How Franchise Businesses Can Prepare for Changing Regulations

August 22, 2016

Regulations are a part of life for any business, but this past year has seen an extraordinary amount of change for franchise businesses. The Greek philosopher Heraclitus stated “Everything changes and nothing stands still,” but for franchise business owners, the amount of change that has occurred related to regulations for franchise business owners often can seem overly excessive.

From changes regarding overtime pay, responsibilities at the franchisor level for the actions of individual franchisees and especially in regards to employee pay and overtime, the last two years have been a remarkably turbulent time for the franchise industry. While this tumultuous time period has been difficult for many franchisors, there are ways to prepare for changes in regulation at the local, state and federal level that can impact the business for a franchisor and a franchisee.

Define Expectations

One of the most important steps that a franchise business can take to ensure that it is following all necessary regulations is to define the expectations that both franchisor and franchisees have for the business. From deciding upon infrastructure requirements, including physical location determination and location appearance, to operations agreements that detail the franchisor policies that must be followed by the franchisee to continue operations, are all vital determinations that need to be made prior to a franchise location opening to help ensure success. This would also be a beneficial time to understand and interpret any local and state laws that may pertain to the individual franchise location; research and determine what the laws are applicable at the local and state level, especially if a franchisee operates in different states.

As an example, California passed amendments in 2015 that expanded the reach of the California Franchise Relations Act. The amendments are effective from 2016 and expand franchisee rights when it comes to termination, renewal and transfer of franchise agreements. While this California law pertains only to franchisees in the Golden State, other states are closely monitoring how the law is working for potential inclusion in their states.

Minimum Wage and Overtime Pay Structures

As regulations on the state levels regarding the franchisor and franchisee relationship continue to expand and evolve, a more pressing issue for both sides is state and federal regulations regarding minimum wage and overtime pay structures. From a state perspective, 14 states raised minimum wage rates at the beginning of 2016 and while many of these minimum wage hikes were either the result of planned inflation indexes or state legislation, some states and cities have incorporated legislation that has moved minimum wage rates even higher.

Some cities, including San Francisco, New York City and Seattle, have pursued legislation and regulation to raise the minimum wage to $15 an hour for certain businesses, including franchise owned restaurants. However, the long-term effect of these changes to the minimum wage are still being determined. Some business owners have stated that raising the minimum wage will, at worst, mean that overall prices for products and services at their businesses will also have to rise to accommodate the increased business cost to maintain financial health, while others have considered longer-term ramifications that may include the closing of businesses entirely.

Prepare for Possible Changes

From a franchise business perspective, being able to prepare for possible changes to the minimum wage is extremely important to ensure long term stability. Planning for these types of financial regulations for franchises should include determining how rises to minimum wages will affect the number of employees that are working at any given time to ensure the highest possible service at your franchise business, as well as planning for franchise growth and retention of existing employees. Paying particular attention to possible legislation from a state and federal level regarding minimum wage and other financial regulations will help your franchise business be able to move and adapt to new regulations as they are made into law.

Preparing for financial contingencies is going to be particularly important for franchisors and franchisees with the recent passage of laws from a federal level regarding overtime pay. New regulations from the U.S. Department of Labor have doubled the minimum weekly salary threshold under which salaried workers are eligible for overtime pay if they work more than 40 hours per week. While many franchise businesses may not have salaried employees, those that do must be acutely aware of what the ramifications are of this new federal legislation.

Redefine Employee Status

The threshold, as defined by the act, will rise to $913 a week (roughly $47,500 annually) from the current level of $455 per week (roughly $24,000 annually) beginning in December of 2016. Careful planning at the franchisor and franchisee level regarding the requirements for these new laws will mean that franchisees must determine which of their employees fall under these new guidelines.

Additional components of this law may also affect how employees are designated by franchisees and franchisors; planning for changes to employee status from salaried exempt to salaried non-exempt, planning and managing of employee hours to ensure that employees are not exceeding 40 hours per week and making determinations regarding bonuses, commissions and other compensation will all need to be determined as a part of careful planning for regulations that will be enacted by the end of 2016.

A recent article by Andrew Volin in CFO Magazine has a wealth of detail regarding how this new legislation for overtime pay can affect businesses, along with information on the importance of planning for ongoing changes to protect businesses from lawsuits related to the Fair Labor Standards Act.

As a staffing franchisor, our team at the AtWork Group has been working with many of these types of rules and regulations for years in regards to salary requirements for employees of a franchise. While many franchisors and franchisees have not had to deal with these types of legislative changes from the local, state and federal level to the extent that they are dealing with it presently, our experience has shown that careful planning can overcome a number of obstacles related to being a franchise owner.

As a franchisor, making sure that you acknowledge and understand the requirements for your location and then implement a careful plan to meet the ongoing requirements that are associated with these new regulations will allow you to survive and thrive, regardless of what changes are foisted upon your franchise and franchisees.

Jason Leverant is president and COO of AtWork Group, a national staffing franchisor with more than 93 franchise and company-owned locations. Find him at fransocial.franchise.org.