CA Assembly passes fast food franchise regs

As changing consumer tastes roil the fast food industry, the California Assembly passed a so-called “Franchise Bill of Rights” designed to transform the way franchisors like McDonald’s do business.

Assembly Bill 525, introduced by Assemblyman Chris Holden, D-Pasadena, would make it harder for franchisors to in effect fire franchisees — the owner/operators of fast food franchise locations. “A franchisor,” as the legislation put it, “would need to prove the franchisee had failed to ‘substantially comply with the franchise agreement after being given notice of at least 60 days in advance and a reasonable opportunity to cure the failure.'”

According to Holden, himself a former franchise owner, “the one-sided nature of a franchise relationship quickly becomes apparent after signing these documents. Right now it’s easy for a company to get rid of a franchisee whether they’ve done anything wrong or not. These small business owners invest substantial time and money into the enterprise and deserve to be protected.”

Advancing union strategy

In an unusual paradox, however, the Assembly’s push to portray the legislation as a boon to small business owners has been strengthened by labor unions, which have been banking on winning key advantages of their own.

“The measure has received significant support from the Service Employees International Union (SEIU), and with good reason,” Al Jazeera America observed. “By altering the relationship between franchisors and franchisees, AB525 could indirectly bolster labor’s efforts to organize fast food workers by constraining the ability of franchisors to intervene in franchises.”

In fact, the SEIU’s support for AB525 has coalesced as part of its broader ambition to unionize fast food workers and secure a $15 minimum wage throughout California and, eventually, the nation at large.

As the Wall Street Journal reported, the SEIU “filed a petition with the Federal Trade Commission to investigate what the labor group claims are abusive practices on the part of major franchise companies including McDonald’s Corp. and 7-Eleven Inc. The union alleges that large franchisers have failed to disclose pertinent financial information to prospective franchisees and have terminated franchises without cause, among other things.”

What’s more, the union recently debuted a new website intended to foster “a national network of fast-food franchisees who want stronger protections for their businesses,” as the Associated Press reported. “The push has the potential to create more unrest within the ranks for companies like McDonald’s, which already are dealing with ongoing demonstrations calling for higher pay and a union for workers.” Those demonstrations picked up momentum in the wake of a failed bid among Congressional Democrats to raise the federally mandated minimum wage. 

Because franchisees, and not franchisors, typically set wages for their employees, they have made a promising target for labor activists.

Fast food fractures

Franchisors have fired back with claims that franchisee relations are so healthy that new regulations are unnecessary. “The International Franchise Association, which represents franchisors like McDonald’s, Subway and Wendy’s, said in a statement that franchisees indicate ‘incredibly high satisfaction rates,'” according to the AP. “It noted that data from the Federal Trade Commission shows franchisees renew their contracts at ‘an extremely high rate.'”

Taken in isolation however, the picture has become cloudier at McDonald’s — long seen as the bellwether in its industry. “The fast-food chain is at odds with some of the estimated 3,000 men and women who operate most of its 14,350 restaurants in the U.S.,” Bloomberg has noted. “A recent survey by Mark Kalinowski, an analyst at Janney Capital Markets, found that acrimony between the restaurant operators and McDonald’s corporate leaders is as high as it’s been in the 12 years the firm has polled franchise owners.”

Top brass at McDonald’s have faced a perfect storm of changing market conditions, according to Bloomberg. “Stung by falling profits, franchisees grouse that McDonald’s headquarters is out of touch with the realities of running restaurants in today’s fiercely competitive market. They also accuse the company of ignoring their concerns on everything from bloated menus to ever-more-costly kitchen equipment to wages for counter workers.” With analysts predicting a swift shift in fast food restaurants toward fully automated ordering and checkout, unions likely faced a narrow window to successfully organize workers before many of their jobs were simply phased out.