Human Resources | August 2013 | By Christine Blank

Paid In Full?

The wage debate is heating up as advocacy groups attempt to unionize fast-food workers and the government considers a minimum-wage increase.

Fast food restaurant employees across the country are protesting wages.
courtesy fightfor15.org / Photo by Christopher Dilts
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Employee wages have perhaps never been as much of a hot-button issue in the quick-service industry as they are today. Labor unions are trying to organize workers to fight for better wages, and fast-food employees have been striking in several cities across the U.S. this year.

While different operators have different opinions on the validity of the right to unionize and demand higher wages, the recent activity has at the very least called into question the appropriate way to go about wages in quick service. Operators, who by and large have very low profit margins—the typical restaurant has earnings before interest, taxes, and amortization (EBITA) of around 3 percent, according to the National Restaurant Association (NRA)—are left to figure out how much they can pay employees and remain profitable, while also helping them make ends meet and be satisfied with their jobs.

It’s a decision that, of course, is first influenced by national law. During this year’s State of the Union address,

President Barack Obama proposed raising the minimum wage to $9 per hour. And earlier this year, the Fair Minimum Wage Act was introduced in the U.S. Senate and House of Representatives, proposing that the national minimum wage be hiked from its current $7.25 per hour to $10.10 an hour by 2015. Every year after that, the minimum wage would be adjusted to keep in line with inflation.

For their part, restaurant industry influencers are opposed to minimum wage hikes.

“I don’t support raising the national minimum wage. The average restaurant company can’t do that without some very serious price-raising. It is terrible for the industry and the consumer, and has a ripple effect throughout the entire economy,” says Don Fox, CEO of Firehouse Subs. “There is not a lot of wiggle room left, especially if the operator has debt in its business. Plus, labor is one of the industry’s highest line items.”

The NRA is also against raising the federal minimum wage—particularly to $15 per hour, as some labor unions are pushing for—because it would have severe consequences on national unemployment. Scott DeFife, executive vice president of policy and government affairs for the NRA, says wages that high will cripple job availability.

“Labor costs are estimated to be about a third of a typical restaurant’s operating budget,” DeFife says. “If the minimum wage doubles, that is going to have a significant impact on the price of dining out and food costs, and a decrease in jobs.”

In addition, the NRA views current legislative proposals as essentially a moot point. DeFife says minimum-wage debates tend to come and go every few years, and that proponents for this year’s Fair Minimum Wage Act don’t have enough support to move the bill.

Of course, most restaurants do care about paying employees fair wages. Fox says Firehouse Subs franchisees pay their employees higher than their state’s minimum wage when they can, depending on the market. “For example, we have a restaurant in a real booming area of Texas where it is very difficult to get employees,” he says. “The operator in that market is paying well above minimum wage—in some cases, more than double.”

Like Fox, many quick-serve executives would like to pay their employees more than the minimum wage when possible. But they are usually not able to do so on a national scale, says Brent Giddens, managing partner for the Los Angeles office of labor and employment law firm Carothers DiSante & Freudenberger LLP, which represents regional and national quick-service chains.

“From our clients’ perspective, a mandated increase in minimum wage would not be welcome because of the impact on jobs and the ability to remain competitive,” he says. “Some markets could withstand it, and some markets could not.”

For example, California has a state minimum wage of $8 per hour. A national minimum wage hike above that level would not only require an increase in pay for hourly employees, but also for some California-based salaried employees. Giddens says a requirement for most salaried employees in California to maintain exempt status is they must be paid at least twice the minimum wage. If the national minimum wage was increased to $10.10, he says, the yearly minimum for salaried employees to maintain exempt status would be more than $42,000 a year.

In fact, the higher minimum wage in California and other states and cities is one of the primary reasons that a federal minimum wage hike is unnecessary, DeFife says.

“The important thing to remember is that the state and local governments are very active … in raising their minimum wage,” he says. “More than half of the country operates on something other than the federal minimum wage already.”

Many quick-service brands contend that an increase in the federal minimum wage would be too costly for their companies. Steak ‘n Shake CEO Sardar Biglari said at this year’s Biglari Holdings shareholder meeting that an increase in the minimum wage to $9 an hour would cost the company $12 million, while an increase in the minimum wage to $10 would cost the company $27 million.

However, one of the rallying cries for advocates of higher fast-food wages centers on the fact that some of the quick-service chains subject to worker strikes and labor union organization in recent months are actually profitable enough to afford
the wage hikes.

“I just find the line that they cannot afford to pay higher wages does not hold water, when you look at the profits they are making,” says Tsedeye Gebreselassie, an attorney with the National Employment Law Project. “McDonald’s posted $5.5 billion in profits last year and Yum! Brands had $1.6 billion in profits.” She adds that some limited-service restaurant chains pay their employees more than the national minimum wage, “and they are doing just fine.”

“Multibillion-dollar companies are making record profits. They can afford to make wage changes,” says Jonathan Westin, director of advocacy group Fast Food Forward and executive director of New York Communities for Change, which supports low-income individuals. McDonald’s corporate office, he says, typically defers to its franchisees when confronted about its wages. “Everything we have heard from McDonald’s Corporate is that it’s the franchisees’ responsibility. It’s a lot more controlled than they let on; we know the corporate office controls [everything, down to] how much sauce gets put on a Big Mac.”

In a statement to QSR, McDonald’s USA defended its compensation practices. “Employees are paid competitive wages in accordance with all federal and state wage laws, and have access to a range of benefits to meet their individual needs,” the statement says.

DeFife says labor unions spend too much time focusing on the high wages of CEOs who are running multimillion-dollar quick-serve chains.

“They like to focus on the brand’s CEO and not the person who is actually operating the franchise and the stores,” he says. “Running a national corporation is very different than running five stores in Chicago, for example.”

Further, the purpose behind strikes against quick-serve chains, DeFife says, is not necessarily to benefit or organize quick-serve workers. “By focusing on our industry, they use it to make a point that they can turn into benefitting workers in other industries,” he says. Labor unions that are organizing the strikes are realistic that they will not organize quick-serve workers into unions, he adds. “Most of the young workers have never seen a great value in paying the union dues.”

After quick-serve workers walked off the job in this spring’s strikes in Chicago and other cities, some franchisees did agree to raise their starting wage. Jennifer Epps-Addison, economic justice director of Citizens Action of Wisconsin, which has organized some fast-food worker strikes, says there were some instances in which franchisees raised wages for employees by 25–50 cents an hour.

While the worker strikes—which also targeted Wendy’s, Subway, Burger King, Taco Bell, Dunkin’ Donuts, and a few retail brands—were not “devastating” to the corporations, they served as a wake-up call, Epps-Addison says. “We have a lot of people in this country who work in the low-paying service-sector industries who are the working poor,” she says.

About one-third of all jobs in Chicago, for example, are now considered low-wage jobs, according to the Workers Organizing Committee of Chicago. Further, six out of 10 of the fastest-growing U.S. jobs by 2020 are projected to be in low-wage occupations, including retail and the “food preparation and serving” sector, according to the U.S. Bureau of Labor Statistics.

“We have to make sure that these are decent jobs,” Gebreselassie says. “If we don’t, more workers will be relying on public assistance and will be able to spend less, which impacts our economy.”

Because the national minimum wage does not increase annually—it was last raised in 2009—it has not kept in line with inflation, proponents of higher wages argue. Gebreselassie says the minimum wage should be much higher than $7.25 per hour because that adds up to $14,500 a year on a 40-hour work week, and most fast-food workers aren’t given full-time hours. The low wage forces quick-service workers to find other part-time jobs or to seek public assistance to support themselves, the proponents say.

However, only about 5 percent of restaurant industry workers are at the federal minimum wage level—the rest are earning above that—and a little more than 50 percent are teenagers, DeFife says, citing the U.S. Bureau of Labor Statistics. “In many cases, minimum wage is a starting wage and high performers are moved up quickly. Eighty percent of managers and owners started at entry-level jobs; the industry is really an industry of opportunity,” he says.

While some suggest the $7.25-per-hour minimum wage is sufficient in the fast-food industry because many employees are students or just out of high school or college, the reality is that more quick-service workers are older and are using the jobs as a way to support themselves and their families, Gebreselassie says. The U.S. Bureau of Labor Statistics reports that the median age for a fast-food worker is 28, while the median age for female fast-food workers is 32.

In certain states and cities, a wage that is “much higher” than the national minimum wage is necessary in order for workers to survive, Westin says.

“Looking at rents in New York, it is very clear that incremental increases aren’t going to get us there,” he says. “Workers believe in what they are demanding: $15 per hour is what they need to live off of.”

While several operators either keep to a minimum-wage model or let their franchisees determine wage rates, many quick-service and fast-casual companies are finding that higher wages are developing a strong company culture. Take Boston-based Boloco, a 21-store fast-casual burrito chain, as an example. None of its employees make less than $9 per hour, and some earn as much as $17 per hour. The average wage for all employees is $11.50 per hour.

“Our objective is to build a successful, profitable business model and pay people as much as possible. We are trying to increase wages,” says John Pepper, CEO and cofounder of Boloco.

The company has always paid higher than the national minimum wage, Pepper says, because he believes it is the right thing to do and because it results in happier, more reliable employees. “If we are asking for all these things from our employees—real hospitality, really taking care of guests, and being loyal to the brand—you have an obligation to give them a fighting chance,” he says. “If you don’t give people a path to move beyond the wages they are at now, they are going to lose faith in the system. Once they lose faith, it is hard to restore it.”

One of the reasons employee theft is so high in the restaurant industry is that many operators do not pay their employees enough, Pepper says. “Why not try to get ahead of that? Our philosophy is, let’s set a standard so high that it pays for the better benefits that we are paying,” he says.

Boloco’s wage and benefits structure is modeled after successful restaurant operators such as Starbucks, which provides its employees with better wages and health benefits. Pepper says Starbucks CEO Howard Schultz’s keynote address at this year’s National Restaurant Association Restaurant, Hotel-Motel Show inspired him with a message about the “softer side” of building a business.

To that end, Boloco pays higher-than-average wages, has a robust health plan for employees, and offers a four-week sabbatical to all employees. As a result of this pay structure, Boloco’s turnover for team members is 64 percent, compared with the national restaurant industry average of 113 percent.

As Boloco looks to grow its company, Pepper wants to prove to potential investors that restaurant operators can be profitable while paying higher wages.

“Higher wages lead to hard-working people who add value to shareholders,” he says. “We have found that there are a lot more questions from investors and capital equity firms in recent years on the value that the company brings to the picture. The value has to do with your food and sourcing, your impact on the environment, and how you are treating people in all ways.”

Investors aren’t the only ones who want employees to be treated well. A recent survey from Restaurant DemandTracker found that 48 percent of consumers prefer to visit restaurants that treat their employees well.

Firehouse Subs’ Fox says he knows the way workers are treated is extremely important. But in his chain’s survey of more than 1,700 employees, most said their job satisfaction was dependent upon their relationship with the store’s general manager—not their wages. “They are much more likely to be dissatisfied and leave their job because of that [relationship],” Fox says. As a result of Firehouse’s strong emphasis on the employee-manager relationship and other employee initiatives, the brand’s turnover rate is 80 percent.

Still, Fox says, restaurant industry leaders can do a better job of inspiring workers to achieve more in their jobs. “Those companies that inspire leadership to in turn motivate their staffs are great companies,” he says. “We are an industry of maximum opportunity as long as they [employees] have the drive, talent, and ambition.”