It’s been one long, hot summer for Dunkin’ franchise owners and others in the quick service business, and we are not just talking about the temperature.

A tight labor market has combined with a wave of minimum wage hikes across the country to ramp up the pressure on franchisees across the country.

And in a growing number of cases, franchise owners are responding by boosting pay and raising prices in order to cover their expenses.

Even in an improving economy, it’s a strategy that comes with risks, including the potential to lose sales as customers go elsewhere, industry experts say.

If that weren’t enough, federal labor regulators are upping the ante as well, aggressively pursuing allegations of wage and overtime violations.

The feds recently inked a big compliance agreement with Subway, with signs the crackdown could soon extend to franchise owners in other chains.

“Many franchises are worried to death about what this means,” according to John Gordon, principal of Pacific Management Consulting Group, and DDIFO’s restaurant analyst. “I don’t think anyone knows yet. People are deathly afraid of wage and hour,” he says, referring to the U.S. Department of Labor unit that investigates wage-related offenses.

Wage hikes hitting bottom line

Baltimore is the latest city to debate hiking the minimum wage to $15 an hour.

The minimum wage in New York City and its environs is now set to hit $15 an hour in 2021, with the rest of the state set to rise to $12.50 and potentially higher, if certain conditions are met. California is set to hit $15 an hour by 2022.

Seattle, Pittsburgh, Greensboro, Rochester, Syracuse, Milwaukee, have either already upped the minimum to $15 an hour or are poised to do so over the next few years.

In a recent interview, Nigel Travis, Dunkin’ Brands chief executive, said the wave of minimum wage hikes sweeping the country has prompted some Dunkin’ franchise owners to boost pay for employees.

“We think that pricing got ahead of itself because [franchisees] saw the minimum wage going up, and the natural reaction is to increase prices,” Travis told the Boston Herald. “It’s not always the best reaction. We’ve managed now to get price increases under control.”

Prices rose 380 basis points in the first half of the year. That led to a 2.9 percent increase in average sales but also a 1.4 percent drop in traffic. Overall, same store sales edged up .5 percent at Dunkin’ Donuts locations in the U.S.

Benjamin Litalien, founder and principal of consulting firm Franchise Well, agreed that simply hiking prices is a potentially risky strategy for franchise owners.

If wage pressures continue to mount, franchisors may have to start exploring ways to cut down on labor costs through automation, he argues.

“Given the headwinds we are facing, given the artificial wage rates, is it going to result in consumer acceptance of higher prices? If it does, we should be able to fold it into our business model,” Litalien says. “If there is pushback, that is going to put significant stress on small business owners.”

“Certainly the franchisors have a responsibility to be thinking about automation,” Litalien says.

Still, it’s not just minimum wage hikes that are forcing franchise owners to make difficult decisions like raising prices, but also a shrinking pool of available workers to draw from, Gordon says.

He pointed to McDonald’s, which boosted its wage rate to a $1 above the minimum, and Starbucks, which recently reviewed the pay of all of its hourly workers with an eye towards keeping them from jumping ship.

“Turnover is higher almost everywhere and wage rates are rising anyway in order to lock the good people in,” Gordon says. “Wage related inflation has become a much greater issue and it has shown up quarter after quarter after quarter in earnings calls.”

Feds ramping up wage and hour investigations

The U.S. Department of Labor has franchise owners across the country wondering who’s next on the crackdown list after forcing Subway to sign a sweeping wage compliance pact.

The agreement, which covers Subway’s 27,000 locations across the country, comes after a spate of more than 800 investigations of wage and hour violations at Subway restaurants by federal labor officials. Subway was forced to pay more than $2 million in wages to more than 6,000 workers as a result of the investigations by the Department of Labor’s Wage and Hour Division.

Intrigued, Independent Joe decided to read the full document and see what all the fuss is about.

The pact goes well beyond developing and distributing educational materials on compliance with wage and hourly laws to franchise owners.

In fact, the deal requires Subway to effectively become a joint watchdog with Labor Department investigators, putting the franchisor on the hook to help prevent violations of wage laws by individual franchise owners, such as not paying overtime.

Subway will pool data with the Labor Department and help regulators analyze it, looking for “new ideas for promoting compliance.” The quick-service chain has also agreed to explore building “alerts” into the electronic payroll and scheduling platform it provides to franchisees.

Subway executives have also agreed to meet every three months with their Labor Department counterparts to “share information, evaluate compliance trends, and solve problems.”

A particularly interesting section deals with enforcement. “When circumstances warrant, Subway may inform franchisees of Section 11 (a) of the FLSA (Fair Labor Standards Act), which authorizes representatives of The Department of Labor to investigate and gather data concerning wages, hours, and other employment practices; enter and inspect an employer’s premises and records; and question employees to determine whether any person has violated any provision of the FLSA.”

In communicating with its franchise owners, Subway is also required to stress that complying with the Fair Labor Standards Act is a requirement of owning a franchise and that a history of violations could lead to the termination of the franchise agreement.

Subway reportedly entered into the deal after being assured that it would not be used as evidence to declare Subway a “joint employer” with its franchise owners, essentially putting the corporate parent on the hook for violations on part of individual owners. No such assurance can be found in the document itself.

(A controversial 2015 ruling by the National Labor Relations Board greatly expanded the criteria for determining whether a franchisor is in effect a “joint employer” with local franchise owners.)

No one-shot deal, David Weil, head of the Labor Department’s wage and hourly division, has been quoted saying. He hopes the Subway deal will become a template for agreements with other franchisors.

Stay tuned – and vigilant!

Sodium police hit streets

Dunkin’ franchise owners in New York City face a double whammy. Not only is the minimum wage going up, they will have to put pictures of little salt shakers on their menu boards in front of foods with higher levels of sodium. If they don’t, they could face fines.

New York regulators this summer gained the power to start fining restaurants who fail to put the little salt shaker symbols next to “salty” menu items.

A state appeals court in June rejected the National Restaurant Association’s challenge of the new city ordinance requiring salt shaker icons next to items that contain at least 2,300 milligrams of sodium. That is roughly the daily recommended limit for one person.

New York officials now have the authority to fine restaurants that don’t comply – the law is aimed at chains with 15 or more locations across the country.

New York began requiring calorie counts on menus in 2006, while also banning trans-fats. A so-called “soda tax” struck out in court in 2014.

Financial fallout from sick leave

Connecticut’s paid sick leave law, passed with fanfare in 2012, hasn’t been such a good deal for younger workers, a new study finds.

Workers between 20 and 34 have seen the number of hours they work per year drop by 24, according to a study by the Employment Policies Institute. That amounts to $850 less in pay per year.

Under the law, companies are required to give employees one hour of paid sick leave for every 40 hours worked. A 2013 survey by the think tank found some business owners were cutting back on hours, wages and benefits to deal with higher costs triggered by the new law.

Looking ahead

For franchise owners, the challenges are coming from all directions these days. Minimum wage hikes and a tight labor market are pushing up costs, while federal labor regulators are ratcheting up the pressure as well. The bottom line pressures can require franchise owners to make tough choices on whether to cut back on hours and benefits or raise prices. With a presidential election looming this fall, the coming months will also help determine the nation’s direction over the next few years and maybe more. Here at Independent Joe, we’ll keep an eye on all these trends so you can do what you do best, run your franchise and take care of your customers and employees. •