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How Minimum Wage Hikes Could Affect Franchisees

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Despite evidence to the contrary, fast-food franchisees say wage hikes will affect their bottom line

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Patrick Pipino has been in the restaurant business nearly his whole life, washing dishes at the age of 12 and waiting tables as a teenager, before working his way up to manager of a Ben & Jerry's in Saratoga Springs, N.Y. In 1996, he purchased that store and, by 1999, he owned three locations of the ice cream chain. The dream of being a multi-unit franchisee was short-lived, though. Just ten years later, he was back down to one location; he was forced to sell the other two because of high franchising costs. "It's very, very difficult to make any business go, but certainly a franchise business, where you have an advertising fee, a royalty fee," he says.

Franchisees say a higher minimum wage could force them to cut jobs and reduce hours.

Today, Pipino says he is struggling to keep his remaining location open. Still grappling with franchise costs, Pipino and other fast-food franchisees are faced with a new set of numbers brought on by phased-in minimum wage hikes. Two states (New York and California) and the city of Seattle have so far approved a $15 per hour minimum wage. With lawmakers in several other states and cities proposing similar measures, the Fight for $15 movement shows no sign of slowing down. Though it's intended to help low-income workers earn a living wage, franchisees say it could force their hands in cutting jobs and reducing hours.

In New York, a new minimum wage for fast food workers began its phase-in on December 31. Currently, fast-food workers are paid $10.50 per hour in New York City and $9.75 per hour in the rest of the state. Those rates will increase annually until they reach an hourly rate of $15, which will happen at the end of 2018 for New York City and in the middle of 2021 for the rest of the state.

While the founders of Ben & Jerry's have long been in favor of minimum-wage increases (the company pays factory workers nearly twice the national minimum wage), franchisee Pipino says he is "in favor of economic justice."

Pipino projects that it will cost his business an additional "$12,000 and $15,000 a year" in 2016 alone to keep up with New York's new minimum wage requirements. He bases these figures on the amount of hours typically scheduled each year, along with payroll taxes ("I've run the numbers for our own store based on current costs and assuming no other changes to cost inputs," he says). As wages continue to increase, he believes costs will continue to rise. "I think next year, it'll cost between $24,000 and $30,000," he says.

As for how Pipino plans to combat those projected costs, he says he'll likely have to raise his prices. "I've run the numbers and we can make it right up to [a minimum wage of] $12 an hour. Above that, it's anyone's ballgame. Essentially, to go to $15 an hour, we would have to raise our pricing structure $1 on every item in the store."

To go to $15 an hour, we would have to raise our pricing structure $1 on every item in the store.

In Seattle, franchisee David Jones has raised prices at his two Subway stores — a direct response, he says, to the city's recent implementation of higher wages. Like New York, Seattle has begun phasing in a $15 per hour minimum wage — and the wages are different for Schedule 1 (those with more than 500 employees) and Schedule 2 (those with 500 or fewer employees) employers. Under the law, those with fewer than 500 employees will reach the $15-an-hour wage in seven years, while employers with 500 or more employees will reach that level in three years. The problem, says Jones, is that franchisees are lumped in with big businesses (due to the assistance they receive with advertising, training, and suppliers) and are therefore required to pay their employees higher wages than local restaurants.

In 2014, just after the law passed, a group of fast-food franchisees along with the International Franchise Association sued the city, claiming the law unfairly discriminates against franchisees. The franchisees lost, with the court finding no empirical evidence "that imposing a faster phase-in schedule on franchisees is going to impact interstate commerce."

Jones disagrees with the court's findings and says franchisees shouldn't be treated like companies with hundreds of employees. "Even though I have eight and nine employees at my two Subways, I was treated like a big business," says Jones. "There are six restaurants near my Seattle University store —” two are franchises and four are considered 'small businesses.' So, because I am a franchise, my minimum wage was higher than four restaurants competing with me. I had to raise prices." The result, says Jones, was a 15 percent drop in traffic (and $80,000 drop in sales) from the year before.

Jones' experience appears to be rare, at least according to a University of Washington study released April 18, which found "little or no evidence of price increases in Seattle relative to the surrounding area" due to wage increases.

In New York, Pipino says he'll also most likely cut back on staff as wages increase. "At the end of the day, businesses try to find a way to survive," he says. "I know McDonald's is testing kiosks, to do away with actual workers. We're not that lucky. The people who take the order in our stores, make the order in our stores. Where we used to have five people on at night, now we'll have two or three. Thirty employees instead of 40. That is a definite."

Jones has already cut back on staff — going from five lunchtime employees to three.

At his Seattle University Subway, Jones has already cut back on staff — going from five lunchtime employees to three, and two graveyard shift employees to one. "I'll survive it," says Jones. "I'm fortunate enough to have high-volume Subways, so I have some room to suffer. Unfortunately, there are 49 Subways in Seattle and I would bet that 42 are low-volume."

Jones is quick to point out that he isn't against minimum wage hikes. In fact, he says he supports him. He is opposed, however, to the gap in wages between fast-food restaurants and mom-and-pop eateries. "The real suffering is going to come in when we have a $2 gap between us [fast-food franchisees] and the rest of the restaurants," says Jones.”

In California, Gov. Jerry Brown signed legislation enacting a $15-an-hour minimum wage in early April. Wages will rise to $10.50 per hour on January 1, 2017 for businesses with 26 or more employees. It will then rise each year until it reaches $15 per hour in 2022. California franchisor André Vener says the law isn't affecting his business in a direct way so far —” nor does he expect it to in the future. "As franchisors, we just have to be more creative," says Vener, a partner at Dog Haus, a fast-casual hot dog restaurant based in Pasadena.

Rather than raising prices, Vener says he and his partners are taking a closer look at their hiring practices. "More than half of our employees get paid more than minimum wage anyway. We try to hire better-talented people, that way they can help with sales and junior management stuff if need be. The way I see it, two $13-an-hour employees might do better than three entry-level people."

Minimum wage laws could affect plans for small chain expansion into other states.

The minimum wage hikes could affect how the company in less obvious ways, too. Dog Haus currently operates 18 restaurants in five states (Arizona, California, Colorado, Nevada, and Utah) and has plans for more than 100 franchised locations around the country. Could minimum wage laws impede that expansion? "Where we would want to be in Seattle or San Fran or New York, those stores are probably not going to be the first to sell."

Additionally, he and his partners are looking at ways to adjust labor costs — like replacing food runners with hand-held buzzers, which would allow diners to go to the counter for their food when it's ready. Dog Haus' purchasing habits could change, too. "Right now, we purchase our hot dogs in California. If the people grinding our hot dogs make $15 an hour, it might end up being cheaper to get them ground in Texas. We haven't reacted yet, but it's a possibility."

James Parrott, Deputy Director and Chief Economist of the Fiscal Policy Institute, says that the fast food industry can accommodate higher wages without reducing profitability. "There will be savings in reduced turnover, which is sky high at fast-food restaurants," says Parrott. "And modest price increases are not much greater than the trend line in the fast food sector to begin with."

A 2015 study by the Berkeley Center for Labor Research and Education revealed that nearly 52 percent of all fast food workers are dependent upon public assistance programs such as food stamps, Medicaid, and child care subsidies. According to Parrott, lowering that number is not just a social good, but an economic positive for taxpayers as a whole. "When living wages are improved, taxpayers are then asked to pay less to subsidize the low-wage business model," he notes. "It's a pretty massive taxpayer subsidy."

If the people grinding our hot dogs make $15 an hour, it might end up being cheaper to get them ground in Texas.

Parrott is quick to point out, however, that some businesses will fail. But will they fail due to increased wages? "Stores go out of business every day. Others take their place. But no one has ever suggested that we outlaw business failure."

As someone actively looking to grow his business, Dog Haus' Vener is confident the wage hikes will be positive — for both employers and employees. "Honestly, I don't know how you can feed a family on ten bucks an hour," he says. "Our brand wasn't built off of minimum wage. It was built off of quality people. I was in one of our stores the other day and I noticed nine guys in the kitchen, six of whom have been there since the beginning. Going cheap is the most expensive thing you can do."