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April 2015

Washington Franchisees Denied Request for Preliminary Injunction from Seattle’s new Minimum Wage Law

In June 2014, Seattle City Council voted unanimously (9-0) to increase Seattle’s minimum wage to $15/hour.  On April 1, 2015, employers in Seattle will begin their first wave of wage increases.  Currently, Washington pays the highest minimum wage in the nation at $9.47/hour.

Under Seattle’s Minimum Wage Law, Seattle Municipal Code 14.19.010-.080, employers in Seattle must increase their employees’ minimum wages to $11/hour for Schedule 1 Employers (“Large Employers”), and $10/hour for Schedule 2 Employers (“Small Employers”).  Large Employers are those with more than 500 employees nationwide—including franchisees.  Small Employers are those with 500 or fewer employees nationwide.  This scheduled incremental increase is part of the rollout plan to increase minimum wage gradually on an annual basis until minimum wage peaks to $15/hour: 

  • Large Employers are set to reach $15/hour in 3 years; however, they will have 4 years to increase wages if their employees receive health care benefits.
  • Small Employers are set to reach $15/hour in 7 years; however, they will also have a temporary guarantee minimum compensation responsibility of $15/hour to be met within 5 years, by combining health care benefits, consumer-paid tips, and wages.

Although $15/hour is the goal, it is not the cap.  Once the $15/hour minimum wage is reached it will continue to increase annually based on inflation.  The full schedule for the wage increase is included in the chart below. 

The Minimum Wage Law applies only to employees who work within the geographic boundaries of Seattle.  Employees in all other cities in Washington will continue to earn a minimum wage of $9.47/hour.  Employees who work occasionally in Seattle are covered and will receive $15/hour if the employee works in Seattle for more than 2 hours during a 2-week period.  However, an employee who merely travels through Seattle to get to their work site is not covered, unless the employee stops in Seattle for an employment related purpose or a commercial stop—this excludes stops for gas, eating, and personal errands.

Some employers are exempt from the Minimum Wage Law and may apply for a special certificate to pay less than $15/hour, but even with a special certificate they must still pay above Washington State minimum wage.  However, special certificates will be subject to limitations and are only available to workers who are, “learners, apprentices, messengers, and disabled.”

The Minimum Wage Law further excludes tips as wages for Large Employers. When an employee is paid through commission, by piece-rate, or receives bonuses, that income can be credited as part of the employee’s total wages.  However, for Large Employers, tips and payments towards a medical benefits plan are not counted towards an employee’s total wages.  On the other hand, Small Employers can count these funds towards an employee’s total wages. 

Under the Minimum Wage Law, employers have a duty to give their employees notice about the $15/hour minimum wage requirement, and to notify employees of their rights to bring a claim if they are not rightfully compensated.  In addition, employers must not discriminate or retaliate against employees who bring claims to receive a $15/hour for minimum wage.  Employers also cannot threaten to reveal an employee’s immigration status as a way to prevent them from bringing a claim for $15/hour.  Employers must keep records on the payment of the new minimum wage for at least 3 years.  Noncompliance may result in the Department of Finance and Administrative Services filing a charge against the employer and could result in the payment of owed wages (and interest) to the employee and a civil penalty ranging from $125 to $20,000.    

The implementation of the Minimum Wage Law has been challenged by the International Franchise Association (“IFA”) and five individual Seattle franchisee owners.  The Franchisees  filed a lawsuit last year against the City of Seattle for its categorization of franchisees as Large Employers.  The Franchisees alleged several claims against the City of Seattle’s new Minimum Wage Law including that the law violates the Commerce Clause, the Equal Protection Clause, the First Amendment, the Privileges and Immunities Clause, and that the law is preempted under the Lanham Act and ERISA.  The Franchisees argued that they are often small, local businesses that often employ only a handful of employees and face the same challenges as other Small Employers.  Hence, they should not be placed on the same scale as Large Employers and should be categorized as Small Employers.

In March 2015, the Franchisees sought a preliminary injunction to compel the City of Seattle to treat franchisees as small businesses.  On March 17, 2015, Judge Richard Jones for the U.S. District Court of Washington, Western District, issued an Order denying the Franchisees’ request for the preliminary injunction.  International Franchise Ass’n, Inc.  v. City of Seattle, No. 2:14-cv-00848-RAJ, 2015 U.S. Dist. LEXIS 33744 (W.D. Wash. Mar. 17, 2015).   In support of the injunction, the Franchisees argued that the Minimum Wage Law violated the dormant Commerce Clause which bars state and local governments from implementing regulations that favor local businesses at the expense of interstate commerce.  The Court examined whether the law has a discriminatory purpose or a discriminatory effect on interstate commerce, and held that the law was not enacted with a protectionist motive to uplift Small Employers, but rather that the law was enacted upon the lawmakers’ reasonable findings that franchisees receive benefits from franchisors and can handle the faster phase-in schedule. Id. Further, the Court held that the Franchisees had not demonstrated that the law would have a discriminatory effect.  The Court noted that the Franchisees did not show that the law creates any barrier to the entry or will eliminate franchisees from the Seattle market, or that the playing field has been rigged such that local goods will constitute a larger share of the market. Id.  

The Franchisees also argued that under the Equal Protection Clause, the Minimum Wage Law arbitrarily and irrationally discriminates against franchisees because it treats franchisees with only 5-10 workers as Large Employers and subjects them to a faster phase-in schedule.  The Court disagreed and found that there was a “rational basis” for classification of franchisees as Large Employers.  The Court relied upon two expert opinions which outlined benefits received by franchisees that Small Employers do not receive, which include: national advertising, extremely valuable and well-known trademarks, the market power of a large corporation when purchasing supplies and raw materials, and access to valuable and trustworthy information based on the experiences of other franchisees.  The Court noted that expert testimony confirmed that there was a rational basis for the City’s decision to classify franchisees as Large Employers, and thus the law did not violate the Equal Protection Clause.  Id.

The Court ultimately rejected the Franchisees other four claims and noted that the Court cannot subject lawmakers’ reasoned decisions to judicial intervention, and that such acts may only be rectified by the democratic process.  Id. As a result of the Court’s rulings, starting April 1, 2015, franchisees will be required to pay their employees $11.00 per hour while Small Employer competitors will be required to pay their employees $10.00 per hour.  The IFA plans to appeal this decision to the Ninth Circuit Court of Appeals.    

The campaign for living wages is occurring nationwide.  In November 2014, San Francisco was the second city to pass a $15/minimum wage law.  Alaska, Arkansas, Nebraska, and South Dakota have all approved proposals to increase minimum wage.  Other cities considering a $15/minimum wage increase include New York City, Minneapolis, San Diego, Oakland, Los Angeles, Portland and Chicago.  Meanwhile, on the federal level, Congress is still debating increasing the federal minimum wage from $7.25/hour to $10.10/hour.

For more information or answers to questions about Seattle’s new Minimum Wage Law, please feel free to contact Sarah Turner or Emily Cardenas in Gordon & Rees’ Seattle office.     

Employment Law

Sarah N. Turner

Employment Law