Low Wages Aren’t the Only Problem

There are some gaps in the new study. As anyone who’s worked a low-wage job knows, if they want to save money, employers may not cut workers’ hourly rate, but they will cut the number of hours they spend on the job. Reich and Sosinskiy didn’t assess the law’s impact on working hours, since the necessary data wasn’t available. But even with questions remaining, a little over a year since its passage, AB 1228 looks like a step toward fairness.

But it is only a step. The problems weighing on fast-food workers have always gone beyond low pay, and are symptomatic of an industry power dynamic that enriches fast-food corporations at the expense of everyone else.

Take wage theft: a widely cited 2012 study by economist David Weil found that employees at fast-food restaurants operated by franchisees were owed, on average, $4,265 more in back wages over a five-year period than employees who did the same job at company-operated stores. The reason, Weil theorized, was that fast-food companies largely control how much franchisees pay for raw materials and put limits on how much they can charge customers. (When Subway introduces a national ad campaign offering any footlong sandwich for $6.99, for instance, most franchisees have no choice but to participate.) As a result, payroll is one of the few areas on a franchisee’s balance sheet where they can squeeze out a (crooked) savings.

California regulators and legislators were not blind to that power discrepancy when they wrote AB 1228. The law applies narrowly to restaurants that are part of a chain with sixty or more locations nationwide, regardless if they are owned by franchisees or multinational corporations, like McDonald’s Corporation.

Beyond the minimum wage increase, the law also introduced a “Fast Food Council” composed of workers and industry personnel that can recommend standards to state regulatory agencies and raise the minimum wage for the entire sector.

An earlier bill that would have given that council enforcement power passed the state legislature. But after the IFA successfully introduced a ballot measure that would have invalidated it, legislators wrote a compromise bill that would provoke less industry backlash. The result was AB 1228.

Entrenching Corporate Power

While AB 1228’s minimum wage increase has already benefited workers, it’s also turned out to be a way for fast-food companies to make more money and entrench their power. As Reich and Sosinskiy note, fast-food corporations typically assess the royalties that franchisees pay them based on revenue, not profits. For that reason, the money they collect from franchisees is poised to increase as prices rise to make up for the higher cost of labor.

Think of it this way: if a fast-food restaurant’s prices go up to make up for increased labor costs and traffic holds steady (as you would expect it to when every restaurant of the same brand and most of its rivals in the area also raise prices), the restaurant’s profits will stay the same, even as the amount of money coming through the door — the revenue — increases. Higher payroll just means a restaurant has to spend more money to make the same profits that it did in the past.

But franchisors like McDonald’s Corporation assess their own cut based on the restaurant’s gross revenue, not profit. For McDonald’s, that figure is 4 to 5 percent. For Subway, it’s 8 percent, plus a 4.5 percent fee for advertising. A franchisee’s profits may stay the same from one year to the next, or even fall, but whenever its revenue goes up, the corporation makes more money off of it.

As substantial as the gains stemming from AB 1228 may be for a generation of fast-food workers, without more fundamental changes to the power dynamics at the heart of the industry, worker exploitation will continue to be as common in fast food as mustard and ketchup.