Big fast-food squeezes workers and franchisees alike

OPINION – April 1 marks the first anniversary of a historic victory for California’s fast-food workers, the establishment of a $20/hr minimum wage for the industry. The higher wage has sparked debate across the state — and deepened fault lines between global fast-food corporations and their franchisees that could define the industry’s future.

In the aftermath of the increase, fast-food franchisees have said they are being unfairly squeezed, as they are already struggling to make rent on their buildings and pay royalties to the franchisor. At their core, the issues they are raising aren’t new. In fact, they’re a key feature of the fast-food industry: corporate-branded restaurants are usually owned and managed by ostensibly independent operators, who run each location under strict corporate control.

Increasingly, California fast-food franchisees are speaking up about the need for their corporate franchisors to do more to support them. At a recent meeting of the state’s Fast Food Council, a Bay Area Burger King franchise owner remarked, “When you hear names like McDonald’s, Taco Bell, Burger King, these are corporations that charge small business owners a fee every single month. If we make money, if we don’t make money, they collect that fee. So I would ask the council to consider — beyond just minimum wage — how to get the franchisors involved in this conversation and help out our cause.”

As the Fast Food Council considers a cost-of-living increase to the fast-food minimum wage — an increase capped at 3.5 percent — more California operators should think seriously about the Burger King franchisee’s comments and demand that corporate franchisors take more responsibility. Similarly, fast-food corporations should hear the pleas of their operators and do more to support franchisees in California.

The data on the $20/hr fast-food minimum wage are clear:  According to one recent rigorous UC Berkeley economic study, the $20 minimum wage increased fast-food average hourly pay by 8 to 9 percent, with no reductions in employment. Meanwhile food price increases were very modest, rising by only about 1.5 percent – about 6 cents on a $4 hamburger. And a UCSF/Harvard study, surveying thousands of fast-food workers, found no evidence of cuts to fast-food workers’ hours or benefits due to the minimum wage increase.

Meanwhile, nothing has been done to address structural imbalances in the franchisor/franchisee relationship. Corporate franchisors do not allow franchisees real control of their ostensibly “independent” businesses. Franchisors actually enjoy what I have called a “control without responsibility” business model, minutely prescribing the operations of franchisees—effectively controlling wages by controlling everything but wages—while avoiding all liability for the consequences of that control.

In most chains, everything from the cost of supplies, to operating hours to even prices, is controlled by the corporate franchisor. In fact, when one McDonald’s franchisee complained about the effect of franchisor price controls, the company told her to “just pay your employees less.” What is more, franchisors extract royalties and fees from franchisees. In short, franchisors have the power to give franchisees relief from higher costs. They simply choose not to do so.

At a crucial moment in the lobbying for the legislation to create the Fast Food Council, franchisors sold out their franchisees. The original legislation included provisions to recognize franchisors’ extreme control over franchisees by holding franchisors jointly liable for labor and other legal violations at franchised establishments.

This would have incentivized franchisors to take into account the effect of their policies on working conditions on the shop floor. Franchisors, led by their trade group, the International Franchise Association, heavily resisted this, saying it was “designed to hurt the franchise business model in California.”

In the end, franchisors made a deal to accept the creation of the council in exchange for the removal of joint liability from the legislation. As franchisee advocate Keith Miller put it: the franchisors “got rid of any joint liability or joint employer and saddled the franchisees with the higher minimum wage.”

The last few years have seen significant changes in California’s fast-food industry, giving the Golden State a chance to establish a national model for raising pay, standards and working conditions in the service industry. Franchisees should embrace this opportunity for change and take a hard look at who is standing the way. The Fast Food Council should also investigate the system that drives abuse of fast-food workers and franchisors’ squeeze on franchisees. Both workers and small business owners deserve nothing less.

Brian Callaci is Chief Economist for the Open Markets Institute.