Fast Food Fears: Chains Warn Investors of Rising Pressure Over Wages

The restaurant industry has absorbed two blows this week, both emanating from New York. First labor activists targeted a New York City meeting of hedge-fund investors Monday, playing up links between the monied men and low-wage, fast-food jobs. Then on Tuesday, the Restaurant Opportunities Center released a report indicating that restaurant-industry profits are being subsidized by government programs that fill the gap between what workers’ need to survive and what their employers’ pay.*

Big Food has been a target for the labor movement for awhile now, but the temperature does seem to be rising faster than a vat of McRib sauce. And what’s fascinating is that the fast-food chains are leveling with their investors about what they see as the growing political risk to the way the do business.

In their SEC-required annual reports, many firms use boilerplate language about labor agitation as part of their disclosure of business risks. The one in Burger King Worldwide’s most recent 10-K, which cited the risk inherent in “the impact of labor costs on our franchisees’ margins given our labor-intensive business model and the long-term trend toward higher wages in both mature and developing markets and the potential impact of union organizing efforts on day-to-day operations of our restaurants,” is pretty standard.

But some go considerably farther. Take Yum! Brands, owners of Taco Bell, KFC and Pizza Hut. In their most recent report they noted:

Taco Bell was named as a defendant in a number of putative class action suits filed in 2007, 2008, 2009 and 2010 alleging violations of California labor laws including unpaid overtime, failure to timely pay wages on termination, failure to pay accrued vacation wages, failure to pay minimum wage, denial of meal and rest breaks, improper wage statements, unpaid business expenses, wrongful termination, discrimination, conversion and unfair or unlawful business practices in violation of California Business & Professions Code. … Taco Bell denies liability and intends to vigorously defend against all claims in this lawsuit. We have provided for a reasonable estimate of the possible loss relating to this lawsuit. However, in view of the inherent uncertainties of litigation, there can be no assurance that this lawsuit will not result in losses in excess of those currently provided for in our Consolidated Financial Statements.

Few have been as candid as McDonald’s, which employed your correspondent for three years in high school. In 2013, the Golden Arches warned investors: of “the impact on our margins of labor costs that we cannot offset through price increases, and the long-term trend toward higher wages and social expenses in both mature and developing markets, which may intensify with increasing public focus on matters of income inequality.”

Mentions of inequality are, one might say, uncommon in corporate reports.

The most recent Mickey D’s annual report steps back from use of the “I” word. But it does address the threat of trouble. “Our success depends in part on our System’s ability to recruit and retain qualified personnel to manage our operations. For instance, the trend toward higher wages and social expenses could have a negative impact on the margins of our Company-owned restaurants. Additionally, economic action, such as boycotts, protests, work stoppages or campaigns by labor organizations, could adversely affect us or the franchisees and suppliers that are also part of the McDonald’s System and whose performance has a material impact on our results,” the company told investors.

“We are also impacted by the costs and other effects of compliance with U.S. and overseas regulations affecting our workforce, which includes our staff and employees working in our Company-owned restaurants. These regulations are increasingly focused on wage and hour, healthcare, immigration, retirement and other employee benefits and unlawful workplace discrimination,” the report continued. “Our potential exposure to reputational and other harm regarding our workplace practices or conditions or those of our independent franchisees or suppliers (or perceptions thereof) could have a negative impact on our business.”

Nor is the threat purely external. In its annual proxy statement, prepared ahead of its yearly shareholders meeting next month, McDonald’s board had to react to a shareholder proposal lambasting a clash between the company’s professed values and it’s drive for profits.

“We pledge to treat our employees with ‘fairness, respect and dignity’, and claim to ‘pay fair, competitive wages,’ however, we have made contributions in 2014 to politicians and organizations opposing increases to the minimum wage including $10,000 to Paul Ryan, $5,000 to John Boehner and $10,000 to the National Restaurant Association,” the proposal reads. “Shareholders request that the Board of Directors report to shareholders annually at reasonable expense and excluding confidential information, a congruency analysis between corporate values as defined by McDonald’s stated policies, and political contributions or trade association fees paid by the Company occurring during the prior year which raise an issue of misalignment with corporate values, and stating the justification for such exceptions.”

McDonald’s board recommended a vote against the proposal. New York City’s pension funds, which held more than $69 million in McDonald’s stock—making the company NYCERS’s 39th largest equity holding—will get to weigh in on it.

* Update: The New York attorney general, Eric Schneiderman, also got into the action this week, inking settlements with five Domino’s franchises over violations of workers’ rights.

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