New York Supreme Court

Transcription

1 Case No Submitted by: JOSHUA B. WAXMAN New York Supreme Court Appellate Division Third Department In the Matter of the Petition of NATIONAL RESTAURANT ASSOCIATION, against Petitioner-Appellant, THE COMMISSIONER OF LABOR, and Respondent-Respondent, ALVIN MAJOR, REBECCA CORNICK, FLAVIA CABRAL, JOREL WARE and JACQUIE JORDAN, Intervenors-Respondents. BRIEF OF AMICUS CURIAE NATIONAL FEDERATION OF INDEPENDENT BUSINESS and THE INTERNATIONAL FRANCHISE ASSOCIATION LITTLER MENDELSON P.C. Michael J. Lotito 650 California Street San Francisco, CA (415) LITTLER MENDELSON P.C. Joshua B. Waxman S. Libby Henninger 815 Connecticut Avenue, NW Suite 400 Washington, D.C (202) Attorneys for National Federation of Independent Business and The International Franchise Association Industrial Board of Appeals Docket No. WB

2 TABLE OF CONTENTS Page TABLE OF AUTHORITIES... ii I. INTRODUCTION... 1 II. STATEMENT OF INTEREST... 3 A. THE NFIB... 3 B. THE IFA... 4 III. ARGUMENT... 5 A. THE WAGE ORDER UNFAIRLY TARGETS SMALL BUSINESS... 5 B. THE COMMISSIONER S ORDER IS ARBITRARY AND LACKS ANY EVIDENTIARY SUPPORT... 8 C. IMPOSING A HIGHER MINIMUM WAGE ON EMPLOYERS AFFILIATED WITH OUT-OF-STATE COMPANIES IS DISCRIMINATORY AND VIOLATES THE COMMERCE CLAUSE IV. CONCLUSION i

3 Cases: TABLE OF AUTHORITIES Page C & A Carbone, Inc. v. Town of Clarkstown, N.Y., 511 U.S. 383 (1994) Comptroller of Treasury of Maryland v. Wynne, 135 S. Ct (2015) Dean Milk Co. v. City of Madison, 340 U.S. 349 (1951) Fulton Corp. v. Faulkner, 516 U.S. 325 (1996)... 12, 13 Homier Distrib. Co. v. City of Albany, 90 N.Y.2d 153 (1997)... 12, 13 Hunt v. Washington State Apple Advertising Comm n, 432 U.S. 333 (1977)... 11, 13 Integrated Beverage Grp. Ltd. v. N.Y. State Liquor Auth., 6 Misc. 3d 638 (Sup. Ct. N.Y. Cnty. 2004), aff d, 27 A.D.3d 159 (1st Dep t 2006), aff d, 6 N.Y.3d 883 (2006) Pike v. Bruce Church, Inc., 397 U.S. 137 (1970) W. Lynn Creamery, Inc. v. Healy, 512 U.S. 186 (1994)... 12, 14 Statutes: 13 C.F.R Other Authorities: Employment Policies Institute, Measuring the Cost of a Higher Minimum Wage for New York s Fast Food Restaurants, June 2015, at 3-4, uploads/2015/06/ny_minwage21.pdf Report of the Fast Food Wage Board to the NYS Commissioner of Labor at , 10, 11, ii

4 SUPREME COURT OF THE STATE OF NEW YORK APPELLATE DIVISION: THIRD JUDICIAL DEPARTMENT NATIONAL RESTAURANT ASSOCIATION, -against- Petitioner-Appellant, THE COMMISSIONER OF LABOR, Docket No BRIEF OF AMICI CURIAE NATIONAL FEDERATION OF INDEPENDENT BUSINESS AND THE INTERNATIONAL FRANCHISE ASSOCIATION Respondent-Respondent. I. INTRODUCTION The National Federation of Independent Business ( NFIB ) and the International Franchise Association ( IFA ) (collectively referred to as the amici ), respectfully submit this joint amicus brief in support of Petitioner- Appellant National Restaurant Association s appeal of the State of New York Industrial Board of Appeals ( IBA ) Order confirming the Labor Commissioner s unprecedented Wage Order raising the minimum wage for a sub-sect of employers in the fast food industry to $15 per hour. In an artifice created by the 2015 Fast Food Wage Board ( Wage Board ), the Wage Order applies to a Fast Food Establishment which is: any establishment in the state of New York: (a) which has a primary purpose of serving food and drink items; (b) where patrons order or select items and pay before eating and such items may be consumed on the premises, taken out, or delivered to the customer s location; (c) which offers

5 limited service; (d) which is part of a chain; and (e) which is one of thirty (30) or more establishments nationally, including: (i) an integrated enterprise which owns or operates thirty (30) or more such establishments in the aggregate nationally; or (ii) an establishment operated pursuant to a Franchise where the Franchisor and the Franchisee(s) of such Franchisor owns or operate thirty (30) or more such establishments in the aggregate nationally. (Order of Acting Commissioner of Labor Mario J. Musolino on the Report and Recommendations of the 2015 Fast Food Wage Board, September 10, 2015 ( Wage Order ).) The decision to exponentially increase the minimum wage for only a portion of employees working in the fast food industry violates both state law and the United States Constitution. First, the Wage Order improperly targets small businesses. Second, there is entirely no evidentiary support for the Wage Board s arbitrary decision to apply an increased minimum to only certain fast food establishments, thus the Wage Order is contrary to law. Third, the mandate of an increased minimum wage upon franchisees discriminates against businesses operating in interstate commerce in violation of the Commerce Clause. For these reasons, the Court should vacate the decision rendered by the IBA and the Wage Order should be invalidated. -2-

6 II. STATEMENT OF INTEREST The National Federation of Independent Business and the International Franchise Association each represent employers operating quick service restaurants ( QSRs ) in the State of New York who are impacted by the Wage Order. Many of the NFIB s and the IFA s effected members are local franchise business owners who operate under the banner of well-known national brands. These franchisees pay up-front fees and ongoing royalties in exchange for the licensed use of brands, trademarks and general business methods. Franchisees are legally separate entities from franchisors. Despite operating under nationwide brands, local franchise QSR employers are small business owners functioning on incredibly narrow profit margins and unrelenting competition. Subjecting these businesses to an exponentially increased minimum wage which other local businesses are not required to incur jeopardizes the solvency of these small businesses. A. THE NFIB The NFIB is the nation s leading association of small businesses and has a presence in all 50 States and the District of Columbia, representing businesses in all aspects of industry including impacted fast food employers in New York. A nonprofit, nonpartisan organization founded in 1943, NFIB represents the consensus views of its 350,000 member businesses nationwide. While NFIB -3-

7 members range from sole proprietor enterprises to firms with hundreds of employees, the typical NFIB member has ten employees and reports gross annual sales of approximately $500,000 per year. 1 B. THE IFA The IFA represents a membership that includes franchise companies in over 300 different business format categories, individual franchisees, and companies that support the industry in marketing, law, technology, and business development. The IFA s mission is to protect, enhance, and promote franchising. The IFA works through its government relations and public policy, media relations, and educational programs to further the interests of over 780,000 franchise establishments that support nearly 8.9 million direct jobs, $890 billion of economic output for the U.S. economy, and 3 percent of the Gross Domestic Product. The IFA s members operate in all 50 states and in all facets of industry including in the fast food industry in New York. Most franchisees are small businesses, without human resources departments or in-house legal counsel. They rely upon information and support provided by the IFA and other resources. 2 1 See 2 See -4-

8 III. ARGUMENT A. THE WAGE ORDER UNFAIRLY TARGETS SMALL BUSINESS Franchise businesses benefit consumers by ensuring access to high quality products and services across the franchise brand. Franchising also benefits the economy. The franchise business model serves as an engine for growth and job creation in New York. New York State has over 15,000 franchises operating in all business sectors. Over half of those franchises are in the restaurant and QSR sector. The Wage Order unfairly targets franchisees by including under the definition of Fast Food Establishment an establishment operated pursuant to a Franchise where the Franchisor and Franchisee(s) of such Franchisor owns or operate thirty (30) or more such establishments in the aggregate nationally. (Wage Order). According to the Wage Order, a franchisee is defined as a person or entity to whom a franchise granted. Id. The result of this definition is that a small business who owns one franchise in New York will be unfairly subject to the increased minimum wage merely because it associates with a nationwide brand. The Wage Board justified this subjective distinction by indicating that chains with 30 or more locations nationally can absorb the detrimental impact of a $15 per hour minimum wage because chains of that size are better equipped to -5-

9 absorb a wage increase due to greater operational and financial resources, and brand recognition. (See Report of the Fast Food Wage Board to the NYS Commissioner of Labor at 19) ( Report )). Aggregating coverage under the Wage Order by including all franchise establishments, regardless of ownership, inequitably attacks small businesses and ignores the reality of the business model. In premising their recommendation as though all franchised corporations constitute a sole enterprise, the Wage Board seemingly failed to consider the fact that the franchisor and franchisee are separate, independent companies. The U.S. Small Business Administration recognizes that a franchisee and its franchisor are separate and independent corporate entities absent common ownership or management. 3 Franchisees are just like other small business owners. They oversee all the day-to-day operations of their business, make all their own labor and employment decisions, including hiring, firing, and how much to pay their employees. They pay all the rent, taxes and financing costs. Nothing in this business model suggests that these small independent business owners have a greater ability to absorb a wage increase than other similarly situated businesses. 3 The restraints imposed on a franchisee or licensee by its franchise or license agreement relating to standardized quality, advertising, accounting format and other similar provisions, generally will not be considered in determining whether the franchisor or licensor is affiliated with the franchisee or licensee provided the franchisee or licensee has the right to profit from its efforts and bears the risk of loss commensurate with ownership. Affiliation may arise, however, through other means, such as common ownership, common management or excessive restrictions upon the sale of the franchise interest. 13 C.F.R

10 The sole distinction between a franchisee and other small businesses is that they license the franchisor s brand and business model. However, while the Wage Board concluded that franchise businesses are in a better position to bear the higher minimum wage because a franchise has a presold customer base, shared marketing, a developed and tested franchise system for operating and distributing goods, economies of scale, and training and software support, it entirely failed to consider that these benefits are not free. The Wage Board did not consider the additional costs that a franchisee pays to receive the same franchise benefits it touted as factors in determining that franchisees can afford to incur higher wage costs than other non-franchised businesses. Indeed, a franchisor licenses its trademarks and proven business methods in exchange for a licensing fee from the franchisee. Now, in addition to those franchise fees, these small businesses will also be faced with disproportionately higher labor costs. These businesses operate on razor-thin margins. As an extensive survey of New York QSR owners released in 2015 by the Employment Policies Institute ( EPI ) indicates, 81 percent of QSR restaurants earn profits of four percent or less of annual revenues. 4 Since labor costs already amount to 30 percent of a QSR s expenses, significantly increasing 4 Employment Policies Institute, Measuring the Cost of a Higher Minimum Wage for New York s Fast Food Restaurants, June 2015, at 3-4, -7-

11 this cost as the Wage Order does will effectively drive many small franchisees out of business. If they do stay in business, small franchisees will be placed at an unfair competitive disadvantage. They will be forced to raise prices, reduce employees, or lower the quality of their goods and services to comply with the increased labor costs as compared to other non-qsr and non-franchise businesses. Some small New York franchisees will not survive this increased competition. Franchise owners may not open new locations in New York and it will adversely impact the value of franchisee s businesses. Overall, the implementation of an increased minimum wage that unfairly attacks small businesses will create significant barriers to food and restaurant franchises in New York State. This discriminatory practice unfairly increases the cost on businesses that simply cannot bear them. Franchise owners are not seeking more favorable treatment, just equal treatment. Such disparate treatment is contrary to law and should not be permitted. B. THE COMMISSIONER S ORDER IS ARBITRARY AND LACKS ANY EVIDENTIARY SUPPORT The Commissioner s Wage Order, adopting the recommendations of the Wage Board was rendered arbitrarily and capriciously, without underlying record support. A Wage Order is contrary to law and therefore invalid if it is unsupported by the record or based upon speculation. See Integrated Beverage -8-

12 Grp. Ltd. v. N.Y. State Liquor Auth., 6 Misc. 3d 638, 640 (Sup. Ct. N.Y. Cnty. 2004), aff d, 27 A.D.3d 159 (1st Dep t 2006), aff d, 6 N.Y.3d 883 (2006). Here, in reaching its recommendations, the Wage Board cited to no empirical evidence establishing why a fast food establishment operating more than 30 locations is situated differently from one with less than 30 locations. Indeed, in drawing this line in the sand, the Wage Board appeared to haphazardly land on the threshold of 30 locations nationwide. As the Commissioner of Labor stated, there s not going to be an answer that says why [you would] choose thirty versus twenty-nine versus thirty-one. There s no answer to that (See Transcript of IBA Review Hearing, November 19, 2015, at 41:19-21). The Commissioner could not provide an answer because none was proffered by the Wage Board. Moreover, the Wage Board provided no evidence that fast food establishments with 30 or more locations nationwide are any better situated to support the imposition of such as significant wage increase. In particular, there was no information provided differentiating the nature or value of the work performed by employees at a fast food chain that has more than 30 locations versus one with less than 30. The Wage Board utterly failed to justify why an owner of one nationwide franchise in New York should bear the increased labor cost -9-

13 associated with a $15 per hour minimum wage while an owner of 29 fast food restaurants in New York not affiliated with a national chain should not. Finally, aside from perfunctory statements expounding the advantages purportedly afforded to franchise owners, there is no record support for imposing a differential wage rate upon small business franchise owners that are not subjected upon non-franchisees. In disregarding statements made by franchisee owners of thin margin, the Wage Board instead cited to certain structural and economic advantages franchisees have over traditional businesses. (See Report at 18). However, as discussed above, the Wage Board failed to consider the significant initial and on-going costs franchise owners incur in exchange for these benefits. This lack of consideration highlights the unsupported attack upon the franchise model that was mounted in the Wage Board s recommendations and report. Overall, the arbitrary and speculator nature of the decision that was reached setting a minimum wage rate for fast food establishments of 30 or more nationwide invalidates the Wage Order. C. IMPOSING A HIGHER MINIMUM WAGE ON EMPLOYERS AFFILIATED WITH OUT-OF-STATE COMPANIES IS DISCRIMINATORY AND VIOLATES THE COMMERCE CLAUSE The Wage Order unconstitutionally imposes a $15 an hour minimum wage requirement upon out-of-state businesses or businesses associated with out-of-state businesses. In expanding the Wage Order to franchises with 30 or more -10-

14 establishments nationwide, the Wage Board concluded that franchisees enjoy structural and economic advantages over traditional small businesses because of their ties to large corporations. (Report at 18). Based upon this pronouncement, the Wage Board recommended that the $15 wage rate be applicable only to fast food chains with 30 or more locations nationally, since chains of this size are better equipped to absorb a wage increase due to greater operational and financial resources, and brand recognition. (Report at 19). However, the definition makes clear that the minimum wage rates also apply to any single franchisee, so long as the franchise brand operates more than 30 establishments nationally. (Report at 21). The Commissioner adopted this recommendation when he issued the Wage Order. The dormant Commerce Clause prohibits a state government from enforcing regulations that unjustifiably discriminate against interstate commerce. Pike v. Bruce Church, Inc. 397 U.S. 137 (1970); Hunt v. Washington State Apple Advertising Comm n, 432 U.S. 333 (1977). This provision precludes states from discriminating between transactions on the basis of some interstate element. Comptroller of Treasury of Maryland v. Wynne, 135 S. Ct. 1787, 1790 (2015). The Commerce Clause limits the power of the State of New York to adopt regulations that discriminate against interstate commerce. This negative aspect of the Commerce Clause prohibits economic protectionism, or regulatory measures -11-

15 designed to benefit in-state economic interests by burdening out-of-state competitors. W. Lynn Creamery, Inc. v. Healy, 512 U.S. 186, 192 (1994). In evaluating state regulatory measures under the dormant Commerce Clause, the first step is to determine whether it regulates evenhandedly with only incidental effects on interstate commerce, or discriminates against interstate commerce. Fulton Corp. v. Faulkner, 516 U.S. 325, 331 (1996). Very few, if any, businesses operating only in New York will meet the definition of a Fast Food Establishment. As the Wage Board indicated, nine out of ten fast food chains in New York are franchised. (Report at 7). Overwhelmingly, the businesses identified by the Wage Board as Fast Food Chains in New York State with 30 or More Locations Nationwide as of 2014 are based outside of New York, have contracts with franchise businesses outside New York State, and/or operate other establishments outside of New York. (Report at 22-23). It is clear from the Wage Board s report and recommendations that it intends interstate franchise businesses, and those businesses affiliated with interstate franchise businesses, to bear a greater economic burden of an increased minimum wage rate as compared to similarly situated New York businesses. When the class of favored business includes only locals, the ordinance cannot be considered even-handed and is, therefore, invalid under the Commerce Clause. Homier Distrib. Co. v. City of Albany, 90 N.Y.2d 153, 159 (1997). As the -12-

16 Wage Order targets a business model almost entirely confined to interstate commerce, subjecting these businesses to an increased burden, it is discriminatory on its face. Such facially discriminatory state regulations are virtually per se invalid. Fulton Corp., 516 U.S. at 331 (1996) (citations omitted); Homier Distrib. Co., 90 N.Y.2d at 159. Thus, the impact of the Wage Order is that out-of-state businesses and those who affiliate with these businesses are required to pay a higher wage to their employees, a burden not imposed on local New York businesses. 5 Local businesses operating less than 30 establishments will not be required to pay the increased minimum wage rate. By contrast, those businesses operating less than 30 establishments in New York, but more than 30 on an interstate basis or with ties to interstate businesses will face the increased economic burden. Thus, the Wage Order has the practical effect of not only burdening interstate business and franchise operations, but also discriminating against them. See Hunt, 432 U.S. at 350. A state cannot discriminate against interstate commerce, even in the exercise of its power to protect health and safety, if reasonable and nondiscriminatory alternatives adequate to conserve legitimate local interests are available. See Dean Milk Co. v. City of Madison, 340 U.S. 349 (1951); Hunt, 432 U.S. at 353. Here, 5 The fact that some New York businesses also fall under the same provisions that discriminate against interstate commerce is immaterial to this analysis. See C & A Carbone, Inc. v. Town of Clarkstown, N.Y., 511 U.S. 383, 391 (1994). -13-

17 there are clear nondiscriminatory solutions available that do not unfairly burden businesses operating in interstate commerce. This differential minimum wage requirement, based solely on whether a business operates interstate, or affiliates with a business operating interstate, essentially creates a tariff on interstate commerce. Requiring a small business to pay a tariff based on its affiliations with out-of-state entities and interstate franchise networks is the paradigmatic example of a law discriminating against interstate commerce. W. Lynn Creamery, Inc., 512 U.S. at 193. That the ordinance disadvantages franchises, franchisees and interstate businesses through a minimum wage and not a direct tariff does not change the analysis. Laws having the same effect as a tariff have long been recognized as violative of the Commerce Clause. Id. at Commerce Clause jurisprudence is not so rigid as to be controlled by the form by which a State erects barriers to commerce. Id. at 201. Here, the Wage Order s impact of de facto instituting a tax in the form of a higher minimum wage upon franchisees affiliated with an interstate company results in a disproportionate and unconstitutional economic burden. Accordingly, the Wage Order should be vacated because it improperly discriminates against businesses operating in interstate commerce, in violation of the Commerce Clause. -14-

18 IV. CONCLUSION For the foregoing reasons, the Court should vacate the IBA s Resolution of Decision and Order and invalidate the Wage Order. -15-

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