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Jun 16, 2014

Earlier this month, the Seattle City Council voted to approve a gradual increase in the minimum wage, ultimately requiring city employees to be paid $15 per hour by 2017, or 2018 if the employer has more than 500 employees.

Smaller businesses will have five to seven years to phase in the increase and in either case part of tipped employees’ earnings can be applied toward the higher minimum wage for as long as 11 years. The new minimum wage ordinance will take effect April 1, 2015, when city employees making minimum wage will receive a mandatory increase to $10 per hour.

Clearly, the increase in minimum wage will have legal ramifications for both employers and their employees.

 Squeezing the Little Guy and their employees

One significant legal issue is the fact that franchise owners are subject to the “500+” employee threshold so long as there are more than 500 employees company-wide. Individual franchise owners may file lawsuits challenging the ordinance’s applicability to those businesses, arguing that they are independent businesses and should be treated as such for the purposes of minimum wage increase timelines.

The practical impact of including franchise owners in the “500+” employee category is that these businesses must increase the minimum wage paid to their employees to $15 per hour in a three-year versus seven-year time frame. This could cause higher prices at franchises as well as job losses. Furthermore, fewer employees could do more work to offset the faster increase in wages, versus non-franchise competitors in the same industry with a four-year cushion on wage increases, creating the potential for overtime violations.

To illustrate the impact of requiring franchise owners to increase the minimum wage at a faster rate than other small businesses we look at the potential real-world impact of this legal issue on “Angela.”

Angela is a 23-year-old woman who has worked full-time at a Subway location in downtown Seattle for the past two years. Angela makes minimum wage (currently $9.32 per hour) and does not receive health benefits. On April 1, 2017 the franchise owner will need to increase the minimum wage it pays Angela to $15 per hour from the $10 per hour it has been paying her since April 1, 2015.

Significant legal ramifications

Knowing that the increase is coming, and examining revenue versus cost, the franchise owner makes the decision that prices will need to increase to compete with those charged by Jim’s Fresh Deli (a non-franchise sandwich shop located across the street). Therefore, the Subway franchise owner that employs Angela makes the difficult decision to lay off Angela (as opposed to her 42-year-old male co-worker with greater seniority) because their employment counsel told them that Angela was the best candidate for layoff.

Angela is left without any paycheck, and sues for discrimination, claiming that she was laid off because of her gender.

Although Angela’s lawsuit is ultimately unsuccessful, a high cost has been paid. The Subway franchise has spent thousands of dollars defending Angela’s lawsuit and Angela no longer has a job and did not recover any damages as a result of her claim. Alternatively, if Angela’s lawsuit is successful, she is compensated for her back pay (and potentially some front pay), but the Subway location she used to work at has gone out of business, only to see Jim’s Sandwich Deli thrive in the two years subsequent to Angela’s layoff.

Clearly the minimum wage increase has legal ramifications far beyond the simple fact that a larger paycheck may be coming to minimum-wage employees.

New minimum wage means new requirements

The Seattle City Council is scheduled to hold meetings to develop the infrastructure to support and enforce the new ordinance. Once this is done there will be a new set of regulations placed on area businesses with respect to the minimum wage.

With new regulations come new violations and penalties of which employers and employees need to be aware. The State of Washington already has the highest minimum wage in the country, and also has specific posting and notice requirements that are more strict than those required under federal law. Accordingly, employers and employees must educate themselves as to the new rules to be sure adequate compensation practices are being followed.

Hypothetically, the Seattle City Council could enact a reporting procedure for suspected violations of the new minimum wage ordinance that reach beyond those already in place under state law.

These reporting requirements could lead to an employee like “Tony” (who works at a restaurant in downtown Seattle) reporting to his manager that he is not being paid minimum wage under the new ordinance. Tony’s manager may mistakenly believe the restaurant is in compliance with the ordinance (and other laws) and may take adverse employment action against Tony for wasting his time.

The aforementioned hypothetical scenario is the basis for Tony’s retaliation lawsuit against the restaurant, which could lead to costly results for whoever comes out on bottom.

Gradual increases mean more violations

Although the minimum wage increase in Seattle is highly publicized, many small (and large) businesses may mistakenly incorrectly pay their employees for a period of time after the increase takes effect. However, these are costly mistakes, as minimum wage violations carry significant statutory imposed penalties under state and federal law. Further, overtime violations at a higher rate of pay mean more significant damages that must be paid.

By way of illustration, Logan is an 18-year-old who works for a large manufacturing company. Logan is a minimum-wage employee who was hired directly out of high school. Logan has been happily collecting his $9.32 per hour, and continued to do so throughout the months of April-June 2015 (after the minimum wage increased to $10.00 per hour on April 1, 2015).

Logan does not keep up with the news, instead watching nothing but hockey when he gets home from work. However, Logan’s friend Paul told Logan that he had heard about a minimum wage increase that went into effect on April 1, 2015.

Subsequent to hearing about the alleged minimum wage increase, Logan asked his father (a plaintiff’s employment lawyer) whether his paycheck was accurate. Logan’s dad Tom reviewed Logan’s paystubs and clearly found that Logan had not been adequately paid for the last two months work.

Situations that could arise

Logan went to work the next day and told his boss that his paycheck was inaccurate. Failing to remember to change payroll (yet forgetting the change in local law), the HR manager told Logan to get back to work. On Logan’s next break he told his friends that Tom had informed him he was underpaid.

The next week, all of Logan’s friends at work got together at Tom’s office and listened to what Tom had to say. A week later Tom wrote a letter to the company asking them to cure the defect in the pay, which the human resources manager somehow failed to see.

The company is now in the midst of a class-action lawsuit for minimum wage violations and is at risk of losing millions of dollars in attorney’s fees and wage penalties. Logan is still employed there, but is fearful that he may lose his job because he participated in the lawsuit and is seen as “the ringleader.”

Although this may seem exaggerated, this is a potential situation that could arise as a result of the new minimum wage increase.

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