Wages Are On The Rise:How Can Franchises Adapt?

Economic dynamics have compelled workers to demand wage increases across industries. But small business owners are often operating on tiny profit margins.

June 1, 2022

As the cost of living has soared, 30 states and Washington, D.C. have increased their minimum wage above the federal standard of $7.25. And some states, such as Washington, have doubled their minimum wage requirements. As of this writing, Washington State’s minimum wage is $14.49 while the City of Seattle has a minimum wage of $17.27 for large employers (501 or more workers) and $15.75 for small employers if they meet certain standards. But as inflation continues to press the finances of workers, employers can expect more living wage increases in the coming years.

Inflationary Forces Push Wages Upwards

The last federal minimum wage increase was in 2009. And while the federal minimum wage has remained steady for the past 13 years, the cost of living has increased 34.76 percent. This year alone, the inflation rate was 8.5% (from January to March); but the cost of certain necessities such as housing, food, and fuel have soared as much as 30% or 50%. As the price tag on everyday necessities goes up, workers are becoming more selective about which jobs they will take as fuel costs alone could quickly eat away at a minimum wage worker’s earnings.

This recent news report featured an Uber driver who quit his side-gig because he just wasn’t earning any money due to high fuel costs. According to the IRS, it costs approximately 58 cents a mile to drive while the average Uber driver earns only 67 cents per mile. Working as a driver on margins this thin leaves profits vulnerable to gas price spikes.

It’s also important to note that inflation is having a domino effect across sectors. Nationally, childcare costs have spiked 41% since the pandemic began. And rising rents and the need to pay teachers more just to retain them is driving that cost increase.

But the high cost-of-living pressure begins early for many workers. Even at the beginning of their careers, many college graduates are saddled with an average of $25,000 to $50,000 in student loans, with debt loads increasing for professions such as law and medicine. These educational debts can prevent workers from taking certain jobs if they don’t pay enough to service the debt and maintain a certain lifestyle. This means that employers who want to remain competitive must adjust their compensation packages to account for the cost-of-living and the average amount of student debt young workers will need to service.

These economic dynamics have compelled workers to demand wage increases across industries. But of course, on the other side of that equation are the business owners, especially small business owners who are often operating on tiny profit margins. It can be challenging to attract and retain quality workers unless you have the capital to invest in higher wages. However, there are ways small businesses can compete.

Understand The Playing Field

The first thing small businesses should understand is the true cost-of-living for their location. There are several cost-of-living calculators available but you should also do your own research. Expatistan is a good start as they provide a cost-of-living breakdown for a single person and a family of four. You will want to figure the average cost to rent or own a home in your city as well as the cost of utilities, taxes (sales, property, income, etc.), food, and transportation. Take into consideration how accessible public transportation is for your employees. It will cost more to drive than to take a bus or train to work. And you should also calculate the cost of housing within a 20 mile radius from your business as this is the housing your employees may find most desirable. Once you understand the true cost of living in your location, this will give you an idea of the minimum you can offer a worker and still consider that offer a living wage.

Consider Adding Perks

There are ways that employers can offset the cost-of-living by offering perks such as childcare. A 2010 Bright Horizons survey of 3100 parents found that parents with employers who provided onsite childcare were able to concentrate more at work and had a better work/life balance. And in a 2021 survey of 5000 employees, 56% of parents surveyed ranked childcare benefits as more important than gym memberships, mental wellbeing programs and parental leave pay. If employers are located in a building with other businesses, pooling the resources of multiple businesses to provide onsite childcare could prove to be a win-win situation for everyone.

If the cost of housing and fuel are high in your city, you might want to consider providing a no-cost shuttle bus service to employees. Companies such as Google, Apple, and Facebook offer free shuttles for their employers and the impact on morale is notable. But even providing free monthly bus passes (in a city with good public transportation) can go a long way in saving your employees money and making them feel like they are being taken care of.

If you don’t have the cash to offer employees increased wages or perks to beat inflation, consider offering them the gift of time and autonomy. With the exception of in-person service workers such as waiters and cashiers at restaurants, many workers can complete their work tasks remotely. According to a study cited in the Harvard Business Review, knowledge workers are more productive working from home, at least in the short-term.

Implement A Wage Inflation Plan

Unless something catastrophic happens (such as deflation), wages will continue to go up across the board. If the minimum wage goes up, you will need to also pay other workers more money. The best way to adjust to this upward trend in wages is to include in your business plan a way to increase all wages systematically year-over-year. Preferably, wage increases should account for cost-of-living inflation and increases based on employee performance. But to maintain this kind of system you will need to systematically grow the size of your revenue and the number of revenue pipelines. Easier said than done? True. But if you fail to keep up with the demand for higher wages, you will struggle to remain competitive and relevant as you lose access to the best workers in your field. There’s an excellent article about how innovation can help businesses grow. A couple of key points to consider when trying to adapt to wage increases:

  • Adjust the prices of your products and services. Every business must keep their finger on the pulse of business costs. As costs increase you should immediately increase the cost of your product or service.
  • Add value to your product or service. Every business should always be improving their product/service and adding value constantly BEFORE price increases. If you have a business culture of adding value to your products or services, price increases rarely come as a shock to the consumer. They already know they’re getting more than what they’re paying for.

Higher Wages Can Be Good

Many employers feel despair at the increased cost of hiring and maintaining workers, but there is another way to look at it. Higher wages can be a good thing for businesses. In 2018, a Chick-fil-A franchisee raised employee wages to $17 an hour. Some people thought he was bonkers for doing that while others were certain his business would implode. But what the Chick-fil-A owner discovered, after implementing a living wage, was that he increased his retention rate to 76% in an industry that has a turnover rate of 150%. And then he went from $5 million in revenue to $11 million in revenue. He could keep employees longer and reduce the cost of hiring new people. And he improved the customer experience because the workers became invested in their jobs. His story is one that every business owner should consider as more workers demand and get higher wages.

West Coast Franchise Law

If you have any questions about franchising, please contact the experienced franchise and business law attorneys at West Coast Franchise Law today at (206) 903-0401 to discuss your situation. Nate Riordan is a 2023 Franchise and Bankruptcy Super Lawyer with over 20 years expertise helping clients achieve their business goals.