Laboring Toward an Uncertain Future: How Growing Labor Costs Could Impact Franchising in 2016

Dear Franchise Owners:

I regret to inform you that I am the bearer of bad news. As you’ve probably suspected by now, labor costs are on the rise. And, consequently, your bottom line is on the decline.

No surprise, right?

Of course, labor costs are headed up (when aren’t they?). Of course, it will impact your bottom line. Of course, you’re not happy about it.

And, of course, I jest. None of this is new to you. But, what may be new is the reason why. This year, the franchise industry stands at a new type of crossroads: the intersection of Affordable Care Act Avenue and Substantially Higher Wages Way.

Benefits expand in 2016 under the ACA, and, for most, this is likely to be the most expensive year for compliance yet. Fines for the uninsured are set to nearly double. Taxpayers without insurance will now pay $695 or 2.5 percent of modified adjusted gross income (MAGI), compared to $325 last year. That means all of those healthy young adults that were holding out are likely going to be signing up. Healthy workers are good workers, but employers will now feel the full effects of the employer mandate.

Under these changes, employers must provide plan options that cover 60 percent of allowed medical costs for full-time employees (FTEs) and their children (26 and under) as well as subsidize any cost over 9.5 percent of MAGI. Companies with more than 50 FTEs must offer coverage for 95 percent of FTEs. All of that will be amplified by insurers, who have already announced plans to raise rates by double digits—some by as much as 52 percent.

“Simply understanding the impact of the ACA can be a challenge in and of itself,” said Nader Masadeh, President & CEO of Buffalo Wings & Rings. “Corporately, the initial requirements of the law didn’t impact us that much. We’ve always offered strong healthcare coverage to our employees. But, at a franchise level, it’s a different story. There is a lack of understanding of the changing requirements from franchisees, and they’re constantly calling for help from us for guidance. With another round of changes happening now, I expect that will only grow as we move through 2016.”

It’s a tough pill to swallow for some franchisors, made even tougher by the prospect that wages are highly unlikely to stay static for much longer. The “fight for $15” has been highly publicized in markets across the country and wage boards are growing more confident by the month that they can boost minimums, despite an onslaught of anti-business and anti-inclusionary arguments that seem to increasingly fall on deaf ears.

“It hasn’t affected our system directly yet, but it is affecting the industry as a whole,” Masadeh said. “I expect that it won’t be long before wages are boosted nationwide. And, it will likely result in short term pain for some franchisors. But, I think of it like I think of gas prices. When prices went up to $3 then $4 per gallon, people did start traveling less at first. But, then those prices became the new normal, and people adjusted their budgets accordingly. The key to weathering all of that is to plan ahead as a franchisor, and expect that change will come.”

Still, even if those storms can be weathered, some franchisors and franchisees alike are finding their most pressing issue is simply hiring enough qualified staff. As the economy’s health continues to improve and hiring continues to expand across a wide variety of industries, there are fewer and fewer workers to staff the scores of new franchises being added each year. A growing number of restaurants, for instance, are finding it necessary to pay beyond the minimum, provide stronger benefits and more transparent career paths to get qualified candidates in the door and then engaged with the company.

“Finding qualified, trained watchmakers and jewelry repair technicians is harder now than it’s ever been before,” said Gerry Weber, CEO of Fast-Fix Jewelry & Watch Repair, the nation’s largest and most successful franchise of its kind with more than 150 locations in the U.S., U.K. and Ireland. “The notion of trade schools has all but disappeared in the U.S. because there is an expectation with parents that their children will go to college. We’re working to combat that by working with for-profit schools across the country to develop a jeweler/watchmaker curriculum. But, in the meantime, we are forced to look outside the borders to ensure we’re employing the highest quality craftsmen in our stores. That does allow us to provide quality employment opportunities for immigrants who find a better life here. But, the downside is: it makes employment a far more difficult process for us, because we’re not willing to compromise on quality.”

“The additional challenge is retaining those quality employees once they are hired,” agreed Masadeh, of Buffalo Wings & Rings. “You have to plan carefully to create the right kind of competitive environment. The values we’ve built Buffalo Wings & Rings on help sell our brand as an experience to both employees and potential franchisees, and those values are more important now than they might have been to previous generations who simply took a job in order to be employed. That gives us a built-in advantage on a very competitive playing field.”

After more than a decade of experience solving a wide variety of labor challenges, Masadeh says the key to strong growth in the environment franchising now faces is a long-term plan.