California recently passed a law raising its minimum wage to $10 per hour by 2016 (from $8 to $9 by July 2014, and from $9 to $10 by January 2016), the highest hourly minimum in the nation. New Jersey's minimum wage was increased to $8.25 per hour beginning in January 2014 and Massachusetts' Senate just passed a bill that would, if signed by its Governor, raise its minimum wage from $8 to $11 per hour, a 37.5% increase. Not to be outdone, several other states, including Alaska, Hawaii, Idaho, Illinois, Maryland, Minnesota, South Dakota and Washington D.C. are considering similar changes. To sum it up, franchisors and franchisees alike should expect the minimum wage in most states to rise above the federal minimum wage of $7.25 an hour.
Proponents of legislation to increase the minimum wage often point to a large franchise company, such as McDonalds, and say: "a company that size can afford it." The truth is, however, that an increase in the minimum wage really impacts franchisees because franchisees hire and employ the workers who work in their franchised businesses. Considering that, and the fact that minimum wage rates will continue to rise throughout the country, franchisees must be proactive and determine how they can continue to turn a profit in the face of this challenge.
Most small business owners will have to do one or more of the following to survive: cut costs, increase efficiency, develop or sell new/additional products or services or find alternate streams of revenue, or raise prices. Cost cutting in a franchise scenario may be achieved in many ways: reducing employee hours, postponing plans for hiring and expansion, reducing the total number of employees and renegotiating the terms of leases and financing obligations, just to name a few. Increased efficiency may be realized by employing energy saving technologies, increasing employee productivity through better training and management and reducing waste. Franchisees, though, may find it tough to add new products or develop alternative streams of revenue without their franchisor's permission, as most franchise agreements restrict the products a franchisee may sell to those approved by the franchisor. And, when all else fails, franchisees may be forced to pass along their additional costs to customers by raising prices, which is sometimes pretty tough to do.
Needless to say, the time is at hand for franchisees to address the issue of rising minimum wage costs with their franchisors and other franchisees in their systems. Both groups are facing the same issues and may have already come up with some creative solutions.