In 2013, McDonald’s generated some ghastly publicity when it came out that the fast-food giant was advising burger flippers to go on food stamps. Why didn’t McDonald’s, a multinational corporation that generates more than $26 billion in annual revenue, simply pay its burger flippers a living wage? The answer in most (but not all) cases was that, appearances to the contrary, most McDonald’s burger flippers don’t work directly for McDonald’s. They work for McDonald’s franchisees—independent, mostly small businesses that contract with McDonald’s Corporation to lease and operate one or more McDonald’s restaurants according to a mind-bogglingly specific set of rules that guarantees every McDonald’s will be indistinguishable from every other McDonald’s.
McDonald’s is not an isolated example. Over the past half-century, corporate America has systematically shed low-wage workers, either by offshoring them, contracting out their work, or designating them as independent contractors. Only rarely today will a large corporation employ someone earning less than $30,000. That’s not because corporations have gotten more generous but because they’ve gotten more wary of assuming responsibility for low-wage workers. Off-loading them spares corporations bad publicity, and in effect allows them to delegate routine labor violations to much smaller companies that can easily liquidate and/or rename themselves if they run into serious legal trouble.
The contractors don’t try very hard to disguise the nature of the service they provide. In a Pulitzer-winning series on migrant child labor for The New York Times, Hannah Dreier reported that Packers Sanitation Services Inc. pitched itself on its website as being able to “take the liability and risk off your facility’s record.” Packers was as good as its word when the Labor Department in February 2023 fined it $1.5 million for assigning migrant children to overnight shifts in 13 meatpacking plants in eight states. Packers took nearly all the heat, while most of the Fortune 500 companies that owned the plants involved—Tyson, Cargill, etc.—went unpunished. Packers then “rebranded” itself as Fortrex and moved its corporate headquarters from Kieler, Wisconsin, to Atlanta. Problem solved.
The Brandeis economist David Weil labeled this phenomenon “the fissured workplace,” in an influential 2014 book of that name whose thesis was that changes in the structure of corporate hiring that are typically thought of as efficiencies are actually a conscious effort to evade union drives and government-guaranteed labor protections, such as child labor prohibitions and payment of minimum wage, overtime, Social Security tax, and unemployment tax. Weil did his best to reverse that trend when he ran the Labor Department’s Wage and Hour Division under President Barack Obama. But when President Joe Biden renominated Weil for that post, the International Franchise Association, or IFA, a lobby group founded by franchisors and still dominated by them, campaigned against Weil and won sufficient support from the Senate GOP and three Senate Democrats (Kyrsten Sinema and Joe Manchin, who later became independents, plus Senator Mark Kelly) to defeat Weil.
The IFA has had a much easier time during President Donald Trump’s two terms in office, as demonstrated by a proposed Labor Department regulation severely limiting the circumstances under which a corporation can be held accountable for work done on its behalf under the 1938 Fair Labor Standards Act, or FLSA, which governs minimum wage and overtime. (A separate joint-employer standard under the 1935 National Labor Relations Act governs union organizing and other concerted activity, and is enforced by the National Labor Relations Board.) The nonprofit Economic Policy Institute, in a public comment sent last week to the Labor Department, estimates that the proposed rule would affect about 15 million workers in “fissured establishments,” of which about 10 million would be the employees of franchisees, and that the rule would cost these workers almost $1 billion annually.
Prior to Trump, the Labor Department followed a guidance document on joint employment drafted in 2015 by Weil. Regarding “vertical joint employment,” wherein an employee works for Company B, which in turn is contracted to Company A, Company A would be designated a joint employer when “the economic realities show that” the worker is “economically dependent on” Company A. This was less an interpretation than a description of what the FLSA actually says. Weil noted that the FLSA defined an employer very broadly as “any person acting directly or indirectly [italics mine] in the interest of an employer in relation to an employee.” (You can look it up.)
But after Trump came into office in 2019, his Labor Department tore up Weil’s guidance and issued a regulation that defined an employer as interacting only directly with an employee. If Company A did not hire and fire a worker for Company B, or schedule that worker’s time, or dictate that worker’s specific work conditions, or set that worker’s wages, or maintain that worker’s employment records, then Company A was not a joint employer. This departed quite blatantly from the statutory language—so much so that a federal court later threw the Trump rule out.
Now the second Trump administration is taking another whack at a Labor Department joint-employment rule, and if any substantive difference exists between Trump’s earlier version and this new one, I can’t see it. Once again, the regulation contradicts the language of the Fair Labor Standards Act by saying that indirect control over employees isn’t good enough to establish that Company A is a joint employer.
The best case the business lobby can make in defense of Trump’s proposed rule is that although it contradicts the statute, it captures the federal government’s past reluctance to enforce it, especially with respect to franchising. In what follows, I rely heavily on an excellent new book, Chains of Command: The Rise and Cruel Reign of the Franchise Economy, by Brian Callaci, chief economist at the nonprofit Open Markets Institute.
When fast-food franchising took off in the 1960s and 1970s, it was often judged in violation of antitrust law, which did not permit collusion between Company A and Company B. The franchisors answered that prohibitions on such “vertical restraint” did not apply because Company A and Company B were essentially the same company. Judges didn’t always buy that, but it was kind of true. Indeed, for a long time the Small Business Administration refused to give loans to Company Bs on the grounds that these weren’t small businesses at all but rather the equivalent of branch offices for Company As.
Unfortunately, franchisors simultaneously contested responsibility for labor violations at Company B by arguing, no, actually, these are two separate companies … which was kind of not true. Yes, Company B signed a licensing agreement to run a fast-food joint for Company A on certain (quite extensive) terms. But Company A could later change that contract’s terms without requiring any sign-off from Company B. It was essentially sharecropping (Callaci more politely likens it to tenant farming), wherein Company B, after being sucked dry by Company A, eked out razor-thin profit margins by squeezing employees. Company A didn’t have to care very much about whether Company B was profitable because it took its money off the top.
Granted, there have been a few franchisee success stories wherein Company B purchased multiple franchises and scaled up sufficiently to earn a real profit. But most Company Bs are single-restaurant operations that barely get by. Callaci quotes one franchise consultant describing the sort of franchisee Company A was looking for:
An entrepreneur makes the worst franchisee. You might think that they would do well, but it is just the opposite. For one thing, they’ll never listen to you.… You don’t want any creative thinkers, either. Again, these people will not follow your system, and instead they’ll look for ways to do their own thing. You want someone who follows the rules.
Ouch.
Fast-food franchising became the behemoth it is today because of an FTC rule in 1979 that gave Company A a get-out-of-antitrust-jail-free card so long as Company A was fully transparent to Company B up front about what a terrible deal it was agreeing to. Franchising also got a boost from the adoption of the “consumer welfare standard,” which said antitrust violations occurred only if consumers were harmed. If franchisees or burger-flippers were harmed, it didn’t matter.
Today the consumer welfare standard is on its way out, but that transition is not happening quickly. Fast-food franchisors used to argue that it didn’t matter how much Company B abused its workers because they were just kids working after-school jobs. But that stopped being true some time ago. Now fast-food employees are mostly grown-ups, often with families, and their best recourse, if they can’t make ends meet, is to go on welfare. Trump’s proposed joint-employer rule will impoverish these workers even more.
