Northwest Arkansas Democrat-Gazette
Wage-stagnation study looks at fast-food contracts
ORLANDO, Fla. — The American fast-food industry is built on two pillars: cheap hamburgers and cheap labor.
As economists try to understand why wages have stagnated across the country’s economy, they are examining the cheap labor part of the equation. A few have zeroed in on an obscure clause buried in many fast-food franchise agreements as a possible contributor to the problem.
Some of fast-food’s biggest names, including Burger King, Carl’s Jr., Pizza Hut and, until recently, McDonald’s, prohibited franchisees from hiring workers away from one another, preventing, for example, one Pizza Hut from hiring employees from another.
The restrictions do not appear in a contract that employees sign or even see. They are typically included in a paragraph buried in lengthy contracts that owners of fast-food outlets sign with corporate headquarters.
Yet the provisions can keep employees tied to one spot, unable to switch jobs or negotiate higher pay. A lack of worker mobility has long been viewed as contributing to wage stagnation because switching jobs is one of the most reliable ways to get a raise.
Defenders of the practice argue that the restaurants spend time and money training workers and want to protect their investment. But two lawsuits, filed this year against McDonald’s and Carl’s Jr.’s parent company, CKE Restaurants Holdings, contend that such no-hire rules violate antitrust and labor laws.
McDonald’s said its policies did not violate any laws. The company recently removed the language from its contract and declined to say whether the lawsuits had played a role in that decision. CKE declined to comment.
The no-hire rules affect more than 70,000 restaurants — or more than a quarter of the fast-food outlets in the United States — according to Alan Krueger, an economist at Princeton University and a chairman of the Council of Economic Advisers in President Barack Obama’s administration who examined agreements for 40 of the nation’s largest fast-food companies.
The provisions, he said, were “ubiquitous” among the companies and appeared to exist mainly to limit competition and turnover, which can keep labor costs low.
The restrictions are different from what are known as noncompete agreements — clauses in employee contracts that keep an employee from jumping to a rival company. Such agreements are typically described as a means of preventing employees from taking trade secrets to a competitor.
Other industries also forbid franchisees from hiring one another’s workers. The practice is more common when turnover rates are high, according to research by Krueger and Orley Ashenfelter, who is also a professor at Princeton and, like Krueger, a well-known labor economist. Health and fitness companies like Curves or Anytime Fitness, and maintenance services like Jiffy Lube have similar rules.
Representatives for Curves and Jiffy Lube did not respond to requests for comment. A spokesman for Anytime Fitness said in an email that employees “frequently move from one gym to another when professional growth opportunities arise and it has not created undue challenges or resentment” among its franchisees.
Krueger and Ashenfelter examined 156 companies in 21 industries, selecting businesses with more than 500 franchise stores in the United States. More than half of the companies imposed some kind of restriction, according to their 2016 franchise disclosure documents, an annual financial filing.
The policies were most common in the fast-food industry: Of the 40 such companies covered in the report, 32 imposed some kind of hiring restriction, including Burger King, Domino’s and Pizza Hut. Workers were often not allowed to take new positions without their bosses’ written permission. Several of the companies surveyed restricted only hiring between franchiser and franchisee.
Domino’s declined to comment. Burger King and Pizza Hut did not respond to requests for comment.
The report’s tally also included McDonald’s, which for at least 30 years had prohibited franchisees from hiring one another’s workers. That changed in March, a spokesman said, when the company informed the owners of its more than 11,000 franchise locations that it would no longer enforce the rule.
The rules have attracted more scrutiny as a result of the two lawsuits challenging their legality.
The McDonald’s spokesman, Andrea Abate, said in an email, “We are confident that the terms of our franchise agreements, past and present, are appropriate and legal.”
McDonald’s abandoned the rule a month after CKE was sued over its version of the provision. But several fast-food experts said the timing could be coincidental because restaurant companies often try to distance themselves from their franchisees to avoid joint liability if the franchisees are sued.
The suit against McDonald’s was filed later on behalf of an employee who worked at a franchise in Apopka, Fla., during the time when the rule was in effect.
Andrew Puzder, the former CKE chief executive who was President Donald Trump’s original pick for labor secretary, once told Congress that franchisees are “not a division, subsidiary or alter ego of CKE, but are truly independent small businessmen and businesswoman.”
The lawyers suing McDonald’s and CKE are trying to use the distinction Puzder made against the companies, arguing that these separate companies within one brand are signing illegal anti-competitive agreements with one another. The lawyers in the CKE case have cited guidance issued by federal officials in October that indicated that it was against the law to, among other things, “refuse to solicit or hire” other companies’ employees.
“They’re either going to have to say, ‘We are separate from our franchisees,’ or ‘We’re one integrated entity,’” said Michael Rubin, a lawyer for former McDonald’s workers who are suing the company separately over accusations of wage violations.
An email sent to Puzder through his personal website was not answered. He withdrew as Trump’s labor secretary nominee in March in the face of Democratic opposition to his positions on workforce issues, and after it emerged that he had employed a housekeeper who was not in the United States legally.