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Small Franchisees, Big Business?

Small Franchisees, Big Business?

Under the Minneapolis wage law, franchise owners must boost wages faster than other small businesses.

Amid the long-simmering debate about a $15-per-hour minimum wage at Minneapolis City Hall, the fate of franchise businesses was largely off the radar. But when the dust settled, the ordinance defined franchises as a “large business” if the franchisor has more than 10 locations nationally. So they will have to boost wages faster.

Franchise industry experts say that automatically declaring franchises large businesses suggests that city leaders don’t understand franchise business basics. Franchisees are commonly local small-business owners; they pay a franchise fee to operate under the name of larger national brands.

“Simply because they operate under a national banner does not mean they’re large businesses,” says Jeff Hanscom, senior director of state government relations for the Washington D.C.-based International Franchise Association.

Under the tiered phase-in schedules to reach the $15 wage, small businesses have seven years to implement the increases and large businesses have five years. Not counting franchises, Minneapolis defines a “large business” as any with 100 or more employees.

The IFA sued Seattle in 2014 after the city’s minimum wage law defined franchises as large businesses. Lower courts sided with the city, and the U.S. Supreme Court declined to hear the case in 2016. Hanscom says that does not necessarily preclude other challenges. In Minneapolis, Hanscom says that the IFA is weighing all of its options, “up to and including litigation.”

Councilmember Jacob Frey, who is running for mayor, authored the amendment which lengthened the phase-in time for local businesses, but also addressed franchises. “This was a two-part amendment. It provided extra lenience and a longer phase-in for locally-owned restaurants,” says Frey. “And a faster phase-in for franchises.”

Why? “To make McDonald’s and Wendy’s large businesses,” says Frey. The IFA’s Hanscom notes that national franchisors don’t pay wages for a local franchisee. IFA statistics indicate that 80 percent of franchisees operate a single unit, and many are not high-profile businesses.

Frey does not dispute that many franchises are locally owned. Councilmember Blong Yang—the only councilmember to vote against the minimum wage ordinance—says there was little discussion about the franchise issue.

Taco John’s franchisee Tamra Kennedy operates eight suburban metro locations. “None are in Minneapolis,” she says, “because of regulations like this.”

Kennedy says it’s not the city’s role to dictate wages. While she says that many of her jobs are entry-level, she notes that amid current competition for workers, she has to pay more than the state’s minimum wage—$9.50 per hour—to attract employees. She adds that some of her managers can make more than $50,000.

Says Kennedy: “I risk losing employees if I don’t pay them enough.”