Financing

McDonald's franchisees are angry over the California compromise

Some operators say they were left out of discussions on a matter that could hurt per-store cash flow by $250,000 in the state. But the company said the deal will protect the franchise model without a costly fight.
McDonald's franchsiees
California McDonald's franchisees could get a $250,000 hit to cash flow by oncoming wage hikes. | Photo courtesy of McDonald's.

McDonald’s franchisees are angry over a compromise reached early this week on a pair of regulatory efforts in California, arguing that the company negotiated a deal with labor groups without the input of the operators who actually employ the workers.

At issue is a provision in the compromise that establishes a council that will set wages for fast-food chain restaurants, including a $20 minimum wage for those restaurants starting next April, a 29% increase over the current minimum of $15.50. That, plus potential 3.5% increases over the next five years, could bring the minimum wage for fast-food chain restaurants to $25 an hour by 2029.

The National Owners Association (NOA), an independent group of McDonald’s franchisees, estimates this will cost a typical California location $250,000 in cashflow.

“A small coalition of franchisors, including McDonald’s, the National Restaurant Association (NRA) and the International Franchise Association (IFA), independently without franchisee involvement, negotiated a deal with the [Service Employees International Union],” NOA wrote in a letter to its members, seen by Restaurant Business. California legislators approved the compromise legislation on Thursday.

The measure “will result in a devastating financial blow to California McDonald’s franchisees,” NOA said.

McDonald’s, however, said that franchisees have played a role in shaping the compromise.

“Over the past year, I’ve worked closely with company leaders, a task force of fellow franchisees, and our own independent advisors as part of a coalition of brands working to protect our business model against an all-out attack on restaurant owner/operators,” Roger Delph, a California McDonald’s franchisee, said in a statement sent to Restaurant Business.

“That involved countless conversations and meetings, and a discussion with the governor’s office directly. Anyone who is suggesting this was not a collaborative and successful effort to protect the franchised business model in California, or that franchisee involvement was absent, was either not involved or is contorting the facts.”

The dispute highlights the seriousness of the issue in California, and how big the original legislation was.

California last year approved a bill called the Fast Act, which established the fast-food wage council that would have affected only restaurants with 100 or more locations, potentially affecting 138 companies. It was expected that the council, which would include labor activists and fast-food workers in addition to operators, would set wages at $22 for those chains.

That bill passed but was on hold pending a referendum. Meanwhile, California started pushing a separate measure backed by labor activists that would label fast-food franchisors as “joint employers” of their franchisees’ workers.

The measures brought out the political activism from McDonald’s, prompting CEO Chris Kempczinski to say that the franchise business model was “under attack” at an IFA meeting back in February.

The compromise largely ended the joint employer effort and eased some of the Fast Act’s provisions, reducing the number of members of the fast-food council to 9, one of whom is from outside the industry. And it set restrictions on wage hikes and lowered the initial wage by 10%.

Myra Doria, national field president for McDonald’s USA, said in a system message viewed by Restaurant Business that the deal also avoids a potentially costly 2024 ballot measure fight over the Fast Act.

“We recognize that California owner/operators will soon be required to make a significant additional investment,” Doria wrote. “While this may be challenging, this legislative outcome brings regulatory certainty and avoids legislation that would devalue owner/operators’ businesses and their ability to make decisions for their restaurants.”

Yet franchisee groups have been furious with the deal, arguing that they were left out of the discussions even though they will be the ones actually paying for the wages.

John Motta, chairman of the Coalition of Franchisee Associations, said franchisees “were intentionally excluded from the negotiations and yet are left to bear the financial burdens of their result.”

McDonald’s franchisees were also angry. One operator said they felt “hoodwinked” by the compromise. Some likened the negotiations to collective bargaining, given that McDonald’s and other negotiators worked out a deal with the SEIU, a union.

“This is a collective bargaining agreement where the main employer is not present,” Robert Zarco, an attorney for NOA, said in an interview.

He took his views a step further, arguing that McDonald’s will ultimately benefit from the higher costs franchisees will have to pay.

McDonald’s generates its revenue from a percentage of its franchisees’ sales, in the form of its service fee and the rent operators pay to the company. Franchisees will have to raise prices to make up for the lost cash flow resulting from the higher wages. When prices go up, so do revenues.

“It benefits McDonald’s tremendously,” Zarco said. “They will be a huge benefactor of this employee increase. Ninety-five percent of the system is owned by franchisees, they’re not corporate stores.”

More to the point, he said, McDonald’s is acting like a “joint employer” by effectively negotiating the wage increase.

Franchisees also fear that this legislation could spread to other states. NOA created a nonprofit for its California franchisees, the California Alliance of Family-Owned Businesses. And in its letter it urged operators to create their own nonprofit organizations and political action committees.

“Make no mistake about it, the success of this measure will surely lead to similar legislation in many other states,” NOA said. “We need to remain unified so that this cannot gain a foothold anywhere else. This will not stop with California.”

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