the workforce’ as people who are seeking work without actively engaging in a job search in the past four weeks. 236 Supra note 162.

44 as pointed out by Andres Antunez, franchisor of D.O.G. Miami,237 have royalty fees from ranging from 3-10%; often times, the margins of franchises can be smaller than other local businesses.238 He explained that someone working hard at his or her low wage job should not be paid differently just because his or her employer is classified as a local business or a franchise.239

Since his wages are competitively above minimum wage, he will have to increase his wages further when the minimum wage increases; however, he did say that he believes prices on goods, not just his services, will go up as well, offsetting this increased income.240 He believes motivated employees are the drivers in a successful business; therefore firing people was the last thing on his mind when I asked him how he would lower costs.241

A global franchise executive, who wishes to remain anonymous, echoed Mr. Antunez’s thoughts by stating the quality of workers is not and should not be driven by wages or salaries; it should be driven by the culture leadership instills in the organization.242 How business is conducted in Europe, Asia, and the United States may differ significantly, but the franchises all across the globe must deal with how they will negotiate with the increased wages and adjust to market forces themselves.243 Furthermore, small businesses and franchises should be treated the same in order to not unfairly tax one and not the other.244

237 D.O.G Miami provides dog services such as hotel, daycare, and grooming. They are currently located in the neighborhood of Midtown and expanding into other areas of the city. 238 Telephone Interview with Andres Antunez, D.O.G Miami President (Jan. 29, 2015). 239 Id. 240 Id. 241 Id. 242 Telephone Interview with anonymous high ranking executive, Anonymous global franchise company (Feb. 6, 2015). 243 Id. 244 Id.

45 When asked about increasing the minimum wage for small businesses differently than franchises, another franchise owner, Ron Mizrahi, an 11 year UPS Store franchisee,245 said, “It will increase your expenses for the business, regardless if you are a franchise or a mom and pop.246 The franchisor will not help you with that; it is the problem of the individual store.”247 He pays his employees above minimum wage and increases the wages based on seniority, not paying attention to federal wage rates; he also believes in concentrating on more than just a basic wage to boost productivity.248 When asked about the minimum wage increase, Mizrahi said, “It causes happiness for one week and then it becomes a normal routine. Continuous performance comes from incentives.”249 Additionally, he says that prices will have to increase along with wages,250 but Mizrahi is not fundamentally opposed to it, because with higher wages comes increased spending power.251

One anonymous pharmaceutical franchise executive put the thoughts of many into perspective with this one quotation: “Franchise and local businesses both react to market conditions, regardless if it is a franchise or not.”252 Workers should not have to be paid more or less based on whether their small business employer is part of a franchise. Furthermore, because it is the franchisee’s responsibility rather than the franchisor’s to deal with increased wages, small businesses and local franchises should be treated equally.

245 Ron Mizrahi chose UPS and franchising, rather than a completely new business, because of the powerful brand recognition in the United States. Other franchise brands are not as powerful. 246 Telephone Interview with Ron Mizrahi, UPS Store Owner (Jan. 30, 2015). 247 Id. 248 Id. 249 Id. 250 Mizrahi stated that how much prices will increase will be based on the margin of each store. Stores with higher margins will not need to raise prices as much as stores with lower margins. 251 Supra note 246. 252 Telephone Interview with anonymous franchise owner, Anonymous pharmaceutical franchise owner (Feb, 4, 2015).

46 International Comments

An executive from another internationally well-known corporation explained how minimum wage regulations affect workers and businesses overseas. This executive, formerly based in their European offices, elaborated on the situation in European markets. The effect of

U.S. regulation will have little to no effect on his operations overseas, he says.253 With higher taxes and wages, the labor structure in Europe is vastly different to that of the United States; taxes in Europe can be upwards of 50 percent at times.254

He believes higher wages for minimum wage workers are necessary to create new jobs; in his opinion, workers in Europe (paid at either $12 to $15 or $15 or $20 at his franchises) are adequately compensated for their work.255 Unlike the historical perception in the United States that these service industry jobs are simply part time jobs for the youth, many of his workers are promoted to higher roles, in his and other companies, because of their experience from working in this industry.256 The higher wages incentivize workers to deliver better results.

Like Mr. Prats mentioned, businesses will have to adjust to the increased wages by adjusting their business practices.257 When wages are increased, prices will increase, and the simple rule of supply and demand will dictate that sales will drop. Firms will need to be creative to increase their sales. Mr. Prats explained, for example, that in Germany and Scandinavia, labor costs are much higher than other areas of Europe; businesses there must work harder to increase their sales by other means, adjusting for this increased labor cost.258

253 Telephone Interview with anonymous high ranking executive, Anonymous global franchise company (May 2, 2014). This franchise executive wishes to remain anonymous due to his position and business brand. This person has worked internationally and in the United States. 254 Id. 255 Id. 256 Id. 257 Supra note 97. 258 Id.

47 In a second interview with this executive, he expanded upon their recommended strategy of increasing sales, rather than decreasing costs.259 By decreasing costs, instead of increasing sales, the franchise will simply be starting a vicious cycle.260 This can be best explained through an example. If the franchisee’s costs are increased by a 20% rise in minimum wage, he or she can choose to decrease labor costs by reducing number of hours worked or employees staffed in the store or restaurant. While this may decrease costs and increase profits in the short term, sales will begin to drop when there is not enough labor to attend to guests. Therefore, this decrease in costs, meant to increase profitability, will, in fact, do the opposite by driving away sales.261

Additionally, this executive believes the minimum wage establishes a base pay to provide a certain standard of living.262 However, once that baseline is set, market forces will drive an increase in this wage; franchisees and small business owners alike will have to adjust their practices to account for this increase in labor costs.263 In fact, the prices of products are only suggested, each franchisee is in charge of pricing their services and products according to the market, just like any small business would.264

Overall, this executive believes an increase in wages to outpace inflation is necessary and beneficial in keeping workers productive and keeping up with the economy; this increase must be strictly enforced, consistent, and transparent in order to be effective.265 Businesses will deliver a better environment if all are held to the same standards. His comments were pertaining to both international markets as well as U.S. markets. Higher wages will incentivize workers to deliver

259 Supra note 253. 260 Id. 261 Id. 262 Id. 263 Id. 264 Id. 265 Id.

48 better results in the workplace, and businesses will become more creative with their sales’ practices.

CONCLUSIONS

Lessons Learned

This article, with the research undertaken thus far, has shown various concerns and positive steps that can be taken when increasing the minimum wage. There are a few facts we know to be certain. Employees most often perform at more efficient rates when treated with fair labor wages and standards. The realities from changing demographics call for increased wages; a working mother will need more income than a part-time teenage student. Thus, if the federal government chooses to proceed with increasing the minimum wage to adjust to this demographic and raise the minimum wage to fairness standards, businesses must learn to cut costs in other ways to adjust for the increased wages. If business do not adapt, negative effects could ensue on franchising as a whole, and other industries in which the minimum wage affects. The extent to which the minimum wage should be increased is still in debate.

The FLSA was created to ensure workers are being treated fairly and have a minimum standard of living. Additionally, workers perform better when they are being paid adequately with higher wages.266 Proponents of the minimum wage increase advocate for such raise on the basis that it is good for society as a whole, the individual workers, and their families, not necessarily the business bottom line.

With the changing demographic of minimum wage workers, older workers need higher wages to support their families, houses, etc. Businesses should take each person and his/her own

266 Supra note 208.

49 circumstances into account when determining wages.267 They cannot just assume these jobs are starter jobs anymore because today, often times, they are not.

Opponents of increasing the minimum wage, however, paint a different picture. There is no doubt that increasing the minimum wage could hurt the bottom line of franchises, especially because franchise’s profit margins are very slim.268 So, franchise owners are going to have to increase prices charged to customers and/or decrease costs, such as advertising and marketing.

Executives and local franchise owners have a variety of different options to choose from in order to remain successful with the increased labor costs.

Additionally, increasing the minimum wage could negatively impact franchising, as well as supporting and surrounding industries. When one cost rises, prices will increase or other costs must decrease in order to account for the loss of profit. By increasing the minimum wage, prices of food for customers may increase, and some speculate that suppliers’ prices will rise, as well.

The effects that would ensue are not few and minor. These effects could have lasting effects on our society, both positive and negative. The federal government may need to explore other options, besides increasing the minimum wage, to increase pay for low-income individuals.

It is not disputed that a single mother raising a family cannot live with a $7.25 per hour wage.269

However, solely raising the minimum wage to fix this problem is not the answer; FLSA and minimum wage were not created to account for this change in demographics. The federal government can pursue other avenues that do not put more burdens on small businesses, stifling economic growth. With the government pursuing other avenues, such as expanding EITC or adjusting the federal budget, the negative effects of a minimum wage increase on franchising

267 Alan Feuer, Life on $7.25 an Hour Older Workers Are Increasingly Entering Fast-Food Industry, THE NEW YORK TIMES (Nov. 28, 2013), http://www.nytimes.com/2013/12/01/nyregion/older-workers-are- increasingly-entering-fast-food-industry.html?_r=0. 268 Supra note 238. 269 Supra note 9.

50 could be minimized. Only time will tell what exactly will happen to our nation when the minimum wage increases.

Predictions

After interviewing professional and executives in the field, and conducting research on the subject matter, I believe obtaining a job in franchising might be more challenging in the near future due to the higher cost of labor. Simple rules of economics dictate that you cannot purchase as much as you would like with less cash on hand. When employers need to pay employees higher wages, they have less cash to hire additional employees. I do, however, believe that employees that receive this higher wage will be appreciative and will work harder. The philosophy that employees should be treated justly and with a fair wage in order to perform and adequately care for the customer has much truth to it, and the “efficiency wage” theory supports this notion.270

The disconnect from the “Fight for $15” to the actual numbers being debated in the federal legislative branch are causing much confusion for the public. Realistically, a $10.10 increase in the minimum wage will happen eventually, proven by the past trends minimum wage has taken and recent executive order by President Obama. With a Republican-run Congress, increasing the minimum wage will not come easy for Democratic Obama, and generally liberal supporters. I believe President Obama’s suggestion in his State of the Union address is more realistic than $15 increase.271 While the “Fight for $15” demand is still prevalent in the United

States, the debate in Congress is and should be more narrowly focused on a more realistic increase in the federal minimum wage. Moreover, this increase, more so than other governmental measures, will and must happen in a gradual form.

270 Supra note 208. 271 Supra note 76.

51 Franchises will struggle to adapt to an immediate $2.75 increase in wages, and the debate over whether franchises should be treated, as small businesses will continue. If treated as large businesses, franchises will struggle to compete with their local business competitors. By increasing the wage gradually, businesses will have more time to think of innovative ways to cut costs, without decreasing jobs, to continue growing their business, whether they are a franchise or not.

Increasing the minimum wage is not a novel idea; it is one that will happen, as history has shown in the past, adjusting for inflation and changing times. The question is when and by how much. What will determine this is which side will lobby Congress more effectively, the workers or the employers. However, when minimum wage increases, both employees and employers will need to adjust their habits. Employers must learn to cut costs where they can, and employees must remain competitive, productive and deserving of the new higher wages.

52