Franchisors and Franchisees Should Prepare for Increased Wage Costs in 2016

In 2016, seventeen states will increase their minimum wage; this will include some highly populated states I.E.  New York and California. In Massachusetts the increase has gone to $10 per hour for 2016 and then will rise to $11 per hour in 2017. At the other end of the spectrum, several states have enacted legislation that will prevent individual cities from increasing the minimum wage, akin to what took place in Seattle, Washington. Although there has been heavy lobbying by industry trade groups and even legal challenges against some of these wage increases, it remains to be seen what the outcome will be.

The bottom line is that countless franchisees will experience increased labor costs and especially in those categories that employ a large number of employees, for example, in the food and home care sectors. Individuals interested in franchising in states with increased minimum wages will have to adjust their financial models since existing Item 19 certain financial information is based upon historical and not current labor costs.  All of this adds up to a challenging year for some current and prospective franchisees. Since labor represents a substantial portion of a franchisees product or service, consider home care services and the QSR sector, an increase in labor costs can lower gross margin and cash flow.

The Steps Franchisors and Franchisees Need to Take:

• Franchisors need to provide the most effective scheduling software and related tools for their franchisees

• Franchisors and representative franchisees should establish a collective group to identify strategies that will minimize the impact from increased labor costs

• Consider introducing products and services that tend to be less labor intensive

• Maximize the use of technology to increase productivity

• Don’t wait until momentum for a minimum wage increase gains momentum in a city or state, rather anticipate that change is coming

• Plan for some minimum wage increase in other states, since even legislators opposed to a minimum wage increase see negotiation a better tactic. The result would be some wage increase

• Franchisors that provide expense data or Item 19 disclosures should consult will legal counsel in order to provide accurate information to franchise candidates in those states with an increased minimum wage

There is little doubt, that there will be increased pressure throughout the country to raise minimum wages and with the outcome of the 2016 national elections in doubt, it remains to be seen what the future of labor costs will be.

Ed Teixeira is an Chief Operating Officer at Franchise Grade and can be reached at 631 246 5782 or at franchiseknowhow@gmail.com

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