NEW YORK -- Hundreds of franchisees are learning they're not small businesses, at least in the eyes of city government.
A new law that will raise Seattle's minimum wage to $15 from the current $9.32 gives small businesses more time to phase in the 61 percent increase -- seven years versus three for large companies. But franchisees, which have ties to bigger corporations like restaurant chain Denny's, Dunkin' Donuts and Merry Maids won't get the reprieve even if they have just a handful of workers.
It's an issue that could affect thousands more businesses in cities where campaigns for a higher minimum wage are underway. In Chicago, lawmakers have proposed a similar measure that would exempt small businesses but not franchise restaurants. Franchise owners say the laws will sharply increase their payroll costs, and threaten to make them less competitive with independent businesses that won't have to comply -- and that they could be forced to raise prices and cut jobs.
"It's unfair, arbitrary and discriminatory against franchise owners," says Steve Caldeira, CEO of the trade group International Franchise Association.
The IFA has filed a federal lawsuit seeking to overturn the Seattle law, arguing it violates the U.S. Constitution by treating franchises and other small businesses unequally. The IFA also opposes the law proposed for Chicago and efforts to pass similar laws in other major cities including Boston, Philadelphia and San Francisco.
In the eyes of the U.S. Small Business Administration, franchises are small businesses. Many franchises are owned by people who have at most a few locations. Some owners are corporations that own dozens or even hundreds of restaurants like McDonald's or Pizza Hut.
It's the ties to bigger companies -- known as franchisors -- that supporters of the laws cite as a reason why individual franchise owners shouldn't get a break.
Franchise owners have advantages the independent owners don't have -- for example, menus and advertising supplied by the franchisor, Seattle Mayor Ed Murray said in a statement responding to the lawsuit filed June 11, a week after he signed the minimum wage bill into law. His office did not respond to requests for comment for this story.
Franchisees counter that they have to pay for the privilege of owning a franchise, and for the services franchisors provide. Chuck Stempler, a plaintiff in the IFA lawsuit, says he pays $400,000 a year in fees to AlphaGraphics for the six printing and marketing businesses he operates in Washington and California. Seattle's Mayor Murray says franchisees and franchisors should renegotiate those fees so business owners have more money to pay their workers.
Stempler, who has 69 employees at two Seattle franchises, says he'll have to cut jobs to afford the higher wage. The law will increase his payroll costs between $68,000 and $100,000 a year. His competitors will find it easier to adapt because of how officials have structured the law, he says.
"They are discriminating against a class of independent businesses, legally recognized by the federal government and the state," says Stempler.
In Chicago, restaurant franchisees are included under the proposed minimum wage law although other businesses with revenue under $50 million would be exempt. Franchisees would have to raise employees' wages from the current minimum of $8.25 to $15 within two years.
At the restaurant chain Firehouse Subs, the Chicago proposal could lead to customers paying more and getting less service because staffs will be smaller, says Steve Szalinski, a franchisee who also helps new owners get started.
"You could see 10 to 20 percent increases in price," Szalinski says. "Levels of service plausibly won't be as good. It would be an enormous challenge."
The laws could end up costing cities some franchises, says franchising consultant Charlie Magee. Several of his clients decided not to buy franchises in Seattle, and instead are looking in the suburbs or Bellingham, 90 miles south of Seattle, even Oregon, says Magee, who works for the consulting company FranNet.
Some franchisors are also wary about Seattle. The shorter phase-in period is just part of the problem, says Jerrod Sessler, CEO of HomeTask, which has six franchise brands including lawn, handyman and pet grooming services. He won't encourage prospective buyers to seek Seattle locations.
"If you have a city that is willing to pass this sort of legislation, it erodes a trust that they're going to make decisions to help businesses grow and prosper," he says.