Who counts as a small business?

Ritu Shah-Burnham, who owned Z Pizza, a small restaurant in Seattle with 12 employees, thought of herself as one. But the city’s policymakers had other ideas.

Despite her small size, Seattle’s $15 minimum wage law – which began phasing in last year – classifies Shah-Burnham and any other small, family-owned business that contracts with a recognizable brand as indistinguishable from a large corporation. As a consequence, they’re forced to pay the city’s $15 wage requirement on an accelerated schedule.

Shah-Burnham couldn’t make the math work, and closed her doors in August. Had she been able to classify Z Pizza as the small business it was, it might have saved her restaurant: “[If] I had seven years, it was doable … but to do it in 24 months, it was going to be too much.”

Seattle justified its treatment of franchise businesses by arguing that they enjoy special economic advantages. The director of Seattle’s Office of Economic Development, for instance, argued that “franchises are different, in that they are part of a network, with built-in economies of scale and support with advertising, supply-chain management and menus.” The state of New York took the same approach in its own minimum wage law targeted at fast-food employees, and a number of other cities and states have considered following suit.

The anecdotal evidence doesn’t seem to support this argument. To determine whether there’s an empirical argument to be made, my organization asked Dr. Lloyd Corder, an adjunct professor at Carnegie Mellon University and University of Pittsburgh, to conduct a nationally representative survey of franchised and non-franchised businesses. Corder pulled his data from the 24 largest U.S. metropolitan areas and focused on eight key industries such as restaurants and hotels that generally employ more minimum-wage employees, and where franchises like Z Pizza are common.

His results showed that franchisees are more sensitive to minimum wage increases than their non-franchised counterparts. For instance, when asked about their reactions to a $15 minimum wage, two-thirds of franchised businesses claimed they’d consider cutting staff, compared with about 50 percent of non-franchised businesses. (A similar disparity exists for those businesses who said they’d reduce hours.) Roughly 50 percent of franchisees reported they’d likely pursue automated staffing alternatives in response to a $15 wage floor – only one-third of non-franchisees said the same.

One possible reason for this disparity is that franchisees employ a larger number of entry-level employees than do nonfranchise businesses: 56 percent of franchise employers reported having employees who earned the minimum wage, compared with 38 percent of non-franchise employers.

But even within specific lower-margin industries such as quick service restaurants and hotels, the negative impacts of a $15 minimum wage are more disruptive for franchise business owners. More than 80 percent of quick-service restaurants said that a wage hike would force them to hire fewer workers, compared with 58 percent of their nonfranchised counterparts. Nearly nine in 10 franchise hotel owners claimed they’d raise room rates to offset the higher labor cost, while 70 percent of nonfranchisees said the same.

Of course, a $15 minimum wage is likely to harm almost all businesses by trimming profit margins, whether they’re franchises or not. The research on this point is clear: According a recent paper released by the Federal Reserve Bank of San Francisco, the best and most-credible studies show that job losses occur after the minimum wage goes up. (A follow-up paper found that the policy is also an ineffective means to reduce poverty.) This survey suggests that policymakers will compound the damage by arbitrarily targeting businesses with a recognizable brand for uniquely harsh wage mandates.