Franchisee cut-backs in wake of minimum wage increase entirely predictable

The New Year rang in a minimum wage increase for Ontarians, as well as a double-double firestorm of controversy as many small and medium-sized businesses—particularly restaurant franchisees, who have borne the full brunt of the increase—took swift action to protect their bottom lines.

With the passage in the fall of Bill 148, The Fair Workplaces, Better Jobs Act, the province increased the minimum wage to $14 from $11.60 effective Jan. 1, 2018. The base hourly wage will jump again to $15 on Jan. 1, 2019. The legislation made other significant changes to Ontario’s labour and employment laws, including increasing paid vacation leave for employees with more than five years of continuous service with the same employer, and stiffening penalties for employee misclassification.

For those who haven’t been following the most recent developments—and I urge you to pay close attention to these changes and their fallout as they continue to unfold—here’s a brief recap:

Prior to the new minimum wage taking effect on Jan. 1, a Tim Hortons franchise in Cobourg, Ont., owned and operated Ron Joyce Jr. and Jeri Lynn Horton-Joyce—the children of Tim’s founders Ron Joyce and Tim Horton, respectively—sent a letter to staff indicating that their store would be eliminating paid breaks and cutting other employee benefits as the wage hike took hold.

Social media went apoplectic, patrons protested the owners’ seeming greed and even Premier Kathleen Wynne weighed in, accusing the Joyce’s and any other franchisees who follow their lead of ‘bullying’ employees.

Then news broke that other Tim Hortons franchisees were following suit. Then franchisees from across other chains, as well, as the chorus of SME owners voicing concern over the swiftness of the minimum wage hikes continued to swell. In the meantime, the government promised a crackdown on any employer who may have violated the Employment Standards Act to preserve profit margins, while also announcing that the minimum wage will now be indexed to inflation.

The reaction from across the small business community was entirely predictable. Increasing wages by more than 30 per cent in two years would place an onerous financial burden on any business, but even more so in the largely franchised food services industry where profit margins are razor thin.

According to the Great White North Franchisee Association—which represents the interests of more than 50 per cent of Tim Hortons franchisees in an ongoing dispute with the chain’s parent company Restaurant Brands International—the minimum wage changes will cost the average Tim’s franchise $243,889.10 per year.

According to the organization: “In conjunction with the minimum wage increase to $14.00, costs to the franchisee will also include: increases in CPP contributions, EI contributions, Employer Health Tax, Worker’s Compensation Board and Training (Safe Serve, First Aid, RBI, WSIB, etc.).  In addition to these costs, there will be added Vacation Pay, increased Statutory Holiday pay and Sick Leave Pay.”

Their calculations put the increased cost per full-time employee at $6,968.26 and assume an average of 35 employees per store.

There are other side effects from the minimum wage increase. Consider a more senior employee who had been earning $14 an hour prior to the base-wage bump. She has now been pushed back down to the bottom of the earnings food chain—and few employees aspire to earn only minimum wage.

As such, she will likely (and understandably) demand to be paid more in the near term to distinguish herself from less experienced or lower-skilled colleagues now earning the same, thus incurring added costs for her employer in the form of benefits, vacation pay and other entitlements as outlined by the GWNFA. Failure to give her an added raise over and above the minimum wage increase could lead to her seeking work elsewhere.

In other words, the general inflationary effect of a steep minimum wage increase is far more widespread than it first seems. Then there’s the fact that some organizations will undoubtedly cut staffing levels to reduce costs, sacrificing service and putting their businesses at further risk.

Even if some of these figures are inflated, the key takeaway is that small business owners are feeling a major impact from the increase to Ontario’s minimum wage. Many are struggling to avoid layoffs or even stave off bankruptcy as a result. Others are embracing the change, arguing that a higher, living wage helps to keep employees engaged. There’s no doubt that’s true, but a business must remain financially solvent to remain viable and keep its staff employed in the first place.

So, what’s a business owner to do? First, it’s important to understand that wages in Ontario will continue their upward climb. The best solution is to prepare. Work with your accountant and closely analyze your financial results on a more frequent basis—and I’d recommend that analysis take place at least monthly. Examine every single area of spending to see where you can reduce costs, and remember that price increases may be one of Bill 148’s inevitable, if unwelcome, ripple effects. Be prepared for pushback from customers by preparing communications that explain why an increase is in order, and deliver it in person or with a phone call if possible. In addition, keep a close eye on core financials and be prepared to act should they show signs of distress.

If you do make workplace changes, make sure you act carefully and avoid violating the province’s Employment Standards Act. Case in point: a car dealership  in Chatham, Ont., informed its casual drivers they would no longer be considered employees and would be paid on a per-trip basis for shuttling customers to and from the dealership. Whether the move violates the ESA—as mentioned, Bill 148 also cracks down on the misclassification of employees as contractors—remains to be seen. But that example only serves as a cautionary reminder to SMEs that new financial pressures don’t give license to test the limits of labour and employment legislation.

Whatever action your organization takes, be sure to communicate it clearly to employees. The last thing you need is to be forced into navigating a public relations disaster as you struggle to manage a raft of new financial challenges.

Lastly, act now. Don’t wait until it’s too late to look at your books and realize that your business is under overwhelming financial pressure. Implementing cost-savings measures immediately will save pain down the road—and may even help keep your business afloat in the process.

Stay tuned for more information from the KRP team as we outline some of the other significant, non-minimum wage-related changes contained in Bill 148 in the days ahead.

Marshall Egelnick, Managing Partner

Marshall Egelnick

905-946-1300, x. 226