The Unwanted Effects Facing Franchising as Overtime Regulations Threaten the Industry

In less than one week, voters will head to the polls to determine who will be the 45^th President of the United States. But no matter who wins a trip to the Oval Office—former Secretary of State Hillary Clinton or billionaire businessman Donald Trump—one thing is for sure: new overtime regulations are set to go into effect on December 1.

The change is part of an initiative led by President Barack Obama’s administration to extend overtime pay to 4.2 million Americans. The new rule doubles the maximum annual income a salaried worker can earn and still be automatically eligible for overtime pay. Right now, business owners are only required to pay overtime to their employees who work more than 40 hours a week and earn less than $23,660 annually. But as soon as December hits, that salary requirement jumps to $47,476.

The White House’s argument is that the new overtime regulations will ultimately put $12 billion back in Americans’ wallets over the course of the next 10 years. However, business organizations—like the International Franchise Association—are saying the opposite will come true. Their fear is that companies will be forced to cut wages and hours in order to be in compliance, and may even have to slow down their hiring processes.

Franchise brands across the country are backing the IFA’s stance and speaking out about the unwanted consequences that will come with new overtime regulations. Scott Gittrich, founder and CEO of Toppers Pizza*, says the new rule will ultimately harm around 100 managers and executives across the brand’s entire franchise system.

While Toppers will boost the base pay of employees who typically log more than 40 hours a week at the beginning of next month, the brand will need to find other ways to offset those costs. One obvious way to do that is to reduce or even eliminate their incentive compensation. That then leads to a smaller bottom line for individual employees when it comes to overall take-home pay.

“[Managers] were attracted to large incentive packages that gave them a sense of autonomy and an ability to control their own pay. It’s going to take away their flexibility,” Gittrich said in an interview with USA Today.

Management level employees aren’t the only ones who will be harmed by the new overtime regulations. Depending on how much franchisees will need to restructure their businesses to afford more overtime, consumers could even pay the price.

“When the price of labor goes up, someone has to absorb the cost. It isn’t that franchisees don’t want to pay their people well, they just have to figure out how to keep their business afloat. It’s tough enough being a small business owner without all of these additional government regulations,” said Lonnie Helgerson, president and franchise consultant of Helgerson Franchise Group. “No matter how you slice it, the cost has to go somewhere. And unfortunately, that burden most often falls on employees and consumers.”

Even though the new overtime regulations are going into effect regardless of who wins next Tuesday’s presidential election, the outcome of the race can still have an impact on future policies. Throughout the campaign season, Clinton has been vocal about her support for Obama’s rule. And despite the fact that Trump has remained silent on the issue, Republicans in Congress have made it clear that they’re not on board.

No matter what happens, the IFA is planning to continue fighting for the future of the proven franchising model that consistently grows at higher rates than small businesses operating outside of the industry.

In a press release, IFA president and CEO Robert Cresanti said, “Franchising is a unique business model that provides working Americans the change to operate and own a small business, yet government regulations like the new overtime rule are continuously jeopardizing this ladder of opportunity and stripping away employees’ ability to negotiate their future.”