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Big or small? Legal cases may hurt profits and change franchisee-franchisor relationships

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NEW YORK — Are franchises small, independent businesses or should they be considered part of a much larger company?

The question is at the heart of two upcoming legal cases. The outcomes could affect profits and change how franchisees hire, fire, manage and pay workers.

A federal judge holds a hearing Tuesday on Seattle's minimum wage law, which treats franchisees of companies such as McDonald's and 7-Eleven as big businesses although many are owned by individuals and have a handful of employees. And March 30 brings the first of a series of hearings into complaints against McDonald's Corp. and some of its franchisees brought by National Labor Relations Board officials. The agency's Office of General Counsel contends McDonald's is a joint employer with its franchisees, and should be held responsible if franchisees are found to have committed labor law violations.

SMALL OR LARGE BUSINESS?

When Seattle's City Council passed a law last year raising the minimum wage to $15 from $9.32 an hour, it gave small businesses seven years to reach that level versus three for large businesses — with franchises considered large businesses.

The law going effect April 1 is being challenged by franchisees and the International Franchise Association. They're asking a federal judge to stop implementation of parts of the law that treat franchises as large businesses; they contend the law discriminates against franchises.

Franchises are at a financial disadvantage under the law, says IFA President Steve Caldeira. For example, a restaurant franchisee will have to pay higher wages than independent restaurants for four years, he says.

"That's a long time for there to be such an unfair competitive wage situation," he says. "Those businesses might not make it."

David Jones, who owns two Subway sandwich franchises in Seattle, will need to raise prices 4 percent to cover the first increase, which lifts the minimum to $10 for small businesses, and $11 for large businesses. He pays his combined staff of 18 $10 an hour.

Jones worries about losing customers. The higher wage is also affecting the expansion of his own chain, Blazing Onion, which has six locations.

"We are watching Seattle closely, but delaying adding a location in Seattle until we see how this pans out," Jones says.

Franchisees are considered large businesses because they benefit from franchise networks, says Viet Shelton, spokesman for Mayor Ed Murray.

PHOTO: David Jones poses for a photo in one of the two Subway sandwich franchises he owns, Tuesday, March 3, 2015, in Seattle. Jones, who has 18 employees at his two stores, says he will need to raise prices 4 percent to cover the first pay increase mandated by Seattle's minimum wage law. (AP Photo/Ted S. Warren)
David Jones poses for a photo in one of the two Subway sandwich franchises he owns, Tuesday, March 3, 2015, in Seattle. Jones, who has 18 employees at his two stores, says he will need to raise prices 4 percent to cover the first pay increase mandated by Seattle's minimum wage law. (AP Photo/Ted S. Warren)

"Franchises have distinct advantages over the typical independent small business - training, product development, and marketing support - to name just a few," Shelton says.

WHO'S THE BOSS?

Franchise owners wonder whether they'll lose autonomy as a result of hearings into about 80 charges against McDonald's and some of its franchisees.

The hearings stem from nationwide protests by employees seeking higher pay. The workers accuse the companies of retaliating against employees who took part in protests and restricting their attempts to discuss working conditions with each other or union representatives.

The NLRB's general counsel contends McDonald's, through its franchise relationship and business practices, had enough control over franchisee operations to be considered a joint employer of their workers, said Jessica Kahanek, an NLRB spokeswoman. She declined further comment while the cases are being litigated.

McDonald's did not respond to requests for comment. In a statement following the general counsel's decision, McDonald's said it offers franchisees resources to help them manage restaurants, but that does not create a joint employer relationship.

Whoever loses during the hearings will likely appeal to the NLRB. From there, the case would go the U.S. Court of Appeals and possibly the Supreme Court.

The franchise industry is concerned the cases could set a precedent requiring all franchisors to oversee how franchisees manage employees.

"No business owner wants to take on the risk without the control," says Karim Webb, owner of three Buffalo Wild Wings restaurants in Southern California.

A ruling against McDonald's would discourage would-be entrepreneurs from buying franchises, IFA head Caldeira says.

Clint Ehlers is concerned the cost of running two Fast Signs franchises in southeastern Pennsylvania could increase if the franchisor must co-manage his 16 employees. To defray its costs, Fast Signs could raise royalties he pays.

"I'm not sure I would want to keep my franchises," he says.

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