The Federal Trade Commission Act gives the commission tremendous power to go after franchisors for practices that are unfair or deceptive or involve unfair methods of competition. These powers have typically gone unused, but under Commissioner Lina Khan, that’s changing in a major way.
The commission is taking a sweeping view of how to wield its full range of statutory powers and has indicated it is considering flexing its muscles to right the power imbalance that plagues the franchise industry, which is responsible for a massive 5.6 percent of all nonfarm private employment in the country, or about 10 million workers.
And that could mean big changes for fast-food cooks and cashiers, who are perhaps the most taken advantage of by the unchecked power of huge multinational corporations like McDonald’s, Burger King and Wendy’s.
SEIU, the labor organization I am privileged to lead, along with the labor federation we’re a part of, the Strategic Organizing Center, submitted information last week requested by Khan seeking to examine the unequal bargaining relationship between franchisors and their franchisees, including — importantly — how that power imbalance affects workers. Khan’s initiative goes well beyond previous attempts to reform the Federal Trade Commission’s (FTC) decades-old Franchise Rule, which requires franchisors merely to make limited disclosures to franchisees, but is far from rigorous and leaves workers out entirely.
Our interest in the franchise business model comes out of the now decade-old Fight for $15 and a Union. As workers joined together, went on strike and demanded $15 an hour and a union from their fast-food employers to address issues like wage theft, unsafe working conditions, sexual harassment and more, we quickly realized that in order to improve the lives of fast-food workers, we’d have to change the problematic relationship between companies like McDonald’s and their franchisees.
We spent years digging into contracts between franchisees and franchisors and discovered corporations have an expansive level of control. It’s clear who the franchise relationship is designed to benefit — and it’s not the workers or even the franchisees. Franchisors like McDonald’s control who franchisees buy supplies from, the hours they must be open, how much they must spend on advertising, when and how they have to remodel stores, and so much more. It’s one thing for McDonald’s to say you need to buy hamburger buns from a certain supplier, but it’s another to say you have to buy this toilet paper from our vendor even though you could get the same toilet paper somewhere else for a lower price.
We identified five of the most problematic franchisor practices: providing incomplete or misleading financial performance representations made to prospective franchisees, requiring significant capital investments during the course of the franchise agreement or even as an unexpected condition of renewal, retaliating against franchisees who seek to band together by joining franchisee associations, unfairly terminating or refusing to renew franchise agreements, and arbitrarily denying franchisees’ requests to sell their businesses.
The level of control over franchisees is so minute that, ultimately, one of the only costs franchisees can control is what they pay workers. And so, inevitably, the fallout from the imbalance of power in the franchise industry falls squarely on the shoulders of workers, the majority of whom are forced to rely on public assistance, get a second job or both, just to survive.
We write in our submission that the franchise model of “having meticulous control of numerous small businesses but virtually no responsibility for those businesses,” creates “low-margin businesses under constant pressure to reduce costs and cut corners, and where labor costs are almost the only cost variable the businesses control.”
“Our evidence of worker harm demonstrates that workers ultimately bear the brunt of this exploitative system designed primarily to enrich the firm at the top — the franchisor,” it continues.
And it’s not just low pay and lack of benefits. Our submission to the FTC includes 10 pages on how workers are harmed by franchisors’ dominance over franchisees, including wage theft, unpredictable schedules, child labor violations, sexual harassment and assault, and unsafe working conditions. The vast majority of fast-food industry profits accrue to the ultimate franchisor company, but they disclaim any responsibility for the workers who make those profits possible. So when a teenager in Pittsburgh or Texas is raped by a manager with a record as a sex offender, the company can throw its hands up and say, “not our fault.”
Because workers are paid so little and need the jobs so badly, they are often reluctant to come forward with complaints about harassment, assault, wage theft and other exploitation. It’s a large reason why workers in California joined together to press their state to pass the groundbreaking Fast Recovery Act, which would create a sectoral council made up of franchisees and franchisors, workers and their representatives, or union and government officials to set minimum standards around pay and working conditions in the industry.
It should come as no surprise that the CEO of McDonald’s, Chris Kempczinski, called the law an attack on McDonald’s business model and an existential threat to the fast-food industry, and why he and other CEOS have pledged millions to try to overturn the initiative via a cynical referendum in which they are claiming to represent neighborhood restaurants.
The good news for workers is that the FTC has powers under Section 5 of the FTC Act to right the power imbalance.
As our submission notes, this system has “legalized the use of myriad vertical restraints that allow franchisors to exert extraordinary control over, and profit from, groups of small businesses” and evades “the costs and liability that legal responsibility for those small businesses and their workers would entail.” For this reason, other franchise practices “may also be vulnerable to FTC challenge as unfair methods of competition.”
The even better news is that, finally, under Khan, the commission appears poised to use those powers to change an unfair and exploitative system that harms franchisees and workers alike. That is why we are urging the commission to use this opportunity to bring to bear the full range of its authority to examine and reform a business system that affects such a large segment of our economy and so many millions of workers.
Mary Kay Henry is the international president of the Service Employees International Union, which represents 2 million workers across the service and care economy.