Why the Courts Won’t Save Fast Food Companies From the $15 Minimum Wage

By Matt Trip; illustration by Greg Wilson

How pending litigation in Seattle could impact the future of Fight for $15.

July marked another victory for the Fight for $15 labor movement, with New York’s Fast Food Wage Board recommending a mandatory minimum wage increase to $15 per hour for all New Yorkers working for major fast-food chains — those with 30 or more locations in the state. The law would be phased in over the next six years, and when all is said and done, it would increase the current minimum wage by more than 70 percent. New York Governor Andrew Cuomo, under whose authority the Wage Board was convened, made no bones about the proposed law directly targeting the fast-food industry: He noted the fast-food sector is the largest employer of low-wage workers and, notwithstanding billion-dollar profits, “nowhere is the income gap more extreme and obnoxious than in the fast-food industry.”

If New York’s Labor Commissioner accepts the recommendation, New York will join Seattle, San Francisco, and Los Angeles as one of the few places in America where fast-food workers are paid $15 per hour. Both the New York proposal and Seattle’s ordinance specifically target fast-food restaurants, albeit in slightly different ways. While Seattle’s ordinance merely requires large fast-food chains to begin paying the $15 per hour minimum wage sooner than independent businesses, the New York proposal applies exclusively to large fast-food chains.

The outcome of the Seattle lawsuit may very well determine the future of the Fight for $15 movements.

Not surprisingly, the fast-food industry is doggedly resisting the wage increases. The Seattle ordinance was challenged in court within a week of its enactment, and some New York franchise owners are already contemplating a lawsuit if the state passes the recommended wage hike. This raises an obvious question: Who’s going to win, workers or fast-food corporations?

The answer can likely be found in the lawsuit surrounding Seattle’s ordinance, which is the paradigm case in this most recent installment in the Fight for $15. The Seattle lawsuit represents the primary legal arguments the fast-food industry will likely rely on when it challenges local minimum wage increases elsewhere. As a result, the outcome of that suit will not only predict the likelihood of New York franchisees’ success if they decide to sue; it may also very well determine the future of the Fight for $15 movement.

The Franchise Business Model

Before digging into fast-food’s minimum wage lawsuits, it’s important to define fast-food’s most common business structure — the franchise. Sometimes simply referred to as a chain, a franchise is a business structure in which a large business (the franchisor) contracts with smaller businesses (the franchisees) to open outlets and sell the franchisor’s brand of products. Many of the larger fast-food franchises, such as McDonald’s, Burger King, KFC, and Subway, have outlets throughout the nation and even the entire world.

Generally, each franchisee is independently owned and operated. Fast-food workers are typically considered employees of the franchisee and not the franchisor. Thus, franchisees are responsible for paying their own labor costs. And therein lies the rub — the fast-food industry argues that fast-food franchises are virtually indistinguishable from small, locally-owned restaurants, and thus, should be treated the same. But that’s not the case under either the Seattle ordinance or the New York proposal, both of which consider the number of employees and outlets associated with the franchise — as a whole — in determining whether fast-food chains are small businesses that qualify for preferable treatment under the law.

The Seattle Ordinance

Seattle enacted its $15 per hour minimum wage ordinance in June 2014, and it distinguishes between local outposts of large franchises — those employing more than 500 employees nationwide — and small mom-and-pop-shops. The two different kinds of businesses have different grace periods to adjust to the increased labor costs: Large Seattle franchisees must begin paying the $15 per hour minimum wage by 2017, while “smaller businesses” have until 2021 to meet the $15 mark. Seattle justifies the ordinance’s different treatment of large franchises on the grounds that they have greater resources than small business, and as a result, are capable of coming into compliance with the ordinance in a shorter period of time.

More: Seattle’s $15 Minimum Wage Law, Explained

But the International Franchise Association (IFA) and a group of five individual franchisee owners and managers quickly responded by filing suit against the city (.pdf). The crux of IFA’s claims against Seattle is that the city’s new ordinance unconstitutionally discriminates against large franchises by requiring franchisees to come into compliance with the ordinance more quickly than small, locally-owned business. This type of discrimination, where the government treats some types of businesses differently than others, is sometimes termed “economic discrimination.”

At the outset of the case, IFA requested a preliminary injunction: It asked the court to prohibit Seattle from enforcing the ordinance’s three-year compliance period against franchises until the discrimination case was resolved. In order to determine whether a preliminary injunction was warranted, the court assessed the likelihood of IFA succeeding on its constitutional claims — it ultimately determined that IFA was unlikely to succeed on its claims at trial, and it therefore refused to grant the injunction. Importantly, the court did not actually decide the case in ruling on IFA’s request; the case is still very much alive. However, the court’s denial of the injunction is supported by a bevy of case law rejecting claims of economic discrimination. Such claims are generally rooted in two provisions of the United States Constitution: the Equal Protection Clause of the Fourteenth Amendment and the Dormant Commerce Clause. IFA argues that Seattle’s ordinance violates both constitutional provisions, but the court disagrees:

Provision One: The Equal Protection Clause

The Fourteenth Amendment Equal Protection Clause was adopted in 1868 largely to prevent discrimination against individuals — in this case, newly-freed slaves. Since its enactment, the Clause has been properly extended to protect individuals and corporations against other forms of discrimination, including discrimination based on gender, alienage and nationality, and most recently, sexual orientation. Although the application of the Equal Protection Clause is not necessarily limited to only these groups, courts are extremely reluctant to extend the Clause’s protections much further. And nowhere is this reluctance stronger than in cases of alleged economic discrimination.

The Equal Protection Clause allows laws that discriminate along economic lines, as long as there is some “rational basis” for the law. Although the term “rational basis” looks innocuous, it can actually be understood as the atomic bomb of constitutional law, typically destroying all of the plaintiff’s claims. Laws that discriminate on the basis of economics will always be upheld if there is any conceivable basis for its existence. In a famous 1981 case, the United States Supreme Court applied rational basis review to a Minnesota law that prohibited the sale of milk in certain types of plastic containers. The Minnesota legislature claimed the law was meant to protect the environment, but the dairy industry presented “impressive supporting evidence” that the law would actually hurt the environment. The law was nevertheless upheld because, as the Court put it, under rational basis review, “States are not required to convince the courts of the correctness of their legislative judgments.”

It therefore comes as no surprise that the Seattle court rejected IFA’s Equal Protection argument. The court acknowledged the similarities between franchisees and small, locally-owned business but focused more heavily on several important distinctions between the two types of businesses. Unlike other business entities, franchisees benefit from their franchisors’ trademarks, national advertising, market power, and trade secrets. With these distinctions in mind, the court determined that Seattle’s ordinance is constitutional because the city can reasonably expect franchises to capable of coming into compliance with the ordinance more rapidly.

Provision Two: The Dormant Commerce Clause

IFA did not fare any better under its Dormant Commerce Clause argument. The Dormant Commerce Clause is aimed at prohibiting state and local governments from engaging in economic protectionism: If a local law directly discriminates against out-of-state businesses, it will almost always be constitutionally invalid. If the law instead only imposes an incidental burden on interstate commerce, it will be upheld as long as the burden is not clearly excessive in relation to the law’s purpose.

Seattle’s ordinance applies to all businesses, regardless of where they are headquartered: a Seattle-based franchise is treated the same under the city’s minimum wage ordinance as a Delaware-based franchise. But IFA argues that because over 96 percent of the franchises operating in Seattle are in fact out-of-state businesses, the ordinance directly discriminates against interstate commerce.

The judge’s denial suggests that the fast-food industry will ultimately lose.

However, the court determined that even this enormous disparity in the number of in-state versus out-of-state franchises is insufficient to establish direct discrimination. Furthermore, the court held that any burden imposed on interstate commerce by Seattle’s minimum wage ordinance is not clearly excessive in relation to the ordinance’s vital purpose, which is to give workers a means to support themselves without relying on state social services.

The New York Proposal

So what does all this mean for New York’s proposal? Not surprisingly, fast-food industry attorneys told NBC News that a lawsuit challenging the New York law would be based on the same economic discrimination arguments raised in the Seattle case. Again, the Seattle case is still working its way through the courts, currently pending appeal in the 9th Circuit. But the judge’s denial of IFA’s request for a preliminary injunction suggests that the fast-food industry will ultimately lose.

There is no reason to suspect that constitutional challenges to the New York proposal, should it become law, would come out any differently. The constitutionality of economic discrimination is deep-rooted in Supreme Court precedent, and trial courts have no choice but to stay the course. Furthermore, recent history suggests that New York trial courts are particularly quick to strike down exploitative labor practices.

It could take years for these cases to work their way through the courts. In the meantime, it appears the fast-food industry will continue to pay workers low wages, reap record profits, and allocate a portion of those profits to litigation aimed at stymieing efforts to obtain a livable wage for the industry’s workers.