Compromise settles dispute over status of franchises in fast food industry

In some ways, the most interesting — and perhaps most significant — event of the 2023 legislative session’s closing days was a compromise agreement on state oversight of the fast food industry.

Last year, unions pushed through legislation that would have created a new state commission to set wages and working conditions in the industry.

Inferentially, the legislation set aside the industry’s franchise system and treated local outlets of as merely branches of their corporate franchisors.

While the wage increases that would have resulted garnered most of the media attention, erosion of the franchise model was most worrisome aspect to the fast food corporations and their franchisees.

Immediately, big guns in the industry pledged tens of millions of dollars for a campaign to challenge the legislation via a referendum that qualified to go before voters in 2024.

The Legislature’s response was entertaining another bill that would have doubled down on attacking the franchise model by making corporate franchisors legally responsible for labor law violations in their franchisees’ fast food outlets.

With the outcome of the referendum election in doubt, the long-warring factions began negotiating and last week a bargain was struck.

The 2022 legislation would be repealed, the 2023 legislation would be scuttled and a substitute for both would retain the fast food council, but alter its membership slightly, limit its authority to set wages and working conditions, provide a new $20 per hour minimum wage for fast food workers, prohibit local efforts to affect wages, and remove threats to the franchise model.

Like all legislative compromises, this one, written into Assembly Bill 1228, had something for everyone but didn’t give every stakeholder everything it wanted.

​​“For the last decade, fast-food cooks, cashiers and baristas in California have been sounding the alarm on the poverty pay and unsafe working conditions plaguing our industry,” Ingrid Vilorio, a fast food union leader, said in a statement. “We have always known that to solve these problems, we need a seat at the table with our employers and the power to help shape better rules across our industry.”

“It provides meaningful wage increases for workers, while at the same time eliminates more significant — and potentially existential — threats, costs, and regulatory burdens targeting local restaurants in California,” International Franchise Association CEO Matt Haller said in a statement. 

Haller’s statement hints that on balance, it appears that given the circumstances, the fast food industry’s big players, such as McDonald’s, came out ahead, although their franchisees will feel whatever financial pinch ensues.

The $20 minimum wage is only slightly over what, on average, fast food workers are being paid now, the industry having boosted wages sharply in the last few years in an effort to fully staff the outlets. Current California fast food wages average $19 an hour.

More significantly, the agreement protects the franchise system’s assumption that the operators of fast food outlets are independent businesspersons who invest their money and are fundamentally responsible for hiring, training, paying and sometimes firing their workers.

Had state regulation of fast food wages and working conditions survived as originally proposed, with franchisees indirectly considered to be merely branch managers rather than entrepreneurs, it could have undermined franchising in other consumer industries.

Union leaders much prefer to deal with large scale sectors rather than individual employers in both organizing workers and negotiating contracts. The recently ratified  labor contract affecting every West Coast port is an example of sector-wide negotiations, as is the current standoff over a new auto industry contract.

Cracking the fast food franchise system would have been a big step in that direction.