Franchisees sue Seattle over $15 wage

By Jason Cruz
Northwest Asian Weekly

From left, Joseph Cheng, Subway owner; Steve Caldeira, president and CEO of the International Franchise Association; Kathy Lyons, owner of BrightStar Care; and Chuck Stempler, owner of two AlphaGraphics print shops. (Photo courtesy of Ashley Bach)

A lawsuit filed in the U.S. District Court of Western Washington earlier this month challenges the recent passage of an ordinance in the City of Seattle that would raise the minimum wage to $15 per hour. Asian businesses have joined the lawsuit, which requires franchised businesses to increase the wages it pays its hourly workers to $15 per hour within 3 years. According to some franchisees, the economic ramifications could devastate their businesses, which operate as small businesses.

The ordinance

The ordinance passed the Seattle City Council on June 2, and was signed by Mayor Ed Murray the next day. Essentially, the ordinance will phase in the $15 hourly minimum wage according to various schedules, and distinguishes the phasing-in process according to the number of employees each business has at the time. The initial minimum wage increase begins April 1, 2015. Businesses within Seattle will need to increase what it pays its hourly workers. The issue has been a hotly contested one, drawing the passions of both proponents and adversaries of the law.

The lawsuit

The International Franchise Association (IFA), a Washington D.C. trade group, and five local franchised business owners filed a lawsuit in Western Washington District Court on June 11, seeking to block the city ordinance. The complaint alleges the new law illegally discriminates against franchisees and improperly treats them as large companies.

“Hundreds of small, locally-owned businesses and thousands of their employees are unfairly threatened by Seattle’s new law. We are not seeking special treatment for franchisees. We are just seeking equal treatment. The city’s minimum wage statute arbitrarily and illegally discriminates against franchisees and significantly increases their labor costs in ways that will harm their businesses, employees, consumers, and Seattle’s economy,” said Steve Caldeira, IFA president and CEO. “We hope the court will block the ordinance to save jobs and prevent Seattle from unfairly singling out one type of business — a franchise — for punitive treatment.”

“Seattle’s new minimum wage law unconstitutionally discriminates against franchisees by categorizing them as big businesses, even when they are small and independently owned. A single hotel or restaurant can be treated as if it employs more than 500 people, even when it actually employs only 15 people,” said Paul D. Clement, a partner at the law firm Bancroft PLLC and a former U.S. Solicitor General. “We’re asking the federal court to stop this unfair attack on small business owners who happen to be franchisees.”

Two of the named franchisees are Asian businesses. Michael Park is the owner of a Comfort Inn in Seattle and president of the Korean American Hotel Owners Association (KAHOA), whose 56 members own and operate about 100 hotels in Washington and Oregon. Another party to the suit, Ronald Oh, owns a Holiday Inn Express in Seattle. Officially, the lawsuit names the City of Seattle and the director of the Department of Finance and Administrative Services.

The effect on franchisees

The basic argument, which is the basis for the lawsuit, is that the ordinance treats “large” employers and franchisees differently from “small” employers, expressly and substantially favoring “small” non-franchised employers, according to the complaint. There is a benchmark of 500 employees in distinguishing large employers from small employers. However, according to the plaintiffs in the lawsuit, the ordinance identifies “all franchisees associated with a franchisor or network of franchises” as the same as a large employer.

This means a small business owner not affiliated with a franchise would have a more gradual wage increase. According to the ordinance, small business owners would not have to pay the $15 minimum wage until 2021. Conversely, owners of a franchise would have to increase wages at the same rates as large companies. This would occur despite the fact that the franchisees are run as a small business with many businesses having small profit margins.

Although not a named party in the lawsuit, Subway sandwich franchise owner Joseph Cheng said he would feel the financial pinch earlier than other smaller businesses. Cheng owns three Subway businesses in the Seattle area.

Cheng uses the current minimum wage as a “training wage” for his employees. After they are familiar with their job, their wage goes up. Cheng states that workers who stay over a year make more than $10 per hour.

When he first came to America from Taiwan, his wife was a waitress and Cheng was a busboy earning minimum wage ($4.50 per hour at the time). “We had $35 saved between us at the end of the month,” Cheng said. He eventually found a job in the technology industry, working his way to run his own business. After 18 years in the tech industry, Cheng used his life savings to invest in a Subway franchise. Now in his 11th year as a franchise owner, he owns three Subways in the Seattle area.

Cheng says the new ordinance has caused him sleepless nights, as he tried to determine how to balance his business with an upcoming 17 percent increase in employee payroll. Currently, he employs 8 to 10 employees at each Subway. With the raise to $11 per hour next year and $15 the year after, Cheng says that his already slim profit margins might actually mean he will operate at a loss once the $15 minimum wage goes into effect.

With the wage increase, Cheng said he would have no other option but to raise prices at his stores, which could affect the frequency that his customers come in.

“I am not against raising wages,” explained Cheng, “[b]ut when they say your business is a large business, it really bothers me.” Cheng believes raising the wages within three years is too soon for small businesses like his, and would rather it be more gradual an increase.

Cheng offered an alternative to the city’s ordinance, which would define the size of a business.

“The city needs to reconsider and figure out how many people we hire and how much volume [we do].” Cheng wants the city to evaluate the number of employees each individual business employs and then look at how much each business does in sales, which he says can be easily determined based on the reported sales volume to the city.

The city’s position

Reacting to the lawsuit, Mayor Ed Murray issued a statement explaining the city’s position.  “Franchises have resources that a small business in the Rainier Valley or a small sandwich shop on Capitol Hill does not have. Franchise restaurants have menus that are developed by a corporate national entity, training provided by a corporate national entity, and advertising provided by a corporate national entity,” Murray stated. “They are not the same as a local sandwich shop that opens up or a new local restaurant that opens up in the city. Our process for reaching $15 an hour in Seattle recognizes that difference.”

While Cheng has received training from his franchisor, he indicates he receives no financial assistance from them. Cheng has spoken with Subway franchise representatives and Subway is looking at the minimum wage issue situation in Seattle closely as it is the first of its kind in the nation.

The City of Seattle seems unlikely to back down. “We believe Seattle’s minimum wage ordinance is constitutional, and we intend to vigorously defend it in court,” stated City of Seattle spokesperson John Schochet. (end)

Jason Cruz can be reached at info@nwasianweekly.com.

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