As major fast-food corporations like McDonald’s and Taco Bell transformed into almost fully franchised operations, the chains created a system that shields them from accountability on labor issues while maintaining strict control over working conditions.
You probably know that the fast-food business in the United States operates on a franchise model. It works like this: an entrepreneur, called the “franchisee,” pays a big corporation with a recognized brand like McDonald’s Corp for the right to use its name and likeness. In exchange, the franchisee usually gets exclusive rights to do business under the franchisor’s name in a given area.
For the two largest fast-food companies in the world, McDonald’s and Yum! Brands (the company that has controlled Taco Bell, KFC, and Pizza Hut since 1997), franchising is the preferred means of expansion. In 2023, 86 percent of McDonald’s and 98 percent of Yum restaurants were operated by franchisees. Subway, the world’s second-largest restaurant chain by number of locations after McDonald’s, has been 100 percent franchisee owned for years. After coming under the umbrella of a Brazilian private equity fund ten years ago, Burger King quickly adopted a “nearly fully franchised model.” In 2010, 13 percent of Burger Kings were company operated, but by 2023, the company directly ran a scant 2 percent of the stores that carried its name.
Independent owners didn’t always control such a large share of fast-food outlets. In 1994, about a fifth of all McDonald’s and half of all Taco Bells, KFCs, and Pizza Huts were company operated. While the change may sound like a problem for accountants, it also has major implications for workers. This dramatic shift to franchising has created a convenient shield for corporate owners, allowing them to maintain strict control over working conditions while distancing themselves from legal responsibility for labor violations — essentially giving them the best of both worlds at workers’ expense.
Turning Big Business Into Small Business
Franchising has long played into popular understanding of the industry. It was a central theme in the 2016 movie about the early history of McDonald’s, The Founder, and Franchise was the title of Marcia Chatelain’s Pulitzer Prize-winning book on the place of McDonald’s in black history. The idea that thousands of restaurants bearing a uniform corporate identity were actually owned by individual entrepreneurs with roots in their own communities has also been central to the industry’s professed identity. In the 1980s, McDonald’s touted itself as “the world’s biggest small business” to investors.
Though the share of franchises has skyrocketed in recent years, it was always part of the fast-food business, especially in the beginning. At first glance, this makes little sense, since leaving restaurant management to independent owners has never been the most profitable way to operate a fast food company. As franchisors, fast-food companies typically claim as little as 4 to 6 percent of a restaurant’s gross revenue. The rest goes to the franchisee. Given the inherent profit disadvantage, fast-food companies might have chosen not to franchise at all in their early years if total control were an option. (In fact, more recent newcomers like Chipotle and Shake Shack are entirely company owned.)
But in the 1950s and early ’60s, franchising was not just one way to grow — it was the only way. Seventy years ago, national restaurant chains were still a new concept, and Wall Street banks were unconvinced that the few that existed represented a genuine trend. Without the backing of institutional investors, leaders in the budding fast-food industry like McDonald’s and KFC turned to franchising to raise money without them.
For aspiring entrepreneurs, it was an easy sell: a way to retain independence while also leveraging the advantages of a big company with national standing. As major corporations took up a dominant position in the postwar economy, franchising offered one of the few means still available for launching a business of one’s own. It was a deal worth remortgaging a house and draining a life savings for, and many franchisees did exactly that to open their first fast-food restaurant.
For both franchisor and franchisee, it was a win-win situation: an aspiring entrepreneur got a business of his or her own, and the fast-food corporation got a much-needed infusion of capital. Even more significant, the corporation gained a committed manager with real skin in the game, totally beholden to it and willing to follow precise instructions about everything from how to keep the books to how to peel potatoes.
The Arm’s Length Advantage
As fast-food companies amassed enough money to open their own restaurants and earned Wall Street’s confidence, major fast-food chains had to decide whether to stick with the franchise model. In the end, they chose to lean in.
In 1965, the year it debuted on the New York Stock Exchange, McDonald’s was a national company with nearly six hundred locations. Franchising had made the company a success, but as its disclosures to investors made clear, selling the name to independent owners was far less profitable than owning restaurants outright. Even though franchisees owned 78 percent of its restaurants, revenues from them came to less than half the revenues McDonald’s made at the minority of restaurants that it owned and operated itself. Seeking a more profitable route, McDonald’s started pouring money into its restaurants of its own, buying out franchisees and opening new ones from scratch. By 1973, the company owned a third of all the restaurants that carried its name, and for a time, franchises seemed to be a model of the past.
But soon after, the company reversed course and doubled down on franchising. One reason was a need for knowledgeable partners. As Chatelain explains in Franchise: The Golden Arches and Black America, by relying on local entrepreneurs to bring McDonald’s to areas like inner-city neighborhoods in Chicago and Washington, DC, the company’s predominantly white executives learned to value franchisees who understood the areas they serviced intimately. By the time McDonald’s and KFC made international expansion a major priority in the 1970s, moving beyond highly developed countries like Canada and the UK to developing territories and countries like Hong Kong and Indonesia, corporate executives were more than willing to put their trust in local partners.
Even in the American suburbs where they still did most of their business, fast-food companies had another reason to return to franchising with newfound zeal: the model insulated them from labor costs, including penalties levied for abuse.
Enter the “Fissured Workplace”
To customers, the question of who owns a given fast-food outlet isn’t top of mind. But franchising matters a lot for workers, as it puts them in a gray area of the labor economy. It’s a concept that economist David Weil calls the “fissured workplace.” While fast-food corporations set the rules and standards for how a restaurant should operate, it’s up to the franchisees to enforce them. When franchisees skirt the law to meet the company’s demands, franchisees can be held accountable, but the fast-food corporations likely won’t be.
I got a taste of the “fissured workplace” myself when I spent a few weeks working at a California McDonald’s two years ago (an experience I detailed in Jacobin earlier this year). Though I was aware that I worked for a franchisee, it was obvious that the rules and standards that defined the job came not from them but from McDonald’s Corp.
Over a year after I left the job, I learned I was entitled to a small payout stemming from a class action suit over stolen wages and poor working conditions. While the suit identified the franchisee and not McDonald’s Corp as a defendant, it made clear the franchisee only followed the corporation’s rules. The “heavy workloads and pressure to meet a 60-second turnaround target for drive-thru customers resulted in chronic understaffing” and led managers to deny workers meal breaks, it said. Day to day, “there were too few employees on duty to handle the workload and attend to customers.” (The franchisee ultimately settled the case out of court but admitted no wrongdoing.)
Under pressure to meet certain “targets,” managers had pushed workers to do too much in too little time and forced them to work without breaks. But if chasing an unrealistic target was the root problem, it was a problem originating with McDonald’s Corp, not the franchisee.
Standardized signs posted near cash registers at McDonald’s around the country remind employees of target times for composite tasks, like taking an order and handling payments. For the store manager, there are other targets, and other reminders to meet them. And there are targets and reminders for the franchisee too — all handed down from McDonald’s Corp.
While the franchisee I worked for (itself a large corporation, with about forty restaurants under its management) may have been forcing employees to meet an impossible standard, it was a standard that came from above.
Fissuring Responsibility
The problem of the fissured workplace isn’t above regulation. California got closer to addressing the problem than any other jurisdiction when it floated legislation that would have made fast-food corporations and their franchisees jointly liable for labor violations. But after the International Franchise Association (IFA), a fast-food trade organization, added a proposition on the state ballot that could have invalidated the law, the IFA negotiated a compromise with the Service Employees International Union, which had taken the lead in pushing for the bill. The resulting legislation scrapped the joint liability clause but increased the minimum wage for fast-food workers to $20 an hour — the highest in the nation.
For labor groups, the higher minimum wage was a major victory. But what many cheered as a step forward actually entrenched the power of the fast-food corporations to the detriment of workers. Higher wages may burden the industry but, like virtually every other aspect of fast-food employment, they are the franchisees’ problem, not the fast-food companies’. To move the needle on workers’ rights, the labor movement and legislatures will have to compel fast-food companies to do as franchisees have long already done: put some skin in the game.