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Chicago City Council Squeezes Big-Box Retailers

Chicago Alderman Joe Moore isn't happy about Wal-Mart setting up shop in his neighborhood--the 49th Ward--on the city's far North Side.

The company has a reputation for paying new employees about $7.25 an hour, a wage level Moore says is insufficient for his constituents. To minimize the potential economic harm of Wal-Mart's descent on the city, Moore decided to lobby the City Council to take action. In April 2005 he drafted the first version of what was to become one of the most highly contentious city ordinances of 2006.

The ordinance mandates that "big-box" retailers--stores with at least 90,000 square feet that are owned by a business with at least $1 billion in annual sales--must pay their employees $9.25 an hour plus $1.50 an hour in benefits. If the City Council passes the ordinance, it will go into effect July 1, 2007.

This proposed ordinance is part of a growing trend of cities and municipalities trying to regulate big-box retailers. But whether ordinances that single out a certain type of company can survive judicial scrutiny remains to be seen.

"It could be an uphill battle to uphold the ordinance, but I certainly think it would be a spirited debate," says John Kuenstler, a labor and employment partner at Barnes & Thornburg in Chicago. "This fight will be very closely watched."

Retail Wars

Ordinances mandating wages above the federal minimum wage aren't anything new, and indeed have passed courtroom tests in the past. In February 2004, for example, San Francisco introduced a statute that forced companies to pay employees who worked at least two hours a week a minimum wage of $8.50.

"Other municipalities have had ordinances [similar to Chicago's]," Kuenstler says. "However, in those cases the laws apply to all businesses or are tied to businesses that have contracts with municipalities or states or that have been receiving certain incentives."

The Chicago ordinance differs from past minimum-wage ordinances in several key respects, and therefore would be subject to a different kind of court challenge. By singling out big-box retailers, the City of Chicago could potentially be violating the equal protection clause of the 14th Amendment.

Jim Hendricks, a partner at Fisher & Phillips in Chicago, believes that if the retailers do challenge the statute by citing the equal protection clause, they will have a good chance of success.

"This won't pass constitutional muster because we have equal protection under the laws," Hendricks says. "How can you say that a retailer of this size should be paying more in wages when you may have other retailers of the same size that don't have the same annual sales? To me this flies in the face of constitutionality."

However, David Franklin, an assistant professor of law at DePaul University in Chicago, disagrees. He says that because the ordinance doesn't actually single out a business by name, the city has a good chance of successfully defending it.

"It's obvious what these laws are designed to do," Franklin says. "They aren't fooling anyone. But the argument could at least be made that nobody is being singled out directly or that other businesses could potentially come within the reach of these laws in the future, even if only Wal-Mart fits the statutory specifications today."

Furthermore, Franklin believes that the judiciary has a history of giving leeway to legislatures as far as economic regulation is concerned. As a result, he feels that the courts will uphold the ordinance unless challengers can prove the law is totally irrational.

"For the equal protection clause argument to succeed, challengers would have to show there is no reasonable regulatory argument in its favor," he says. "This is an extremely difficult showing to make."

Shopping Around

Wal-Mart is banking on the fact that the ordinance will not pass a constitutional test. Spokespeople have already stated that the retail giant plans on expanding into the Chicago market with the addition of as many as 20 stores within the next 10 years.

However, if the ordinance does go into effect, it is likely that big-box retailers, which also include Home Depot, Lowe's, Costco, Office Depot, Best Buy and Target, will reconsider opening more locations in the city proper.

"Laws such as this one tend to drive businesses just across the border to nearby suburbs, which has perverse economic effects and don't help the city at all," Franklin says.

Although Alderman Moore's intention is to benefit citizens by providing wage levels that allow big-box employees to support themselves and their families, Hendricks believes such a law could have the opposite effect.

"Why would these businesses locate here when the cost of labor is so much cheaper in the suburbs?" he says. "The city is not going to get the taxes from these people. The city's constituents aren't going to get the income. It's a lose-lose for the residences, for the tax base and for the retailers."

At press time, the City Council has yet to make its final decision on the ?? 1/2 ordinance. However, the statute is likely to pass--a majority of City Council members already have said they would back the measure--and the retailers are likely to challenge. The real question is, what will the courts say?

"This is certainly a groundbreaking statute, and I have not seen anything like this pass muster anywhere else," Kuenstler says.

Technology Editor

Keith Ecker

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