Franchise Lawyer Blog

A Fifteen-Dollar Dilemma

A hot topic facing many state and local legislatures across the country is whether to implement a fifteen-dollar minimum wage. This year, the States of California and New York passed bills to gradually increase the minimum wage to $15 per hour. The State of Oregon has passed a bill raising the minimum wage to nearly $15 per hour in certain areas. The cities of Seattle and San Francisco are also phasing in minimum wage increases to $15 per hour or more. Debate exists whether the benefits for workers of these measures will outweigh the potential negative impact on employers and the economy, in general. However, it is undisputed that new minimum wage laws will have far-reaching implications on franchisors and franchisees.

Every franchisor will have to re-evaluate its business model if they plan to offer franchises in areas where new minimum wage laws are effective or planned. A substantive fixed charge in labor affects franchisees’ bottom lines. Franchisors will need to be mindful of state and local minimum wage laws when offering development areas and franchise locations. Franchisors will most likely have to include information concerning state and local wage laws in Franchise Disclosure Documents and account for the impact on its financial projections. Similarly, potential area developers and franchisees should weigh newly enacted or pending legislation regarding increased wages when making their investment decisions and deciding where to develop franchise locations.

A fifteen-dollar minimum wage will inevitably affect hiring practices of franchisees. Naturally, franchisees will be inclined to hire fewer workers to increase their profit margins. For example, one McDonald’s franchisee will implement a system where customers will place their orders at computerized kiosks instead of with employees “behind the counter.” Automation is only one of many cost-saving measures that may result from increased minimum wages. Employers may use less minimum wage employees, but hire more qualified employees at higher wages.

There are additional unintentional consequences of these minimal wage laws. Many potential franchisees are foreign investors seeking to obtain green cards under the EB-5 visa program. Pursuant to the EB-5 visa program, foreign nationals who invest $1 million (or at least $500,000 in a “Targeted Employment Area”) in a commercial enterprise located in the United States and employ 10 or more U.S. workers within two years can obtain permanent residence for themselves, their spouses, and their children. Accordingly, franchises have been traditional vehicles to obtain EB-5 visas. In the event more states enact a $15 minimum wage, an increased number of franchise systems will utilize technology to reduce the number of employees necessary to operate the business, and, thus, potential EB-5 investors will have fewer options available to them.

As more state and local governments implement a $15 minimum wage, the franchise community must stay informed. At EDG, we are.

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