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.

In 2008, the Los Angeles City Council voted unanimously to freeze new fast food franchises. But as the Los Angeles Times reported, the ban’s imprecise language allowed “fast casual” outlets to flourish while failing to prevent new franchises from popping up anyway:

“The ban, supporters say, was meant to be a stop-gap measure to buy time as officials crafted initiatives to lure the sort of restaurants that area residents want. But when Gov. Jerry Brown dissolved redevelopment agencies in 2012, the city lost one of its best tools for enticing developers to invest in blighted communities. Without the leverage of tax incentives and other city support, attracting new restaurants is tough, city officials and business leaders say.”

Harsh findings

At first, the unprecedented effort to affect municipal diets had shown some gains. Four years after the moratorium, The New York Times reported that “no new stand-alone fast-food establishments have opened in the area,” while, instead, south L.A. saw its “first new supermarket in roughly a decade”:

“A handful of much smaller cities have enacted similar regulations for primarily aesthetic reasons, but Los Angeles, officials say, is the first to do so as part of a public health effort. The regulations, which the City Council passed unanimously last month, are meant to encourage healthier neighborhood dining options. Supporters envision more sit-down restaurants, produce-filled grocery stores and takeout meals that center on salad rather than fries.”

But a RAND Corporation study released in March revealed that, whatever its impact on businesses, the fast food moratorium failed to curb obesity levels. Investigating a five-year period of eating patterns, the study found that the City Council had little to show for its efforts. Although obesity and overweight rates were impacted by “a drop in soft drink consumption since 2007,” the authors concluded, “that drop is of similar magnitude in all areas.”

“In fact, obesity rates in the area had grown at a faster clip than elsewhere in the city,” the Atlantic noted. “As NBC News reported, the percentage of people in South Los Angeles who were overweight or obese in 2007 was 63 percent. By 2011, that figure was 75 percent.”

What’s more, the study also suggested that the affected restaurants even managed to squeeze in a few more franchises by exploiting a simple loophole in the new regulations. “Over the study period,” the New Orleans Times-Picayune observed, “the rate of new fast-food restaurants that opened in south Los Angeles in that period was ‘no different’ than in other parts of the county, in part, because in the affected area they skirted the ban by opening in shared spaces instead of ‘free-standing’ locations.”

Finally, according to the Los Angeles Times’ own analysis, what new restaurants did move into the South L.A. area clustered overwhelmingly around the University of Southern California campus:

“From 2009 through 2014, the roughly 32-square mile area covered by the ban gained 86 restaurants, a Times analysis of Los Angeles County Department of Health records shows. More than half of those new locations, however, were on or near USC.”

Strange bedfellows

Free-market and small-government advocates swiftly hailed the study, which seemed to confirm the criticisms they raised at the ban’s inception.

More notably, however, grassroots health and dietary activists have not done much to defend the ineffective law. “Nonprofit leaders were not surprised by the findings,” according to Southern California Public Radio. “They say the obesity epidemic is complex, and that solving it will require more than a ban on new fast food restaurants.”

“The answer is long-term, patient committed work,” said Neelam Sharma, director of a nonprofit that makes produce readily available in South L.A. “Like engaging with people. That isn’t sexy and doesn’t get immediate results.”

The California Legislature this year boosted California’s $8 per hour minimum wage to $9 in July 2014 and $10 in January 2016. But advocates for, and beneficiaries of, that 25 percent wage hike are not content. Pressure is building to increase the minimum wage to $15 per hour.

Nationwide strikes by fast-food workers were held in August. This month, the workers argued their case before a joint legislative committee hearing on the societal impact of fast-food wages.

“They pay us non-livable wages with no healthcare,” Oakland KFC worker Shonda Roberts told the committee on Nov. 13. “We can’t take care of our basic needs. We are not lazy. It’s the fast-food corporations that get away with murder. I want to be able to take care of myself without having to depend on government programs. I’m not getting paid enough to live, and have to rely on taxpayer services. Force the fast-food companies to pay us enough to survive without public assistance.”

Simone Sonnier Jang has two children and works at a McDonald’s in Los Angeles. She receives $1,400 per month from the taxpayers for childcare along with Medi-Cal, Section 8 housing and assistance from Cal Works. She makes $8 per hour and averages 20 hours a week.

“It’s tough to support a family with those hours,” she said. “Ask fast food to give us 40 hours a week and a decent wage to raise my kids with, so I can make ends meet on my own without help from the state. I would like that.”

Ilda Amador has two kids, is pregnant and works 15-27 hours per week at a fast-food restaurant. She said, “I don’t think it’s right that I work so hard and have to go to public assistance. I should be able to provide for my family. But $8.25 is not cutting it for my family. They won’t give us a living wage.”

None of the women mentioned receiving support from the father or fathers of their children, and none was asked about it.

Study: 52 percent receive assistance

The fast-food industry is taking advantage of taxpayers by paying their workers so little that they are forced to rely on government assistance, argued Ken Jacobs, chairman of the U.C. Berkeley Center for Labor Research and Education. He’s also co-author of a recent study, “Fast Food, Poverty Wages: The Public Cost of Low-Wage Jobs in the Fast Food Industry.””

“It documents the high public cost of low-wage work in America,” said Jacobs. “When jobs pay too little for families to get by and meet their needs on their own, then they must rely on publicly funded programs to make ends meet. A staggering 52 percent of families in fast-food jobs rely on one or more public assistance programs. It’s the rule, not the exception for fast-food workers.”

The study focused on fast-food employees working at least 11 hours a week, 27 weeks a year. Their median wage is $8.69 an hour. The study looked at their use of four assistance programs: the earned income tax credit, health insurance/Medicaid, food stamps and temporary aid for needy families.

“There’s a common misperception about fast-food workers that they are teenagers living at home with their parents,” said Jacobs. “Sixty-eight percent are main wage earners in their family. More of the workers are parents raising a child than are teenagers 18 or under living with their parents. People working in fast-food jobs are, however, much more likely to live in or near poverty. One in five families with a member holding a fast-food job has income below the poverty line.”

Jacobs said that California’s 25 percent increase in the minimum wage over the next two years will help make a difference. “Though not enough to fully address the scope of the problem,” he added.

In addition to paying their workers more, the fast-food industry should contribute to Medicaid and allow employees to unionize and collectively bargain, he said.

“It’s not a question of should we have public programs or higher wages,” Jacobs said. “They both work best when they are combined. So if we are thinking about the best way to address program cost, it’s to raise labor standards so that fewer families need to rely on public assistance. Not to cut the programs themselves. It’s not that public programs are too generous, but that wages are too low.”

Slim profit margin

The problem is that the profit margin in the restaurant industry is slim, just 3-5 percent, according to Jot Condie, president and CEO of the California Restaurant Association.

“In other words, for every dollar that comes into a restaurant, there’s three pennies to a nickel left over,” he said. “The other 95 to 97 percent covers labor cost, goods, food and operational expenses in that order. That leaves little room to react to the many external variables that exist in our industry: rapidly changing market trends, lawsuits — the kind that make California so famous — unforeseen spikes in commodities, equipment and building repairs, minimum wage increase, to name a few.”

Many restaurants are mom-and-pops — 55 percent of the association’s 22,000 members have only one location. One out of four restaurants don’t last a year; the average lifetime is 4-9 years. They will likely have to cut into their profits to absorb the coming minimum wage increases, according to Condie.

“It’s gone up every three to five years,” he said. “We grumble sometimes more than others. As an industry we will deal with it. We always do. The alternatives are either you increase prices, you reduce your workforce by numbers of people or cut back hours. Most will try to eat into the profit margin. They don’t want to let anyone go. It’s bad for morale. Raising prices will happen over time. A 55 cent taco, those years are gone.”

Employee hours have been cut and prices have increased at restaurants in San Jose since that city increased its minimum wage to $10 a year ago, he said, based on anecdotal evidence.

None of the fast-food workers speaking at the hearing was asked whether they were concerned about decreased hours or being laid off as a result of further minimum wage increases.

$12 McDonald’s hamburgers?

But Sen. Holly Mitchell, D-Los Angeles, asked them what a reasonable compromise might be.

“If we push the envelope and pay you what would be a livable wage in Los Angeles or San Francisco, they will have to pass on the cost, and the burgers will be 12 bucks a piece,” Mitchell said. “Who could afford it? We don’t want the industry to go out of business. What is a reliable, happy medium? If you were a McDonald’s franchise owner having to make payroll, what would you do?”

Roberts responded that the cost of increased wages could be offset by reducing the amount spent on advertising and by modestly increasing prices.

“They only have to raise a Big Mac 21 cents to pay every one of their workers nationwide $15 an hour,” she said. “Twenty-one cents. You distribute that through your whole menu, our customers would not know.”

But it’s not always easy for small businesses to pass on cost increases, according to Michael Saltsman, research director for the Employment Policies Institute.

“Instead it forces adjustments that adversely affect employees that policy makers are trying to help,” he said. “That’s the conclusion of not a handful of studies, but actually 85 percent of the credible academic studies on this issue over the last 20 years point to that conclusion.”

Saltsman told the committee that the Labor Center report is biased because it’s funded by labor unions, which would benefit from a higher wage floor. The study is skewed because it ignores fast-food employees who worked fewer than six months, and it’s conclusions are overblown in any case, he said:

“The Labor Center report argues that the fast-food industry makes a disproportionate — that’s their word — contribution to the safety-net programs. Specifically, they estimate the industry costs taxpayers nearly $7 billion a year. That’s a big number and it’s intended to shock readers. But it represents just 1.8 percent of total safety net spending. According to the Census Bureau, fast-food workers are about 3.3 percent of the private-sector work force. In other words, fast-food employees represent a quote ‘disproportionate share of safety net spending’ only in the sense that the government is actually spending less on them relative to their share of the workforce.

“In truth, the most shocking thing about this report is the lack of shocking information about fast-food employees and their safety net participation rates. For instance, the public cost for fast-food workers and their families represented only 1.9 percent of total food-stamp spending. And just nine-tenths of 1 percent of temporary assistance to needy families spending.

“A more comprehensive and less biased report might have acknowledged that, while some fast-food workers live in low-income housing, there’s another large segment of the workforce that lives in middle- or even upper-income households. In California, for instance, roughly 37 percent of the fast-food workforce lives in middle-income households earning $45-$99,000 per year. That’s the same as the percentage of the state’s entire workforce that lives in a middle-income household. Nearly half of the fast-food workforce has household income 200 percent or more above the poverty line. These data paint a much more complex picture of the fast-food workforce.”

Striking a balance

Committee Co-chairman Sen. Bill Monning, D-Monterey, picked up on Mitchell’s suggestion to find a happy medium.

“We have to find a balancing point,” he said. “We want the jobs to continue to be available. We don’t want California businesses to go out of business. But there’s the reality of the reliance of fast-food businesses on government to support their workforce. A distinction has to be made between large corporations and individual franchises; that has to be included in the calculus.”