McDonald’s Is Being Accused of Charging Its Franchisees ‘Sky High Rents,’ Forcing Them to Keep Wages Low

May 02, 2017

The Service Employees International Union , backer of a five-year campaign to improve pay and job conditions for fast-food workers, on Tuesday asked Illinois and California officials to investigate how McDonald's Corp calculates restaurant rents, which generate about one-fourth of its revenue.

The union behind the "Fight for $15," campaign alleges that McDonald's does not accurately or specifically disclose the formula used to set rents and that it charges far more than landlords of other fast-food chains. That makes it difficult for the company's 2,500 U.S. franchisees to raise hourly wages for restaurant crews, it said.

"McDonald's sky-high rents leave franchisees financially squeezed, making it difficult to impossible for many of them to pay workers anything more than minimum wage," said Scott Courtney, executive vice president of the SEIU, in a statement announcing the requests to the Illinois attorney general's office and the California Department of Business Oversight.

"We are confident in the legality and appropriateness of our financial relations with our franchisees and our disclosures of those relationships," McDonald's said in a statement. "Our business model helps our franchisees secure prime real estate locations and reflects a significant level of company investment in the restaurant premises."

California's Department of Business Oversight said in an email that it "takes these allegations seriously and is reviewing the matter. Until that review is complete, the DBO must decline further comment."

A spokeswoman for the Illinois attorney general's office said it received the request and is reviewing it.

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McDonald's, unlike many other restaurant chains, either owns or holds long-term leases on its restaurant sites. It then leases or sublets properties to franchisees.

The fast-food company last year collected over $6.1 billion in rent from its more than 31,000 franchised restaurants, according to regulatory filings.

"This issue is always bubbling," said John Gordon, founder of Pacific Management Consulting Group.

SEIU's move comes a week after McDonald's Chief Executive Steve Easterbrook told investors that franchisees were overwhelmingly positive about the company's now two-year-old turnaround plan, which depends in part on convincing restaurant operators that growth is strong enough to justify pricey property renovations.

Easterbrook in March told analysts that McDonald's franchisees continue to generate cash flow growth at or near all-time highs in many of its markets worldwide.

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