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Franchise Associations Pleased Connecticut Rejects Low Wage Penalties

Dunkin' Donuts in a small town in Connecticut
A Dunkin' Donuts shop in a Connecticut town. Photo by bmm

WASHINGTON – Franchise lobbying groups say they are pleased that Connecticut has decided to reject the Act Concerning Low Wage Employers, House Bill 5069. The bill would have required companies with over 500 employees to pay 130 percent of the state minimum wage. The bill would have put large chains at a competitive disadvantage to small non-franchised competitors. While the Connecticut minimum wage for 2015 will be $9.15 for smaller establishments, the bill would have required a franchisee with 500 employees or more to pay a minimum wage at 130 percent of the state’s minimum wage, or $11.90 per hour. The employers were to be fined a dollar per worker hour for pay below the new minimum wage.

“Many of Connecticut's most profitable corporations do not provide affordable quality health insurance including Wal-Mart, Dunkin' Donuts and McDonald's,” wrote the Service Employees International Union to the state’s lawmakers. The SEIU claimed that chains were taking advantage of government handouts to workers that essentially allowed them to pay employees under a wage that they could survive on. “Some of the largest and most profitable corporations in the world pay poverty wages equal to or just above the minimum wage to most of their employees,” the letter from Paul Filson, director of the labor union’s Connecticut council, stated. “HB 5069 charges large low wage employers a fee to offset their sycophantic business model.”

The bill failed to pass the Connecticut House Finance Committee on Friday, April 11.

Similar bills that target chain stores have been proposed in other jurisdictions. For example, on April 14 Minnesota passed a two-tier minimum wage law, which has a smaller hourly wage for small employers and a larger one for large employers and New York lawmakers have just proposed a higher $15 minimum wage for major employers.

The Washington-based Coalition of Franchisee Associations, which consists of franchise owners from some of the country’s largest chains, thinks that a double-standard approach for large and small employers is inherently unfair. The bill also affects certain industries unfairly. “Legislation intended to raise the wages of workers should not target a specific industry for a different minimum wage scale than all other businesses with which they compete for employees,” says franchisee Robert Branca, vice chairman of the Coalition.

What is different about Connecticut is that their bill would have treated the employees of all of a chain’s franchisees in the state as though they were under a single employer and then assessed a de facto fine against the franchisor. While most stressed how the bill unfairly put large establishments at a disadvantage, it was the fact that franchisors could be held vicariously liable in the wages paid by franchisees that the International Franchise Association (IFA) took issue with.

“The bill would have made the unprecedented move of obligating franchisors to pay taxes on the employees of franchisees, despite the two being completely separate business entities,” focused the IFA’s chief executive officer Steve Caldeira on his main issue with the bill. “Franchisors in the state would have been faced with large new costs, making them more reluctant to extend opportunities for new locations and causing significant damage to Connecticut-based businesses,” said the chief executive of the IFA, an organization created in 1960 by franchisors who wanted to protect their interests.

That view was supported by the state lawmakers’ own Office of Legislative Research, which issued a report questioning the legality of the bill concerning franchisors. “In general, franchisors are not considered the employers of the employees who work in a franchise,” reported the office. “It is unclear whether a franchisor could be held financially liable for decisions over which it does not have control.”

The Coalition of Franchisee Associations also praises Connecticut lawmakers for their decision. “The Coalition of Franchisee Associations (CFA) is pleased that Connecticut legislators did not move forward with HB 5056,” says Branca, who is a New England-based multiunit franchise owner. He stresses that this would have harmed even small franchisees because the penalty assessed to its franchisor by the state would have been passed along to the franchisees anyway. “Many franchise agreements require franchisees pay any local, including state, taxes or fees. If this legislation would have passed, franchisors would have been taxed by the state, and then the franchisors would have billed the franchisees to pay for the additional tax,” says Branca. “There would be no new net money going to the local economy whatsoever.”

The elected vice chairman stresses how his franchisee association’s efforts will continue to educate legislators on the business model of franchisees: such as how franchisees, while the investors and employers in the local economy, most often run on very small margins. “While proponents of the bill intended to tax franchisors for higher wages to employees of franchisees, the net impact would have been an increased cost to the local, Connecticut-based franchisees,” says Branca.

The general assembly’s Office of Fiscal Analysis estimates that if the bill became law, Connecticut could gain up to $104.7 million in 2015 and $222 million in 2016 in additional tax revenue from the fines. The administration of the bill would cost the state $18.6 million annually.

The IFA argues that the bill would have ruined Connecticut. “Nowhere in the country has the franchise industry ever seen a bill as potentially damaging as HB 5069, which would have effectively ended franchising in the state of Connecticut, home to roughly 8,000 franchise establishments that account for more than 100,000 jobs and $12.6 billion in annual economic output,” states Caldeira.

The CFA's Branca, who is also elected into the northeast regional advisory council of all Dunkin’ Donuts franchise owners, which includes Connecticut, stresses that drafters of the Connecticut bill seemed to have fallen into a common misperception that franchised "chains" are owned by large, remote corporate conglomerates. “In fact, they are owned by their local constituents who already support their local communities in many ways,” says the franchisee. The Coalition of Franchisee Association’s leader and volunteer adds, “Legislators, regulators and policy makers that would like to target franchising should first try to get to know the small-business owners that invest in their own neighborhoods. When legislators talk about creating jobs in their own districts, they should ensure that they aren't punishing their own constituents and directly deterring them from giving someone a job.

Caldeira, who also has his roots in Dunkin’ Brands as its former chief global communications and public affairs officer, stresses that Connecticut’s decision to avoid more government intervention is helpful. “Connecticut businesses are already being pressed hard by the impending implementation of the Affordable Care Act’s employer mandate [and] the proposed increase to the federal minimum wage, so this important decision ensures that franchise businesses can continue to operate without unreasonable government interference into the franchise relationship,” says the chief executive.

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