U.S.A: New labor laws target franchise systems.

Carl ZWISLER | USA | 2015-02-16


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During the past year, four states and at least 14 municipalities have enacted, or are considering enacting, legislation to increase the minimum wage and/or to provide workers with additional rights or benefits. Many of these laws exempt small businesses or allow small businesses to phase-in compliance over time. [1]  However, in at least five jurisdictions, lawmakers have or are considering making independently owned and operated franchised businesses ineligible for the exemptions and phase-in benefits conferred upon other small business owners, because of their affiliation with franchised chains.  These discriminatory laws will increase labor costs for thousands of small franchised businesses, placing the franchised businesses at a competitive disadvantage over their non-franchised competitors. 


The most highly publicized of these discriminatory wage laws is City Ordinance No. 124490 (the “Seattle Ordinance”), which was passed on June 2, 2014 by the City of Seattle, Washington.  The Seattle Ordinance increases the minimum wage of employees within the city to $15.00, and permits employers with 500 employees or fewer to phase-in the minimum wage increase over several years.  However, the Seattle Ordinance characterizes franchise systems composed of independent franchisees and franchisor-owned stores as “integrated enterprises” for purposes of the compliance with the law.  Thus a franchised business which employs three workers would be ineligible for the phase-in if was part of a network of franchised businesses and corporate-owned locations that that collectively employ more than 500 employees nationwide. 


On June 11, 2014, the International Franchise Association (the “IFA”) and several franchisees filed a complaint in the United States District Court for the Western District of Washington, alleging that the discriminatory treatment of small franchisees vis-á-vis their non-franchise competitors violates the Commerce Clause of the United States Constitution.  Specifically, they argue that the Seattle Ordinance violates the Commerce Clause because it imposes liability based partly upon the activities of separate businesses operating in other states.  The lawsuit further alleges that the Seattle Ordinance violates the Equal Protection Clause of the United States Constitution by arbitrarily discriminating against small businesses simply because they are franchises.  Laws similar to the Seattle Ordinance are being considered in Boston, Massachusetts and Philadelphia, Pennsylvania.  The City of Chicago, Illinois also considered a minimum wage law similar to the Seattle Ordinance, but eventually chose to increase the city’s minimum wage uniformly, without discriminating against franchised businesses.


Meanwhile, the City and County of San Francisco, California passed a “Retail Workers’ Bill of Rights” (the “San Francisco Ordinance”), which applies exclusively to government employers and to “chain retail stores” consisting of 20 or more locations worldwide that that employ 20 or more workers and maintain two or more of the following standardized features: trademarks or service marks, signage, façade, décor and color schemes, array of merchandise, or uniform apparel.[2]  Thus, the law would apply to any small franchised business which is part of network of 20 or more franchised or corporate locations, regardless of how many workers the franchised business employs.  Under the San Francisco Ordinance, chain retail stores must provide part-time employees with an estimate of the minimum number of schedule shifts per month prior to employment, a bi-weekly schedule of hours, compensation for cancelled shifts, on-call shift pay, and equal treatment in terms of starting hourly wage and paid and unpaid time off, among other rights.  The San Francisco Ordinance also requires chain retail stores to offer new work to existing part-time employees before they may hire new employees, use independent contractors, or hire temporary employees.


Critically, under the San Francisco Ordinance, chain retail stores must notify employees of any change in ownership, and the new owners must retain the existing employees who worked for at least 6 months prior to the sale (other than management staff or confidential employees) for at least 90 days after the sale.  In the United States, employment is generally “at-will,” and successor owners are not obligated to retain existing employees unless they expressly assume the existing employment contracts.  Thus, the San Francisco Ordinance may make non-franchised businesses more attractive for investors.  The San Francisco Ordinance is also likely affect the purchase price a franchisee can expect to receive upon the sale of its franchised business. 


We will report on new developments regarding these wage and labor laws as they arise.  –


Carl E. Zwisler, IDI franchising Country Expert for U.S.A., and Janaki J. Parmar,Gray Plant Mooty, Washington, D.C.





[1] These laws seek to rectify “income inequality” within the nation’s workforce, and to alleviate the plight of the nation’s working poor.  The current federal minimum wage of $7.25 per hour was last reset in 2009, and is likely to remain stagnant due to political discord.  In the November 2014 elections, Alaska, Arkansas, Nebraska, and South Dakota approved minimum wage increases without discriminatory application to franchises.

[2] In conjunction with the Retail Workers’ Bill of Rights, the City and County of San Francisco passed “Proposition J,” which sets a uniform minimum wage for all employees working within San Francisco, without exception.  

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