You win some, you lose some. That’s the short version of the outlook for quick-service franchise owners as we head towards the end of the first quarter of 2020.
On the plus side, the Trump Administration has finally nixed the controversial “joint-employer” rule that has roiled the quick-service sector for more than a half a decade. Whether that decision will stand for more than a few months, though, depends on what happens come November.
On the con side, the entire field of candidates in the Democratic presidential primary has jumped on the $15-an-hour bandwagon, including one particular billionaire and former New York City mayor. And the number of city and state regulations across the country that are taking aim at the quick-service sector – sometimes in very odd ways – only seems to be growing.
Those dastardly drive-thrus
There is a small but growing movement to ban drive-thru windows. Really? Yes, really. Santa Clara is the latest city to take aim at drive-thru windows, a staple now of most quick-service restaurants. Officials in the California city recently voted to extend a moratorium on new drive-thrus for up to a year. The emergency ban is needed, officials say, thanks to cars stacking up in the drive-thru lines of local restaurants, supposedly creating traffic problems.
At least one big city has also adopted a drive-thru window ban: Minneapolis. The Midwestern city banned new drive-thrus in August as part of a larger rezoning plan, with city officials arguing it would help reduce greenhouse gases from idling cars. But there’s more. Some supporters of the Minneapolis drive-thru ban had a more ambitious agenda, arguing it would also help cut down on local obesity rates.
The ban prompted Reason magazine to weigh in with a critique of the budding drive-thru bans titled, “Fast-Food Bans Are a Dumb Idea That Won’t Die,” in which it accuses “fast-food critics [of] using fake nutritional and environmental arguments to make it more difficult for consumers to eat fast-food.”
This is no laughing matter; franchisees know losing the sales from the drive-thru would be devastating. QSR Magazine estimates as much as 70 percent of all sales at McDonald’s franchises come through the drive-thru windows. Some Dunkin’ franchise owners report similar results, though the magazine says drive-thru business accounts for 30 percent of all Dunkin’ sales.
Long Beach, Calif. and Fair Haven, N.J. are among the among the other U.S. cities with bans on new drive-thrus, but this is not just an American phenomenon. Several communities in Canada have also slapped bans on new drive-thru windows as well. A Canadian study found a range of motivations, from the typical concerns about bad eating habits, to aesthetic concerns that drive-thrus were an eyesore. Go figure.
Look who’s joined the fight for $15
Watching the field of contenders in the Democratic presidential primary tear into one other, it appears there’s not much they agree on. But appearances can be deceptive. While there’s a big divide over Sen. Bernie Sanders’ would-be takeover of the country’s health care sector, better known as Medicare for All, the field of contenders is all in agreement that the federal minimum wage should be hiked to $15 an hour, up from the $7.25 an hour a rate it has stayed at for years now.
Former Vice President Joe Biden hopped on the $15 an hour bandwagon in the first major speech of his presidential campaign last April. Fellow moderate and Democratic presidential primary candidate Pete Buttigieg is playing up his $15 an hour bona fides as well, recently joining striking McDonald’s workers in Charleston in the days before the South Carolina primary.
Still, probably the most striking convert to the $15 an hour campaign is the most conservative candidate in the Democratic field, billionaire Michael Bloomberg.
The ex-Republican and former NYC mayor rolled out plans for revamping the nation’s labor laws, including $15 an hour base wage for all workers in the country. Bloomberg recently took some heat for his embrace of a $15 an hour minimum wage in Wall Street Journal opinion article.
Michael Saltsman, managing director of the Employment Policies Institute, noted that during his time running the Big Apple, Bloomberg took a much different stance. Back then, Bloomberg vetoed a City Council vote to roll out a “living wage” of $11.50 an hour, and then later sued after the council overrode his veto. Job growth in the city’s quick-service restaurant sector has since fallen in half, from 7 percent a year between 2010 to 2015 to not even half that in the last two years, the piece contends.
“If $15 is bad for workers in Midtown Manhattan, imagine the consequences in Manhattan, Kan.,” Saltsman wrote. “Mr. Bloomberg used to appreciate that reality.”
Obama-Era Labor Law Finally Repealed
It took more than three years to get there, but the Trump Administration has finally delivered on its promise to get rid of the Obama-era “joint-employer” ruling. In late February, the National Labor Relations Board took the final step in rescinding the controversial 2015 ruling. It is worth noting, the original ruling was made by a board appointed by a Democratic administration, and was rescinded by members appointed by a Republican administration promising to be more business-friendly.
The original ruling put franchisors on the hook for a range of issues, from pay to hours, traditionally left up to franchise owners, even if the control was indirect, as long as certain conditions were met.
Critics of the Obama-era rule argued it threatened to undermine the foundation on which the franchising sector was built – and through which countless individual franchisees have built thriving businesses – while also opening the door to a sweeping unionization of the sector.
For franchisors like Dunkin’ Brands or McDonald’s, the NLRB’s about-face issuance now means they can no longer be held responsible for the pay and treatment of franchise employees unless they exert direct control over them. Under the NLRB’s new and improved version, a franchisor can only be found to be a joint-employer only if it exerts direct control by hiring and firing a franchisee’s employees, controlling and supervising the schedule of employees, setting age rates and wages for employees, or maintaining their employment records.
Regulatory tidal wave?
At a time when QSR operators are facing unprecedented challenges to finding and retaining employees, a virtual tidal wave of labor regulations is making their job even harder—especially in some of the nation’s biggest cities.
The story was highlighted recently in an article in QSR magazine titled, “Labor Legislation Bears Down on the Fast-Food Industry.” Companies like Shake Shack and Chipotle say they are struggling to comply with new fair workweek regulations adopted by New York City, while operators in Chicago and Philadelphia are facing new rules governing workplace scheduling.
The new laws are already sparking legal action, with New York taking Chipotle to court over allegations by workers at a Chipotle restaurant in Brooklyn claiming the company violated the City’s new scheduling regulations.
Meanwhile, in Massachusetts, Chipotle and Wendy’s are both on the hot seat after being found to be in violation of child labor laws. Chipotle has been fined $1.37 million while Wendy’s is on the hook for $400,000 in penalties.
“These regulations add a significant amount of inefficiency to our labor model, removing the ability for more dynamic scheduling, and adding payroll costs and administrative burden to [our] managers,” Shake Shack’s CFO Tara Comonte told investors in November.
Summing up
Rules and regulations have a way of eating away at profit margins for small business owners. And there certainly seems to be a rising tide of new regulations passed by cities and states that are targeting quick-service restaurants, from the broader push for a $15 an hour minimum wage to the work scheduling rules in New York, Chicago and Philadelphia. The prospect of losing drive-thru business would be frightening to any franchisee, yet we are seeing a growing number of communities seeking to ban drive-thru windows. It pays to pay attention to the information in this space as well as Ed Shanahan’s weekly newsletter, “Small Regular No Sugar.” DDIFO will continue to monitor the issues, rules and regulations that will impact how you operate your business and profit from it.
