Ed-ShanahanWhy is it that so often a mandate is issued from on high, but when the inevitable unintended consequences come to pass, there is shock and dismay at the unfavorable results?

In a prior life, I was an advocate/lobbyist for rental housing owners in Massachusetts. At that time, political powers had put strict rent controls in place in a handful of communities mandating that rents could not increase without the expressed approval of the local government. In response to that government fiat, housing developers avoided building in those rent control jurisdictions and chose to invest where their return on investment wasn’t contingent upon government largesse. Inevitably, officials in those localities would lament that, despite the strong demand, new – and much-needed housing – just wasn’t being built. They refused to connect the dots.

Similarly, we see abundant parallels in today’s political debates in states and cities around the nation. In the case of minimum wage hikes, for example, the thinking is that when lower skilled workers – those closest to the poverty line – have their pay raised to a particular magic number (first pegged by President Obama at $10.10, but now commonly seen as $15/an hour) these workers would have enough income to live the more prosperous life they want and the advocates believe they deserve. The reality, however, can be far different.

Increasing wages has a cumulative effect that generally exceeds the actual hourly increase by 20% to 50%, so when the minimum wage is increased by $1, the employer must also absorb increases to workers compensation and unemployment insurance. When you couple those increases with the health care mandate and perhaps a paid sick leave requirement, then the total additional employment costs are significantly higher than the publicized $1 per hour. And, that doesn’t even take into account the tangential increases associated with the minimum wage that ripple throughout the food processing chain – farming, processing, delivery, packaging, etc.

The reality is that business owners have few options with which to respond. They can increase prices, or reduce labor costs by implementing more automation or increasing the employees’ workload. Either way, the elected officials, who pushed the increase in the first place, will turn around and blame the business owners for the higher prices, the lost jobs or the added burden on employees.

Another example surrounds new work rules regarding scheduling. Some cities and states are forcing employers to provide workers with two weeks’ notice before scheduling their shifts. Then, if circumstances warrant a schedule change, the employer must pay a penalty to the employee. In these cases, employers have to find other ways to cut costs, which can often have a negative impact on workers.

Then there is the joint employer situation, which is an example focused entirely on the franchise business model, It’s pretty clear the National Labor Relations Board (NLRB) went above and beyond what a rational individual would define as a joint employer, but who led the agency down that path? For years, franchisors have issued edict after edict on what franchisees can and cannot do with their employees, with their training programs, with their work schedules and, in extreme cases (McDonald’s), even with how they slice vegetables.

The joint employer ruling demonstrates that franchisors can’t have it both ways—a lesson not lost on Dunkin’ Brands. When he reported less-than-stellar second quarter earnings, Dunkin’ CEO Nigel Travis blamed weak numbers on franchisees who raised prices, even though guidance for the price increases came from the brand, in the wake of its decision to eliminate combo deals. Here again, Dunkin’ set the stage for higher consumer prices – not by edict, but by “recommendation,” then blanched at the results when they negatively impacted same store sales.

The lesson is that edicts have repercussions that can often exacerbate the original problem. It may be an unwanted and unintended consequence, but it is likely a direct result of the edict nonetheless.

Business, by its very nature, is dynamic. Whether it’s a mom and pop operation, a national franchise chain or an international conglomerate, when one door closes, successful business owners will search out different, more efficient and effective ways to succeed. That is the very construct of business, and it embodies the genius of American business – creativity, perseverance and determination.

Governments – and franchisors – are ill-advised to try to stifle it.

Ed Shanahan
DDIFO Executive Director