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The Real Reason Behind the McDonald's Corporation Wage Hikes

By Rich Duprey - Updated Nov 27, 2018 at 2:22PM

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Despite what McDonald's will have you believe, it is not because the company had a change of heart about the low pay its employees make.

McDonald's (MCD 0.32%) is raising the entry-level wage for some 90,000 employees at its company-owned restaurants to $9.90 per hour, an 8% hike from the average $9.10 they are currently paid.

Depending on whether you believe someone flipping burgers and dunking fries is entitled to be paid $15 an hour -- the rate advocated by labor activists who are calling for nationwide strikes against fast food restaurants on April 15th -- the announcement is either a good faith first step that pays what the job is worth, or a half-hearted failure that neglects the vast majority of the company's 750,000 workers who are employed by its 3,100 franchisees in the U.S.

In both cases you would be wrong.

Two men and two women eating at a table in a fast-food restaurant

Image source: Getty Images.

An ulterior motive
McDonald's wage hike had little to do with it being a corporation with a conscience, despite CEO Steve Easterbrook saying the moves "demonstrate meaningful progress" in improving employee benefits and enhancing the turnaround of its business. Instead, the burger chain was trying to make a point: When it comes to doing business with its franchisees, McDonald's is not a "joint employer."

That point is essential as that definition is the linchpin of a number of contentious cases pending before the National Labor Relations Board, which said earlier this year that due to McDonald's exerting "sufficient control over its franchisees' operations, beyond protection of the brand," it was liable for the unfair labor practice violations committed by the franchisees.

Since November 2012, nearly 300 cases were filed with the NLRB against McDonald's alleging violations. The board said 86 of the cases had merit while another 71 remained under investigation. Only 10 of the charges involve company-owned stores.

McDonald's position, as well as that of those siding with the restaurant operator, including the franchisees themselves and the trade group that represents them, is that franchisees are independent businesses that set their own wages and control the working conditions within their restaurants.

You did not build that
These independent businessmen and women invest anywhere from $955,000 to $2.3 million in start-up costs -- 40% of which must be in cash or other non-borrowed resources -- for construction, equipment, and inventory in their McDonald's franchise. They then pay a monthly fee equal to 4% of their monthly gross sales as well as rent, which is also based on a percentage of monthly sales.

It is McDonald's contention that while it helps franchisees by providing them access to resources related to food quality, customer service, and restaurant management, the NLRB ruling strikes at the very foundation of the franchise system. But it would make union organizing activities easier, which is in part driving the campaigns around the country to raise the minimum wage.

More than just a greasy spoon
McDonald's Easterbrook has been tasked with turning around his faltering company, which has suffered from falling comparable sales since late 2013 as consumer tastes change and competition intensifies with the appearance and proliferation of fast casuals like Shake Shack and The Habit Restaurants.

Yet, even though consumers are said to be seeking out healthier fare, which is what they are supposedly rejecting when they turn up their noses at McDonald's burgers and fries, rivals like Wendy's and Burger King parent Restaurant Brand International have still managed to string together consecutive quarters of high sales growth.

It is obviously something more endemic to McDonald's itself and Easterbrook's challenge is to create a restaurant where customers will want to come and employees will want to work.

Part of that is paying them more and giving them improved benefits. McDonald's announced that starting July 1st, it will pay its employees $1 more than the legally mandated minimum wage, and it anticipates that by 2016, the average hourly wage rate for McDonald's employees at company-owned restaurants will be in excess of $10. Franchisees will have to make their own decisions.

Trickle-down economics
That move, of course, is going to put pressure on the franchisees even as they are struggling to cope with the downturn in sales while implementing the many new programs Easterbrook is initiating.

Among the efforts that have been unveiled in recent weeks include fresher ingredients, build your own burger options through a kiosk ordering system, and the launch of bigger sirloin burgers. Beef prices are at record levels, though, and having to pay higher wages on top of it could pressure profits even more for franchisees.

That is something of a secondary concern to McDonald's at the moment, which needs to demonstrate that these business operators are their own bosses. There is a larger point to be made and pitting itself against its franchisees seems to be how that message will be delivered.

Follow Rich Duprey's coverage of all the restaurant industry's most important news and developments. He has no position in any stocks mentioned. The Motley Fool recommends McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

McDonald's Corporation Stock Quote
McDonald's Corporation
$266.29 (0.32%) $0.85
The Wendy's Company Stock Quote
The Wendy's Company
$21.29 (0.61%) $0.13
The Habit Restaurants, Inc. Stock Quote
The Habit Restaurants, Inc.
Shake Shack Inc. Stock Quote
Shake Shack Inc.
$53.87 (-0.33%) $0.18
Restaurant Brands International Inc. Stock Quote
Restaurant Brands International Inc.
$60.82 (0.48%) $0.29

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