Schneiderman Suit Targets the Heart of the Fast-Food Profit Model

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Domino's around the world (clockwise from top left): New South Wales, Australia;  Taichung, Taiwan; Wuppertal, Germany; and the suburbs of Paris

Bidgee, 龍本, Atamari, Griolin

Domino's around the world (clockwise from top left): New South Wales, Australia; Taichung, Taiwan; Wuppertal, Germany; and the suburbs of Paris

Wage advocates welcomed and restaurant reps denounced on Tuesday a move by the New York State Attorney General to try to hold restaurant companies responsible for what occurs at their franchise locations.

Eric Schneiderman’s lawsuit against three corporate entities associated with Domino’s and three Domino’s franchisees alleges that they underpaid workers at least $565,000 at 10 New York state stores. It marks the first time the AG has alleged that “a fast food corporation is liable as a joint employer for labor violations at its franchise stores.”

The suit arrives as franchisees and corporations confront a new legal landscape. Last August, the National Labor Relations Board ruled that the waste contractor Browning-Ferris was responsible for the treatment of the employees that a contractor used to run a California recycling facility. The decision articulated a new standard that could apply to fast-food and other industries that try to separate a global brand from the work identified with it.

New York Fight for $15 member and Domino’s worker Joseph Bello said Schneiderman’s move shows “that corporations like Domino’s and McDonald’s can’t mistreat their workers and then hide behind franchisees, pretending to have no responsibility.” He added: “We’re going to keep on joining together to make sure that fast-food companies don’t steal our wages, and that they pay us $15 so we can support our families and respect our right to a union.”

International Franchise Association President & CEO Robert Cresanti countered that it is “settled law” that franchisees “are responsible for following federal and state laws regarding wages for the employees they directly hire – not brands such as Domino’s.”

“Unfortunately, in furtherance of their own political agenda, government bureaucrats are purposefully attempting to confuse the public and employees about where liability for possible misdeeds rests,” Cresanti’s statement continued. This is a blatant attempt to payback special interests who have spent tens of millions of dollars attacking franchising as they have unsuccessfully sought to organize employees.”

Cresanti called franchising a “proven and successful business model,” and there’s little argument about that. In fact, the growing role of franchises in the global fast-food industry is why labor advocates are focusing on the link between companies like McDonald’s, Burger King and Domino’s and the franchises, and it’s central to the argument those advocates are using.

The fast-food industry, for all intents and purposes, is franchises. Seventy percent of Domino’s restaurants in New York state are franchises. Yum! Brands, which owns KFC, Pizza Hut and Taco Bell, reports that 77 percent of its 43,000 global outlets are independently owned. Four out of five McDonald’s restaurants worldwide are owned by franchises, and of the 15,003 Burger Kings out there, a mere 82 are owned by BK itself.

And franchises are likely to become even more important to fast-food brands in coming years. Yum!, which says 85 percent of the 705 new KFCs that opened in 2015 were franchises, wants to be at 96 percent franchising by the end of 2017. McDonald’s has set a goal of becoming 95 percent franchised.

Information that McDonald’s provides to potential investors indicates that the typical franchise is sold as a going concern, although a few involve building new restaurants. A down payment—from assets the franchisee owns, not cash she has borrowed—of 25 percent to 40 percent is required, and the company says it rarely considers a person for a franchise if she doesn’t have at least $500,000 in assets.

During the term of the franchise, which is typically 20 years, the franchisee pays a monthly service fee based on sales (currently 4 percent) and rent for the use of the restaurant space.

According to Yum! Brand’s most recent annual report:

Under standard franchise agreements, franchisees supply capital – initially by paying a franchise fee to YUM, by purchasing or leasing the land, building, equipment, signs, seating, inventories and supplies and, over the longer term, by reinvesting in the business. Franchisees contribute to the Company’s revenues on an ongoing basis through the payment of royalties based on a percentage of sales.

Yum! Identifies the evolving regulatory landscape around joint employer liability as a risk to profits in its 2015 report. Elsewhere in that document is language that could supports either side in the legal dispute over joint liability. On the one hand, the Yum! corporation says, it has “limited control over how our … franchisees’ and licensees’ businesses are run” but on the other it notes: “The success of our business depends in part upon the operational and financial success of our … franchisees and licensees.”

Schneiderman’s office alleges that the Domino’s corporation “micromanaged employee relations at its franchisee stores” because it “played a role in the hiring, firing, and discipline of workers; pushed an anti-union position on franchisees; and closely monitored employee job performance through onsite and electronic reviews” and supported the use of a payroll system that it knew was cheating workers.

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