Why Franchise Owners Hate Seattle's $15 Minimum Wage

Lawyers for the city of Seattle will be in federal court Tuesday to defend the city’s new $15-an-hour minimum wage law.

Franchise owners have sued, arguing the law improperly treats them as big businesses rather than as locally owned businesses that operate on a license from a larger national company.

The new city law phases in the $15 wage over a period of years, beginning April 1. Small businesses have longer to reach $15 than big businesses, and franchisees say that puts them at a disadvantage to other small businesses in the city.

The fight boils down to the definition of a small business and how national corporations structure their operations. But it is also a philosophical debate between people who love or hate the franchise model.

Franchise Pros

Joseph Cheng calls himself a “hands-on owner” of his two Subway sandwich shops in Seattle’s First Hill neighborhood.

“I do from A-Z,” he said. “I do making sandwiches, I do wash the floors, I do cleaning stuff, I fix my plumbing.”

Cheng immigrated to the U.S. from Taiwan in 1981 and spent a couple of years working as a shipping clerk and as a busboy while his wife waited tables. He knew he wanted to own a business, but he was young, didn’t speak much English and had no business experience.

So he bought his first franchise.

“The franchise program teach you real world. The school only tell you, OK, this is how you do it. But the franchise program, they hold your hand to do it. And that’s the night-and-day difference,” said Cheng, who is not a plaintiff in the challenge.

Proponents of franchises argue they give people like Cheng opportunities they might not otherwise have.

“What franchise does is it allows people to have a bit of the American Dream, but with guardrails,” according to Jeff Levy, owner of the Entrepreneur’s Source. He calls himself a “franchise coach.”

Franchises pay for access to a proven brand, national advertising and, most importantly, business expertise.

“The franchise will say, here is the road map, and these are the things that are best practices, and these are the activities that you can do to increase your chances of success in your business,” said Levy.

Franchise Cons

While franchises might be great for business owners, labor unions argue they have been terrible for workers.

Beginning in 2013, labor activists began targeting fast food franchises because of what they see as the disconnect between what franchisees pay their workers and what the larger corporations earn in profits.

“When McDonald’s at the national level is making corporate profits that are astonishingly high and workers are struggling to make ends meet, we know that there is money out there for workers to be paid a fair wage,” said Sejal Parikh of Working Washington, a union-funded advocacy group.

Critics of the franchise model say it’s no accident that franchises are often at the center of low-wage industries.

“The franchise business model was developed at the beginning of the 1950s specifically as a way of forcing workers to live in poverty without the national brands, which are publicly traded corporations, holding any responsibility for that,” said David Rolf, head of the Service Employees International Union, Local 775, which was heavily involved in organizing the fast-food strikes.

Corporations take their share of profits in franchise fees, and then leave the franchisees to pay their workers from the margins that remain.

“Are the employees of these giant multinationals really employees of small local businesses or is this just a strategy that was invented by smart lawyers in the New York and other global headquarters of these companies in order to force risk onto the least powerful people in the economic equation, the workers and then their immediate bosses who are the operators of the local stores?” Rolf asked.

Which Side is the City On?

When the new minimum wage law was being hammered out in Seattle, with David Rolf as one of the primary drafters, opponents of the franchise system won out.

In granting small businesses more time to phase in the increase, the law defines them as having fewer than 500 employees.

But the city counts national employment numbers in that equation. So if you own a Subway shop and employ 10 people, for example, you are still considered a big business, because nationally Subway employs far more than 500.

According to Jeff Levy, the franchise coach, that’s absurd.

“We can spend hours talking about the people that I work with, and I could tell you they are not big businesses,” he said.

Franchise owners say they are collateral damage in the fight between the city and big corporations.

According to Subway owner Joseph Cheng, the new law means that his labor costs will go up much faster than the independently owned sandwich shop down the street.

“But when we are the only one to be at $15 and everybody still at 12, it’s a huge gap. So we feel like we’ve been singled out, not really fair,” he said.

Oral arguments on a preliminary injunction in the case take place Tuesday.