How Franchise Restaurants Opened the Door to the Gig Economy

The franchise model is legally a trademark licensing arrangement in which a brand owner collects royalties of roughly six to twenty percent of sales while dictating prices, hours, product mix, staffing levels, and even customer greeting language. Brian Kalachi argues that franchisees function as middle managers for a large corporation but carry personal financial risk with no corporate shield, meaning a failed location can cost an operator their home and car. Because franchisors control most inputs, wage suppression and effort extraction from workers become the primary levers franchisees have to improve profitability.

The modern fast food franchise model dates to the 1950s and 1960s, but petroleum refiners pioneered the legal structure earlier to circumvent chain store taxes, antitrust law, and the Fair Labor Standards Act of 1938, achieving vertical integration without owning assets or employing workers directly. Ray Kroc and Colonel Sanders openly acknowledged their model was not fully legal and formed the International Franchise Association to change laws in their favor. Franchisors fought strategic legal battles through the 1960s and 1970s to legalize vertical restraints over nominally independent businesses, aided by the University of Chicago economics and law school, and largely won.

The Teamsters Union, attempting to organize gas station attendants in the 1960s, called the franchisor legal strategy double barrel immunity, arguing franchisors claimed to be a single entity for antitrust purposes while claiming franchisees were separate companies to avoid labor law obligations. Senate Antitrust Committee hearings in 1963 and 1965 questioned whether franchisees could be considered truly independent when franchisors controlled products, prices, and operations. Antitrust law initially constrained franchisors from setting prices or defining territories, but those constraints were largely dismantled by the mid-1970s.

McDonald's and many other chains maintained no-poaching agreements requiring workers to obtain permission from their current franchise owner before working at another franchise location. A horizontal no-poach agreement between two franchisees would be per se illegal, but a vertical mandate from McDonald's to all franchisees falls under the more permissive rule of reason standard, making it very difficult for workers to challenge. Washington State entered a consent decree with McDonald's and other chains to eliminate no-poach agreements, and wages rose causally as a result. Research by Alan Krueger and David Weill's book The Fissured Workplace both find that wage workers earn more at company-owned chain locations than at franchised locations within the same chain, and that franchised establishments violate worker safety and other rights at higher rates.

Broadband internet connected to point-of-sale systems in the 1990s gave franchisors a continuous data stream enabling intense operational control. McDonald's now exerts more operational control over its franchised locations than a vertically integrated firm like US Steel or General Motors had over its own plants in 1950, despite employing far fewer people directly. AI-enabled surveillance now allows franchisors to identify individual slow employees by name and instruct franchisees to take action without directly firing those workers. Staffing levels at McDonald's are mandated in the operations manual, which is incorporated into the franchise contract and can be changed unilaterally by McDonald's at any time.

The joint employer rule enacted under Obama attempted to allow workers to bargain with McDonald's itself, given that McDonald's controls staffing, supplies, and operating hours. That rule was overturned under Trump, reinstated under Biden, and reversed again, leaving the question of who the employer actually is legally unsettled. Franchising expanded rapidly after the Taft-Hartley Act of 1947, a timing the speaker treats as deliberate rather than coincidental, since Taft-Hartley restricts workers to acting only against their immediate employer, which is typically the franchisee rather than the franchisor.

The legal loophole franchisors opened in the mid-twentieth century has since expanded into a framework that companies like Uber and Amazon now use. Amazon's Delivery Service Partner model is structurally closer to franchising than Uber because DSP contractors are small businesses operating multiple trucks out of Amazon facilities, wearing Amazon uniforms, and driving Amazon-branded vehicles, yet they are legally distinct from Amazon. Uber and Lyft treat each driver as an independent entrepreneur, which Joe Weisenthal described as misleading since the arrangement eliminates both the downside and the large right-tail upside associated with conventional entrepreneurship. The speaker's central policy argument is that any entity directing and controlling work, including through algorithmic direction, should be held responsible as the employer for wages, union bargaining rights, and liability for harms its systems cause.