A couple of years ago, I mentioned how union-backed demands for higher minimum wages could end up biting fast food franchise owners right in the wallet. Since then, a number of cities have increased their minimum wages to $15 an hour and a few retailers have increased low-wage earners' pay to offset the negative images they were gaining through worker protests. And, as has been clear, fast food operators have often been the targets of demonstrations and PR campaigns.

Now, in a twist, there's some growing partnership between franchise owners and the Service Employees International Union. Rather than a sudden Kumbaya moment, this may be a case of entrepreneurs saying, "The enemy of my enemy is my friend." And in some cases the perceived enemy is the franchisor.

FTC complaint

SEIU sent a 32-page petition to the Federal Trade Commission requesting an investigation into franchisor activities it called "abusive and predatory" and asked that top companies be forced to turn over information about their relationships with their franchisees. The union has pushed to have franchisors, specifically McDonald's, legally treated as joint employers of the workers at franchise locations, which would change the potential economics of how much employees could be paid. Fast food franchises often see profit margins of only mid-single digits, meaning that there is little money to offer generous wages.

But what made the phone conference today unusual was the presence of people who were long-term franchise owners. A group of McDonald's franchisees from Puerto Rico, one from California, and a 7-Eleven franchise owner also from California were on the call, complaining about the policies that both companies have put into place over the years.

According to said Luis Moyett, a 34-year McDonald's franchisee in Puerto Rico, said that after years of successfully building the market, he and other independent operators on the island saw McDonald's "make a financial experiment in Puerto Rico at our expense." According to Moyett, the company brought in a third-party sub-franchisor from South America that abandoned the important advertising cooperative, "degraded services," and competed with the existing franchisees, opening its own locations close to theirs and taking business.

Kathryn-Slater Carter of California said that she lost the franchise business she had inherited from her father after speaking out against franchise industry practices. She claimed that someone from McDonald's came in, saw that they were selling coffee for a nickel more than the "recommended" corporate price, and told them to immediately sell their locations.

Jas Dhillon, a 7-Eleven franchisee from Los Angeles, said that the company has systematically taken actions that were bad for franchisees, including lowering the operation period from 15 years to 10 years, making franchisees pay all credit card processing fees, and take increasingly larger portions of sales at successful locations rather than the traditional 50-50 split. Dhillon was associated last fall with a group of South Asian 7-Eleven franchise owners who claimed that the company wanted to take their franchises and resell them at higher rates to boost profits. He claimed that owners had little control even over basics like air conditioning and heating settings, could not adjust volume on televisions, and could not withdraw money without approval by the chain, which handled all bookkeeping.

A "union-financed campaign"

In a statement sent by a spokesperson, McDonald's claimed to have "a strong working relationship with our 3,100 independent franchisees" and dismissed the action as "driven by a union-financed campaign that has targeted the McDonald's brand." 7-Eleven did not respond before publication.

It might be that these stories are isolated incidents, but perhaps not. Some chains -- McDonald's is one -- pull a lot of gross revenue out from the top line. Even as business increases at a McDonald's location, rent increases as a percentage of sales, as Nation's Restaurant News has reported. Food prices are also up, and with the single-sourcing supply model, franchisee operators can't find better prices elsewhere, even if they exist.

The central company has also supposedly pressured franchisees to increase kitchen staff to get food out faster. According to a consultant who used to be a McDonald's executive, a quarter of franchisees don't generate positive cash flow.

Franchising is a business like any other. The more money is taken off the top, and the less control an entrepreneur has to run the operation in a way that makes sense in that particular market, the harder it will be to make money. And, apparently, the more attractive talking to unions becomes.

Published on: May 18, 2015