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The Forms and Consequences of the Fissured Workplace

d In his book Th e Big Squeeze, New York Times reporter Steven Green- house recounts a cavalcade of woes facing people in their daily work life. Drawing on hundreds of interviews, Green house summarizes the worsening conditions at the workplace faced by millions of workers:

One of the least examined but most important trends taking place in the United States today is the broad decline in the status and treatment of American workers—white- collar and blue- collar workers, middle- class and low- end workers— that began nearly three de cades ago, gradually gathered momentum, and hit with full force soon after the turn of this century. A profound shift has left a broad swath of the American workforce on a lower plane than in de cades past, with health coverage, pension benefi ts, job secu- rity, workloads, stress levels, and often wages growing worse for millions of workers.

Th e book recounts case after case of eroding wages and benefi ts and the often egregious violation of basic labor standards, abrupt termination of long- standing and loyal employees, fl agrant discrimination, and abusive behavior by supervisors.

Scholars and pop u lar writers alike have documented for more than a de- cade the fact that working conditions in the United States— and those in many other industrialized nations— have declined. Even before the onset of the Great Recession in December , a growing part of the U.S. workforce became increasingly vulnerable to a range of economic, health and safety,

Weil, David. The Fissured Workplace : Why Work Became So Bad for So Many and What Can Be Done to Improve It, Harvard University Press, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/sfsu/detail.action?docID=3301409. Created from sfsu on 2024-09-23 23:28:14.

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and social risks. Th ese troubling conditions have been examined in consider- able detail in a number of recent studies.

Part I discussed the origins, causes, and dynamics that have led to the fi s- sured workplace. Th e strategy pursued by lead businesses in many industries is to pursue core areas of value creation while shedding activities— and employment— to other, subsidiary, business entities. Lead businesses balance the pursuit of core competencies against the eff ort to shed activities to other organizations via a variety of mechanisms that provide a means of assuring that subordinate organizations adhere to quality, technical, time, and brand standards.

Part II looks at subcontracting, franchising, and supply chain structures: three or gan i za tion al mechanisms used to ensure this balance that result in fi s- sured workplaces and their connection to worsening conditions as described by Green house and others. Table II. presents examples of these three forms that lead to fi ssured workplaces and examples of each from a variety of indus- tries, ranging from some of the oldest (mining) to the newest (cell phones). Although the occupations that fi ssuring aff ects are concentrated at the low- wage end of the labor market ( janitors, warehousing, home health aides, fast food), the practice increasingly includes mid- level employees (machine oper- ators, cell tower workers, customer ser vice providers) and even highly skilled workers ( journalists and lawyers).

In subcontracting, the lead fi rm contracts out activities to separate parties. Once shed, these activities are typically further broken apart into subcon- tracting to other parties, resulting in cascading levels of employment. In con- trast, under franchising, the lead business keeps overall control of manage- ment of the brand but creates an or gan i za tion al structure that allows separate business entities— franchisees—to carry out the activities. Finally, in supply chain structures, the lead company plays the key role of coordinator of com- plicated networks of subsidiary organizations that together provide goods or ser vices.

Each lead business is orbited by successive tiers of business enterprises (described in each row of Table II.). Th e nature of the relationship between each tier is specifi ed in the types of contracts or agreements between the respective businesses. For example, the cellular tower industry begins with major cell carriers like AT&T and Verizon who contract with “turfers,” large companies who act as lead contractors. Turfers, in turn, contract the actual

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t h e for ms a nd consequ ence s of t h e f i s sur ed wor k pl ace 

work to a next tier, and often several tiers, with small subcontractors provid- ing maintenance ser vices on specifi c towers. Each subcontracting tier oper- ates for the one above it through bidding systems and highly detailed con- tracts specifying terms of work.

In a franchised industry like fast foods, the tiers are linked through de- tailed franchise agreements that specify business operations central to the brand and expectations by the parties on maintaining it. Supply chain struc- tures like retailing rely on standards specifying how each tier will coordinate with others, usually through the adoption of standards regarding both prod- uct characteristics and logistics.

Th e agreements underlying subcontracting, franchising, and supply chains— and the market relationships that arise around them— diff er in form but have similar impacts on the pressures facing each tier’s bottom line. Since labor is usually a signifi cant component of cost, the tiered structure and the glue that holds it together have consequences for employment con- ditions. When shifting employment outward to other businesses in more competitive settings operating in low- wage labor markets, the incentive for skirting workplace standards can be signifi cant. Th e rise of labor standards violations— from failure to pay minimum wages or overtime to requiring employees to work off the clock— refl ect this problem.

As discussed in Chapter , shifting activities outside of lead companies to successive tiers also means a change in the wage- setting pro cess. When jani- tors were direct employees of manufacturers, hotels, or fi nancial institutions, the higher wages earned by others inside company walls pulled up the wage levels of janitors. Once janitorial activities shift to other businesses in orbit- ing tiers, those job referents become irrelevant to wage setting. Janitorial wages move closer to those prevailing in the more narrow market of other contractors of cleaning ser vices or of franchised janitorial ser vice providers. Th e downward pressure on wages and associated benefi ts intensifi es with each cascading tier of fi ssured employment depicted in Table II..

Finally, the tiered or ga ni za tion of fi ssured workplaces can create coordina- tion failures, particularly where it is superimposed on complicated production pro cesses. When the steps of production are broken into activities overseen by diff erent business organizations, the actions of workers of one employer are more likely to create risks for the workforce of another. Th is has been a long- standing problem in construction. As more and more places of work are

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Table II. Th ree or gan i za tion al forms resulting in fi ssured workplaces (selected examples in parentheses)

Industry Lead business st tier nd tier rd tier th tier

Subcontractor model Coal mining Mine controlling

business (Massey Energy)

Mine operators (Per for mance Coal Co.)

Contract operators (Black Diamond Construction Inc.)

Cellular phones Cell phone carriers (AT&T)

Turfi ng managers (Nsoro)

Lead subcontractor (WesTower)

Second- level subcontractor (ALT Inc.)

Th ird- level subcontractor

Logistics operations

Retailer or manufacturer (Walmart; Hershey)

Logistics provider (Schneider Logistics)

Temporary help company (PWV)

Second- level temp. agency (Rogers-Premier)

Cable ser vices Media provider (Time Warner)

Regional cable turfer (Cascom)

Installers as in de pen dent contractors

Franchise model Fast food Franchisor

(KFC; Pizza Hut) Franchisee (Morgan’s Foods Inc.)

Labor contractor

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Janitorial and building ser vices

Lead company in variety of sectors

Franchisor (Coverall)

Regional franchisee Local franchisee Labor contractor

Hotels (hybrid model)

Hotel/motel brands (Marriott)

Franchisee/own er (Host Hotels and Resorts)

Brand or in de pen dent operating company (Crestline Hotels and Resorts)

Labor staffi ng company (Hospitality Staffi ng Solutions)

Subcontracted landscaping or janitorial ser vice

Supply chain model Apparel Manufacturer

or retailer (Forever )

Contract manufacturer/ subcontractor (CMR Clothing Inc.)

Second- tier contractor (CUI Sewing Inc.)

Th ird- tier contractor

Food industry Food pro cessor Growers Farm labor contractors Farm workers as in de pen dent contractors (prior to )

Computer industry

Computer brand (Apple)

Contract manufacturer (Foxcomm)

Subcontractors Sub- subcontractor

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 t h e for ms a nd consequ ence s of t h e f i s sur ed wor k pl ace

composed of multiple employers operating under one roof, new risks arise, and with them health and safety problems, including elevated fatality rates (as we shall see in the case of cell towers).

Part II explores the three major or gan i za tion al forms that create fi ssured workplaces and examines their impacts on workers. We start in Chapter  with the use of subcontracting. Its use, once a hallmark of a small number of industries, has spread widely. When paired with in de pen dent contracting, its consequences can be particularly pernicious.

Chapter  looks at a more subtle form of fi ssuring— franchising. Born out of core strategies focusing on building brands, franchising represents a distinc- tive form of fi ssuring that allows the franchisor to focus on core competency while ensuring that the businesses that provide the products and ser vices keep up with standards. Franchising has now spread far beyond the fast- food in- dustry commonly associated with it.

Chapter  looks at supply chains in the context of fi ssuring. Whereas com- panies like Ford and IBM once built internal empires of suppliers through expansion and vertical integration, modern supply chains achieve even more complicated coordination of hundreds and often thousands of suppliers. But they do so by carefully steering that network from the center, establishing detailed, demanding, and high- stakes requirements and thereby satisfying the core requirements of the lead businesses at their center. e

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Fissuring and Franchising

Lead companies retain activities that are central to their competitive strategy while shedding activities where doing so reduces costs, increases fl exibility, and shifts liabilities. But this decision is guided by the constant balancing of the potential impact of shedding an activity that might in the long- term un- dermine the core competitive strategy. Franchising is an or gan i za tion al form used to connect the lead company with subsidiary organizations that pro- vides the required glue to keep the pieces of the fi ssured strategy together. Franchising is an old form of business or ga ni za tion. It historically solved the unique problems faced by manufacturers in fi nding eff ective ways to distrib- ute products. In more recent times, it has proved a powerful means to tap the capital and entrepreneurial drive of new business own ers who seek opportu- nities to expand an established product or ser vice. But, less recognized, fran- chising also provides a way to glue the two pieces of the fi ssured strategy together.

Franchising potentially provides a lead business with a method of preserv- ing the benefi ts of a strong brand while controlling labor costs (particularly important for ser vice businesses, where labor represents a signifi cant share of costs). It has become a pervasive form of business or ga ni za tion in a wide variety of industries, spanning fast food, hotels, car rental, home health care, and janitorial ser vices. Since it also allows lead companies to focus on enhancing the gains of branding while using fi ssured employment to lower labor costs, exploring its use and consequences helps illuminate the broader eff ects of fi ssuring. We explore examples of franchising as an or gan i za tion al form that leads to fi ssured workplaces in three diff erent settings: fast food, janitorial ser vices, and the hotel/motel industries.

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First Principles for Fissured Franchising

Build the Brand

In many of the industries where fi ssured workplaces have become common, major companies have sought to enhance the value of their products and ser- vices to increase revenue streams. Brand- focused competencies enable busi- nesses to create a distinctive bond between customers and the products and ser vices they consume. Successful branding allows a company to diff erentiate its products in the minds of consumers, who, over time, become willing to pay a higher premium for them. Branding acts on the revenue side of profi tability: the more successful the brand, the greater the ability of the business to charge a premium and expand and retain its customer base. Once established, the benefi ts arising from branding can be expanded by broadening product off er- ings and managing the expectations of the brand’s devoted customer base.

Branding is particularly important in industries where perceptions of the quality, consistency, and variety of the product are critical to competitive performance— that is, in areas where the product or ser vice is not viewed as a commodity. By establishing a brand, a company can diff erentiate its prod- uct and create a large and loyal customer base. Return business for a company and the willingness of customers to pay a higher price are based on a variety of product or ser vice attributes that companies can control through production, by infl uencing customer perceptions, or both. A branded competency involves major investment in the creation of the brand identity on the production/ delivery side and in the realm of marketing. It also requires huge investments in protection of brand image over the long term given that investment. Brand core competencies also require an ongoing ability to manage and expand the brand, in response to competitive brands, threats from new entrants, or the inevitable product fatigue that a consumer group may develop over time.

In the fast- food industry, return business is based partly on the customer’s belief that the experience will be the same in any outlet of the company vis- ited. Th e investment in brand name and protection of its image is therefore a central part of the competitive strategy of national chains and an integral part of the way they make operational decisions. As a result, franchise agree- ments begin with statements about the importance of adhering to the chain’s

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basic standards. For example, the franchise agreement with Taco Bell states, “You must operate your facilities according to methods, standards, and pro- cedures (the ‘System’) that Taco Bell provides in minute detail.” Not surpris- ingly, the methods, procedures, and guidelines regarding the creation of a good or the provision of a ser vice are the “crown jewels” of a branded busi- ness. Th e books of standards associated with fast- food or hotel/motel brands are highly confi dential documents that are provided only to franchisees who have been approved. Monitoring mechanisms, contract terms, and high- powered incentives (including, in the worst case, loss of the franchise) are associated with adherence to those standards.

One of the key operational decisions made by companies is how to ex- pand. In ser vice industries like eating and drinking establishments, hotels and motels, and rental cars, companies expand by adding outlets. Th is can be accomplished in a franchised structure in one of two ways. Th e fi rst way is by opening new outlets that are both owned and operated by the franchisor it- self. Expansion through the creation of company- owned outlets is an attrac- tive option because the branded company (or “franchisor”) retains control over operational decisions and can therefore be better assured that brand standards are maintained. However, expansion through company own ership entails using the franchisor’s capital directly and introduces managerial chal- lenges about ensuring effi cient operation of the outlet.

Th e second way a company can expand is by off ering outside investors the opportunity to franchise. Strong brand identity benefi ts franchisees: by pur- chasing or operating a franchise of an established brand, a franchisee gains a proven business strategy with a known and trusted name. At the same time, franchising allows for expansion by tapping into the capital of franchisees, potentially expanding the opportunities for growth of the brand. Franchisors receive revenue streams both in the form of upfront fees by franchisees to purchase the franchise and as ongoing payments based on sales. Under a typical franchise agreement, the franchisee purchases the right to own and operate an establishment using the franchisor’s brand name and products for a set period of time. In return, the franchisee pays an upfront fee and agrees to provide a portion of revenues (typically around %, although it may go as high as % in the case of McDonald’s) to the franchisor.

Franchising is also an attractive own ership form for geo graph i cally dis- persed, labor- intensive, and service- based industries. In such an industry, an enterprise’s profi tability is closely tied to the productivity and ser vice delivery

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of its workforce. Assuring workforce productivity, in turn, requires eff ective management, including careful monitoring of the workplace. A large com- pany with geo graph i cally dispersed outlets can therefore use franchising— rather than relying on company- owned and - managed outlets— to better align the incentives of the franchisee, whose earnings are linked to the outlet’s profi tability. For these reasons, restaurants represent the most highly fran- chised industry in the United States.

Gaining Access to Capital for Second- Tier Firms

Franchising provides a means for the branded company to expand, drawing in large part on the capital provided by individual franchisees. One reason franchising has grown and expanded in scope is the expansion of capital sources for franchisees.

In the developed franchise model found in fast food, part of that start- up capital comes from the franchisor itself. Franchisors provide capital not out of altruism but as an additional source of revenue: by loaning money to fran- chisees at a higher interest rate than they can access capital for themselves, they earn a nice spread. In many cases, this represents a legitimate way for the franchisor to arbitrage risk itself, benefi ting both parties. However, in some cases (such as with janitorial franchising, as we shall see) it represents a perni- cious way for franchisors to take advantage of unsophisticated franchisees.

In the hotel/motel industry, with its far higher requirements for capitaliza- tion, franchisees draw on more sophisticated sources of capital, including, increasingly in recent years, private equity providers like Nobel Investment Group and Blackstone. A second source of capital is real estate investment trusts (REITs), an investment vehicle expressly developed by Congress for industries like hospitality that allows multiple investors to pool their capital and receive tax benefi ts from real estate investment.

Th e other capital market option for franchised industries with lower up- front capitalization requirements such as janitorial ser vices and home health assistance (and, in general, for lower tiers of many fi ssured structures) is rela- tively high- interest sources of fi nancing like personal and business credit cards. Small businesses are particularly reliant on credit cards as a source of capital. In  almost % used some form of credit. While % of small fi rms used six traditional types of loans, such as credit lines, mortgage loans, and others, about % used nontraditional sources such as own ers’ loans and

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personal and business credit cards. Nontraditional sources like business credit cards expose small second-, third- and lower- tiered businesses to even more cost pressure and risk, further exacerbating the negative employment conse- quences of fi ssured workplaces.

Fissured Fast Food

Although franchising acts as an or gan i za tion al glue, tensions between fran- chisors and franchisees still arise in franchise structures. Because franchisees pay royalties that are linked to revenues as opposed to profi ts, the franchisor benefi ts fi nancially from increased sales (revenue), while the franchisee seeks to maximize profi t (revenue less cost). Th is can lead to diff erences in terms of pricing, promotion, and cost control strategy. In addition, although the franchisee has a stake in brand reputation, its stake is not as great as that of the franchisor. A franchisee has incentives to “free ride” on the established brand and may be willing to cut corners to reduce costs or improve its indi- vidual bottom line, even if such actions have negative consequences for the branded company. Th is means that franchisees may be more willing to vio- late consumer, workplace, or environmental regulations in order to reduce labor costs than would be the case for company- controlled units.

Brand investment by the franchisor also makes investments by potential franchisees attractive. Franchisees, through the agreements signed with the franchisor, must adhere to standards and procedures that maintain the integ- rity of the brand. But because their profi ts are determined by the percentage of revenues kept after payment to the franchisor minus their costs, they face incentives to manage costs carefully (if not aggressively).

From one perspective, this puts the franchisor in a position to attempt to “appropriate” (in economics jargon) as much of the profi ts as possible, leaving franchisees only the bare minimum return to justify their investment. On the other hand, if franchisors are too greedy and take all of the spoils, they will be unable to attract other franchisees and potentially will lose existing ones as well. From a long- term perspective, it makes sense for the franchisor as the lead player to share (although certainly not everything).

As anyone with young children knows, learning how to share is diffi cult. Not surprisingly, one fi nds a spectrum of franchisor/franchisee sharing behav-

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ior. At one end of the spectrum is the grandfather of fast- food franchising, McDonald’s. McDonald’s has some of the highest hurdles faced by would- be franchisees in terms of screening, approval, qualifi cations, and upfront pay- ments. Th ese high per for mance standards continue after a fi rm has entered into a franchise relationship, and franchisees pay one of the higher royalty pay- ments (percentage of royalties on revenues) of any fast- food company.

But the company leaves money on the table for its carefully screened fran- chisees. In a rigorous analysis of the economic profi tability of franchising, Kaufmann and Lafontaine show that McDonald’s franchisees earned an esti- mated economic profi t of close to % on revenues. Th ey conclude that this represented a return above and beyond what a franchisee might receive from a comparably risky investment if they had not become a franchisee. Th e authors do not provide a comparable estimate of the economic profi ts of the franchisor side of McDonald’s operations, however.

On the other end of the spectrum, many franchisees complain that fran- chisors do exactly what a self- interested lead fi rm might be feared to do: take as much profi t as possible from franchisees while continuing to reap the eco- nomic profi ts from investment in a national brand reputation. In the early s, this was a common complaint among franchisees of Subway, who complained that the sandwich company was perfectly happy to cycle through failed franchisees as long as it received its upfront payments and at least enough royalty payments to keep the Subway brand on the street. Other ex- amples of franchisors benefi ting at the expense of franchisees include a series of suits brought by franchisees of Quiznos.

It’s Good to Be the (Burger) King

In a fi ssured workplace, one would expect the returns to the lead company (here a franchisor) to have higher profi tability than a subordinate unit oper- ating at an outer orbit (a franchisee). It is diffi cult to directly compare the rates of returns of franchisees and franchisors using publicly available infor- mation because most franchisees are privately held and because of the diffi - culty of attributing costs that are often pooled in income statements to ei- ther the franchisor or the franchisee. It is still useful to compare profi tability to illustrate the diff ering fi nancial pressures faced by the parties in a franchise agreement. Table . compares two mea sures of profi tability— return on assets

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Table . Comparative profi tability between franchisors and franchisees, Yum! Brands and Burger King Corporation

Company Brand(s) Franchisee or franchisor

Return on assets (%)a Return on revenues (%)b

   

Yum! Brands (U.S.) Pizza Hut, KFC, Taco Bell, Long John Silver’s, A&W

Franchisor . . . .

NPC International Inc. Pizza Hut Franchisee . . . . Morgan’s Foods Inc. KFC, Taco Bell,

combination stores Franchisee . . . .

Burger King Corp. Burger King Franchisor . . . . Carrols Corp. Burger King Franchisee . . . .

Sources: United States SEC Form - K: Yum! Brands Inc., FY , ; NPC International Inc., FY , ; Morgan’s Foods Inc., FY , ; Burger King Holdings Inc., FY , ; Carrols Corporation, FY , .

a. Net income before taxes divided by total assets. b. Net income before taxes divided by total reported sales from all sources.

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f i s su r ing a nd fr a nchis ing 

and return on revenues— for two major franchisors with the returns for some of their publicly held franchisees. Th e table compares both mea sures of profi t- ability in  and , the years immediately before the Great Recession.

Th e Yum! company, which owns Pizza Hut, Taco Bell, KFC, and other brands, had return on assets of .% in  and .% in  and return on revenues of around % during those years. Th is compared to return on assets and on revenues of about % for NPC International, one of the largest U.S. franchisees (which owned , Pizza Hut restaurants in ). Morgan Foods, another large Yum! franchisee that operates KFC and Taco Bell outlets, had somewhat better per for mance, with return on assets of % in  and % in  and return on revenues of % in  and a little under % in . But these were still far below the level of profi tability of its franchisor.

Similar gaps in profi tability are apparent for Burger King and one of its franchisees, Carrols Corporation. In  and  the return on assets and return on revenues for the Burger King Corporation ranged around %. For Carrols Corporation, the comparable rates of return were around .% (return on assets) and just under % (return on revenues). Notably, Carrols Corpora- tion was one of Burger King’s largest franchisees.

Since Yum! and Burger King, like most franchisors, encourage growth among their most successful franchisees, it is likely that the rates of return in Table . among the franchisees represent the higher end of profi tability among franchisees of those companies. Th is would make the franchisee estimates an upper bound, meaning that the gap between the profi tability of franchi- sors relative to franchisees is even larger. To paraphrase that great economist, Mel Brooks, “It is good to be the [Burger] King.”

Eff ects of Fast- Food Franchising on Workplace Labor Standards

Th e eating and drinking industry employs over  million individuals. It is composed of two distinct sectors: full- service restaurants and limited- service (or fast- food) eating places. Th e limited- service sector accounts for about % of employment in the industry, or about . million workers. Th e vast major- ity (%) of jobs in the industry are low- skilled and relate to food prepara- tion and ser vice. Employment is concentrated in small establishments, which average about seventeen workers per outlet. Average hourly earnings for food preparers and servers in  were $., with a median wage of $. and a tenth percentile wage of $.— both well below the current federal

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minimum wage of $.. Th e large number of low- wage jobs makes the in- dustry particularly prone to minimum wage and hours of work violations.

An estimated .% of workers in the sector experienced minimum wage violations, .% overtime violations, and .% off - the- clock violations. Estimated violation rates were similar for one key occupational group within the sector— cooks, dishwashers, and food preparers: .% experienced min- imum wage violations, .% overtime violations, and .% off - the- clock violations. Th e estimated amount of annual back wages owed by the industry is also sizable: the average amount of back wages recovered during the –  period was $. million per year.

Franchisees, who typically own and manage their own outlets, seek to maximize the profi t of only their own units whereas the franchisor benefi ts from increases in sales of all outlets in the chain, whether franchised or company- owned. Franchisors are therefore more concerned about the deterio- ration of brand reputation, because it potentially aff ects sales in all units. Given this, a franchisor has a greater incentive to comply with laws that aff ect consumers’ perceptions of the brand. As a result, company- owned units have a greater incentive to comply with workplace regulations relative to franchisee- owned units, which are likely to exert relatively less eff ort to com- ply given their incentive to maximize profi ts only at their own outlets.

A comparison of outlet- level compliance with federal minimum wage and overtime laws between franchised and company- owned enterprises in the top twenty U.S. fast- food companies illuminates the consequences of franchising as a form of the fi ssured workplace. Th ere are many reasons franchisee- owned outlets might have higher noncompliance than company- owned outlets that have little to do with franchise status itself. In this view, the comparisons are unfair in that they involve outlets that might be very diff erent in other re- spects, leading one to incorrectly attribute the diff erences to franchising. For example, franchisees might be more common in areas where there is greater competition among fast- food restaurants. Th at competition (and franchising only indirectly) might lead them to have higher incentives to not comply. Alternatively, company- owned outlets might be in locations with stronger consumer markets, higher- skilled workers, or lower crime rates, all of which might also be associated with compliance.

To adequately account for these problems, statistical models that consider all of the potentially relevant factors, including franchise status, are gener- ated to predict compliance levels. By doing so, the eff ect of franchising can be

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examined, holding other factors constant. Th is allows mea sure ment of the impact on compliance of an outlet being run by a franchisee with otherwise identical features, as opposed to a company- owned outlet.

Figure . provides estimates of the impact of franchise own ership on three diff erent mea sures of compliance for the top twenty branded fast- food com- panies in the United States. Th e fi gure presents the percentage diff erence in compliance between franchised outlets relative to otherwise comparable company- owned outlets of the same brand.

Compliance diff ers dramatically between franchisees and company- owned outlets. Th e probability of noncompliance is about % higher among franchisee- owned outlets than among otherwise similar company- owned outlets. Total back wages owed workers who were paid in violation were on average % higher for franchisees, and overall back wages found per inves- tigation were close to % higher. Not only do these results suggest that franchisees, faced by more competitive conditions and holding less of a stake in the brand than the lead company (the franchisor), are signifi cantly more

59.3%

50.0%

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0.0% 20.0% 40.0% 60.0% 80.0%

Back wages per investigation

Back wages per employee paid in violation

Probability of noncompliance

Percentage differential of franchise compliance outcome to a comparable company-owned outlet

figure .. Eff ects of franchising on employer back wages and compliance, U.S. fast-food industry, top twenty brands, –  (in  dollars). Source: Ji and Weil .

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likely to fall out of compliance, but they also show that workers directly em- ployed by the lead companies are much more likely to be paid according to the law. Indicative of this is the fact that one- half of the top twenty brands had no violations and owed no back wages at any of their company- owned outlets even though the franchisees in those same companies often owed substantial back wages to employees.

Franchising and Fissuring in Janitorial Ser vices

For the majority of janitorial ser vice workers, wages are low and benefi t cov- erage minimal. Conditions on the job subject them to workplace injuries and illnesses as well as the ups and downs in employment that are basic to market economies. Th e janitorial ser vices sector usually ranks high on lists of work- places with widespread violations of labor standards. In  an estimated % of surveyed workers in the security, building, and grounds industries had not received minimum wage payments, and % had not received pay for overtime. Based on an occupational rather than industry defi nition, building ser vices and grounds workers experienced minimum wage violation rates of % and overtime violation rates above %. Far more than half of workers in this industry and occupation classifi cation failed to receive required meal breaks. An equally high percentage were not compensated for work done at the beginning or end of their shift (that is, off - the- clock violations), such as being asked to clean an area before offi cially punching in or out for work.

As in other industries, it is not useful to simply attribute high violation rates to the malevolence or venality of specifi c employers. Instead, they can be traced to the structure of markets and competition arising from the wide- spread outsourcing of maintenance activities, the consequent creation of a competitive market to provide janitorial ser vices to those organizations, and the emergence of specifi c types of business models that set market prices and the conditions in which wage policies are set.

Creating the Janitorial Ser vices Market

Like many other business functions, cleaning and maintenance of facilities have been shed by many organizations— public, private, and nonprofi t. Th is outsourcing of maintenance and janitorial ser vices has a logical rationale: a hospital, law practice, software developer, or insurance company does not have

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In late September , Hyatt off ered the ninety- eight fi red employees health coverage through the following March and full- time positions with United Ser vice Companies (a Chicago- based staffi ng or ga ni za tion that the hotel chain used for contract labor) through the end of  at wages compa- rable to the ones they had lost. Notably, however, Hyatt continued with its agreement to use Hospitality Staffi ng Solutions for staffi ng the positions. De- spite the unfavorable publicity over its role at Hyatt, the staffi ng company’s Boston area market continued to blossom, and in early , Hospitality Staff - ing Solutions advertised for a number of entry- level managerial positions for the area.

Franchising and the Workplace: Having It Both Ways, Again

Fast food represents franchising at its most developed: a sophisticated system to align the interests of major brands with individual own ers in order to al- low both parties to benefi t from a branding core competency. Yet tensions in incentives have repercussions on the cost side of the ledger. Th e result is de- cidedly diff erent profi les in compliance with workplace laws like minimum wage and overtime between the lead company’s own outlets and those run by franchisees.

Franchising in the janitorial ser vices industry is more pernicious. Th e pres- ence of a tier of franchised janitorial ser vice providers that in many markets cannot be fi nancially viable without cutting corners. Wide- scale noncompli- ance with labor standards results. Franchising in the hotel/motel industry takes a more complicated form. Because of the signifi cant capital investment in the industry, investors, brands, and managers all have a stake in the man- agement of hotel properties. Th is has given rise to a complicated mix of orga- nizations with hands- on roles in day- to- day hotel operations. A given prop- erty may have four or more businesses with some impact on how work is or ga nized, managed, supervised, and compensated. Th is complexity leads to downward pressure on wages and benefi ts (the multiple margins problem found in subcontracting), coordination diseconomies, and contradictory incentives. For the workforce, this can mean at best confusion over who is minding the store and at worst signifi cant violations of workplace labor standards.

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Many of the attributes of franchising have benefi cial aspects for consum- ers and investors. A well- structured franchise agreement creates incentives for the own er to provide ser vice and achieve standards that customers expect and from which they benefi t. A well- structured franchise agreement solves some of the problems arising from managing large and geo graph i cally dispersed operations. And franchising brings to the table new sources of investment capital—such as individual entrepreneurs who wish to start new businesses but may not be ready to create new brands or business models— that may benefi t entrepreneurs, franchisors, and their customers.

But franchising also creates social costs, arising from incentives that leave franchisees less committed to compliance than their franchisors; from the pernicious use of the model in the janitorial sector; or from the sheer com- plexity of the crosswinds of incentives created in its application to the hotel industry. Our workplace laws fail to recognize the complexities created by franchising: as will be seen in Chapter , workplace statutes and legal inter- pretations of them usually hold the franchisor harmless for the actions of franchisees when it comes to employees, even as franchise and commercial law protect the franchisor’s right to impose standards on every other aspect of business decision. Th is creates the fundamental dilemma of the fi ssured work- place by allowing lead companies (in this case franchisors) to have it both ways: creating, monitoring, and enforcing standards central to business strat- egy while at the same time ducking responsibility for the social consequences of those policies when it comes to the workplace.

Any eff ort to improve labor standards compliance in franchised indus- tries must recognize that or gan i za tion al form’s role in creating fi ssured work- places. Traditional approaches to enforcement— focusing on the individual enterprise— may bring to light widespread violations of minimum wages, over- time pay, and off - the- clock work. But if not wedded to a larger strategy that attempts to change the forces that drive this behavior, enforcement will be eff ective only at the margin.

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Supply Chains and the Fissured Workplace

Manufacturing supply chains are composed of the network of businesses companies draw on for the components used in making products. Retail sup- ply chains are composed of the broad network of manufacturers that sell their products through retailers. Strictly speaking, the fi rms making up a supply chain relate through market transactions: suppliers provide parts, assemblies, and inputs to their customers: retailers or manufacturers. Characterized in this way, supply chains are a very old phenomenon: most producers rely on pur- chases of inputs from other companies. And, going back to the Phoenicians, these supply relationships often existed internationally as well as within na- tional borders.

What has changed is the degree to which lead companies have shed inter- nal pieces of the production pro cess to other companies and, for reasons de- scribed in Chapter , the extent to which those companies have increased the degree they specify, monitor, coordinate, and choreograph the activities of suppliers in the network. In manufacturing, the relationship is much closer than arm’s-length market transactions because it is often composed of work formerly done within corporate boundaries: this is outsourcing (moving jobs outside the company, but to domestic sources of supply) and off shoring (mov- ing jobs outside the company to fi rms providing the ser vice in other countries).

Even where work has traditionally been done by other suppliers, the need for greater coordination has increased as products have become more com- plex, quality standards more demanding, time- to- market demands tighter, and management of inventories more critical. In retailing, information tech- nologies have also transformed arm’s-length supplier relationships, allowing

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retailers to manage an ever- growing scope of products while substantially reducing their exposure to inventory risk.

Consequently, supply chain management results in the pressures that cre- ate fi ssured workplaces and their often deleterious impacts on the people work- ing within them. Th is chapter focuses on supply chains as a form of fi ssured employment. Th e chapter starts by looking at how the core of supply chain operations— logistics—has been changed in distribution centers. Th ough co- ordination represents a highly valued core competency for lead businesses in both manufacturing and retail industries, the actual work is done through complex webs of contracted work. Th e chapter then turns to the intersection of fi ssured employment and the phenomena of outsourcing and off shoring and examines their close relationship and implications for employment domesti- cally and internationally.

Fissuring Squared in the Logistics Industry

Lean manufacturing is a core production strategy famously developed for the auto industry by Toyota and then widely diff used across the sector. Its objec- tive is to reduce the amount of in- process and fi nal inventory in a production system, carefully matching real- time demand for fi nal products with the quan- tity of goods moving through the manufacturing and assembly pro cess. In a complex manufacturing system like auto production, this requires high levels of coordination at each step in the pro cess, careful management of capital and labor, attention to quality and factors that aff ect throughput, and an overhaul of management support systems, from accounting, to inventory management, to compensation.

It also requires a diff erent way of handling logistics— the movement of goods— within a manufacturer, between the manufacturer and its suppliers, and between the manufacturer and the end retailer of goods. As lean manu- facturing spread to industries beyond the autos and into the retail sector, the importance of logistics as part of competitive strategy rose as well.

Th e change is best seen in the evolving activities in a manufacturer’s ware- house. If you pay little attention to in- process and fi nal inventory, large stocks of parts accumulate at each stage and in fi nal production. A ware house is sim- ply the place where you store that inventory— and where that inventory can sit for long periods of time. Warehousing requires tracking and managing where things have been left (perhaps a bit more systematically than in a typi-

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cal person’s basement). It does not require a lot of attention to how quickly those things can be accessed and moved once needed.

In the modern age of lean manufacturing, the ware house becomes a dis- tribution center— a place where intermediate or fi nal products are effi ciently tracked, pro cessed, and moved. In one type of distribution center, a modern cross- docking facility (critical to both manufacturing and retailing), the lay- out reveals its central role as a means to move, not store, goods. Typically, cross- docking facilities have a rectangular footprint, with one long side de- voted to incoming trucks (from suppliers) and the opposite long side to outgo- ing trucks, destined either for the fi nal assembly facilities or for retail outlets. Between the two walls is a capital- intensive maze of automated conveyance systems, governed by an incoming fl ow of data regarding incoming shipments (types, quantities, and costs) and outgoing destinations.

For logistics providers— UPS, Federal Express, DHL— and for companies with logistics central to their function— retailers like Walmart, Target, Safe- way, and Kroger— operating logistics is the core competency to be nurtured, perfected, and safeguarded. But fi ssuring has come to logistics. It has popped up in a variety of ways.

Perhaps best known is the case of FedEx. FedEx has long treated drivers servicing its routes as in de pen dent contractors. Drivers are paid by the deliv- ery, based on a schedule from the FedEx package terminal where they receive a listing of packages each day. Th ey are given a window of time for drop- off s and can be docked if packages arrive outside of it or if the company receives complaints from customers. As an in de pen dent contractor, the driver is re- quired to purchase a truck (as specifi ed by FedEx) that bears the company logo. In addition to fi nancing the vehicle, the driver must pay all expenses (gas, insurance, maintenance). A driver’s income is therefore based on the dif- ference between the fees paid per delivery and the costs incurred for servicing the route, rather than on a salary or hourly rate.

As in de pen dent contractors, drivers are not covered by overtime or other labor standards or protections against discrimination, health and safety laws, or provisions that would allow them to take leave to care for a sick child or family member. Contributions for Social Security and Medicare taxes fall entirely on the driver, and because drivers are in business for themselves, they are not eligible for unemployment insurance or workers’ compensation.

Not surprisingly, FedEx has been the target of state litigation for misclas- sifi cation of workers by state tax and workplace authorities. In de pen dent con- tracting status was also the subject of a major IRS audit of FedEx. But in

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most cases to date, the FedEx position has been upheld: FedEx, as a branded, logistics juggernaut for which time to delivery is central to customer value, need not directly employ the workforce central to that mission.

FedEx is not alone in its use of fi ssured workplace arrangements for logis- tics, the centerpiece of modern supply chains. More and more distribution centers are adopting an or gan i za tion al form where third- party management has been married to subcontracting. Since supply chain management has ele- ments that create many of the preconditions of the fi ssured workplace, the increasing use of subcontracting and temporary staffi ng companies within logistics can be considered fi ssuring on top of fi ssuring— fi ssuring squared.

Lean Retailing and the Modern Distribution Center

Like lean manufacturing, lean retailing takes advantage of information tech- nologies, automation, industry standards, and management innovations to align orders from suppliers more closely with what consumers are buying in the store (rather than what purchasing agents, months in advance, think con- sumers might buy). By using sales information collected through millions of scans of bar- coded labels, retailers reduce their need to stockpile large inven- tories of products, thereby reducing their risks of stock- outs, markdowns, and inventory carry ing costs. Th e companies that have adopted lean retailing prin- ciples now dominate major retail segments, from mass merchants like Walmart and Target to department stores like Macy’s.

Core competencies of a modern retailer depend on a combination of tradi- tional practices with the benefi ts arising from lean retailing. Like traditional retailers, companies using lean retailing must provide their customers with a changing variety of products that lure them into the store. But as lean retail- ers, they do so while minimizing the inventory they need to hold to ser vice that demand. In contrast to the infrequent, large bulk shipments between suppliers and retailers that characterized traditional retailing, lean retailers require frequent shipments made on the basis of ongoing replenishment or- ders. Th ese orders are made based on real- time sales information collected at the retailers’ registers via bar- code scanning. SKU- level sales data are then aggregated centrally and used to generate orders to suppliers, usually on a weekly basis for each store.

Lean retailing changes the relationship between a retailer and its supply base. Suppliers must replenish orders in three days or sometimes less. Retail-

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ers like Saks Fifth Avenue create standards that require frequent replenish- ment and demand that shipments meet standards concerning delivery times, order completeness, and accuracy. Any disruptions to the weekly replen- ishment of retail orders by apparel suppliers constitute a major problem for retailers. Not surprisingly, the implementation of standards by suppliers to companies like Saks is carefully monitored (also in real time). And failure to adhere to them can lead to substantial penalties or, even worse, result in can- celed orders or cutting off the supplier altogether.

Walmart: Shedding Distribution?

Walmart was a pioneer in lean retailing. More than any retailer of its era, it discovered the importance of managing inventory inside and outside its cor- porate walls. Its success at using real- time customer information collected at the register, information systems on the status of inventory and orders, auto- mated distribution centers, and sophisticated logistics relations with its custom- ers was (and is) central to its ability to lower the costs of providing products to customers.

But just as hotels gradually turned even core functions over to others, Walmart has begun to do so with logistics. Th is shift in policy is refl ected in the case of distribution centers operating in Mira Loma, California, in the so- called Inland Empire region of Southern California.

Schneider Logistics, headquartered in Green Bay, Wisconsin, provides a wide variety of logistics and transportation ser vices to its customers. Its par- ent company, Schneider National, was one of the fi rst trucking companies to invest in two- way satellite communications systems for its trucks and to use electronic data interchange (EDI) to handle transactions in the mid- s. Th is coincided with the adoption of similar technologies in retailing (by Walmart and others) to transform how those companies handled informa- tion and coordinated logistics.

Schneider Logistics was launched in  to focus on the rapidly growing business of handling the fl ow of products and materials in the manufacturing and retail sectors, winning a contract to provide General Motors with logistics support for its part suppliers in . It used its access to its own network of trucks, trailers, and drivers, major intermodal facilities and equipment, and sophisticated communication systems. Its core competency, which makes it attractive to customers like Walmart, is its expertise in handling imported

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goods arriving in shipping containers from ports and pro cessing those goods so that they can be effi ciently shipped to retail stores.

With the rapid growth in goods arriving from off shore in the s, retail- ers like Walmart needed to fi nd effi cient means to pro cess, transport from docks, and unload that stock from shipping containers used for ocean trans- portation, and then sort, record, repack, and load those goods for transportation to regional distribution centers or directly to stores. Th e work of unloading and pro cessing goods from containers (called “lumping”) is more labor- intensive than the typical operations in distribution centers. Schneider Logistics di- rectly employs workers in its distribution centers to do lumping. But it also uses subcontractors— sometimes several layers of them— who often employ temporary workers to undertake these operations. Temp employees working for subcontractors are used to handle increased volumes during peak retailing peri- ods (particularly the run- up to the holiday season). But they have also become a growing share of the main workforce in these operations, representing up to a third of the workforce in nonpeak times and much more in peak periods.

As with cell towers, discussed in Chapter , the agreements between Schnei- der as logistics ser vice provider and subcontractors are very informative about the larger fi ssured subcontracting structure in play. In the case of the Mira Loma facility servicing Walmart, Schneider contracted with three companies: Premier Warehousing Ventures LLC (PWV), Rogers- Premier Unloading Ser- vices, and Impact Logistics Inc. Th e agreement between Schneider and PWV is typical. In its contract, Schneider explicitly specifi es that PWV will pro- vide ser vices for Schneider’s Walmart account. Th e contract states that while Schneider operates warehousing and transloading facilities, the company “de- sires to concentrate its eff orts and expertise on the internal ware house opera- tions while contracting for trailer loading ser vices.” Th e contract makes clear that PWV will be compensated on the basis of the number of trucks loaded, not on an hourly basis or on the basis of the number of workers used to achieve output targets. It also makes clear that the relationship between the two or- ganizations is a principal/vendor one, where “PWV will, at all times, remain the sole and exclusive . . . employer of any personnel utilized in providing the Ser vices and the Principal of any subcontractor it may elect to utilize.” Th is and other provisions regarding indemnifi cation attempt to establish market- relation distance between the parties.

However, other features of the agreement imply a fuzzier boundary between the responsibilities of the two companies. Section  describes in considerable

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detail the standards to which Schneider holds PWV and the mechanisms it will use to monitor compliance with them. Section ., for example, describes a variety of audit- based per for mance metrics that PWV will periodically pro- vide to Schneider (at no cost to the latter) regarding average number of cases loaded per hour; number of trailers loaded per week; trailer loading accuracy (a critical dimension for Walmart); and average cubic meters packed in trail- ers per week. Th ese mea sures serve as the basis of compensation and for on- going evaluation of PWV’s per for mance as a contractor. Although PWV is required to provide on- site management of its workers, the agreement also gives Schneider audit rights for per for mance with the provisions of the contract and requires that PWV rectify any problems within thirty days. It also makes PWV liable for any damages to merchandise in the pro cess of handling it.

Th e blurred lines of actual employment between Schneider and PWV be- come evident in section .. Th e contract notes that Schneider (referred to as SLTD)

will notify PWV of any problems regarding the Personnel. In the event SLTD is dissatisfi ed with the per for mance or conduct of any Personnel, SLTD may request PWV to remove such person from the premises and from their as- signment with SLTD immediately. SLTD will not be responsible for the payment of any amounts with respect to such Personnel so removed for that day’s assignment or any future assignment of that specifi c Personnel unless approved in advance by SLTD.

Schneider also reserves the right to audit the immigration status of any of PWV’s workforce, in conformance with Walmart’s concern that all contrac- tors working for them be in compliance. But the agreement states (in capital letters) that “PWV further acknowledges that SLTD’s said audit is in no way intended to waive or release PWV’s I- compliance obligations . . . or alter the in de pen dent contractor relationship between the parties.”

Subcontracting and the Workforce: A Refrain

Subcontractors like PWV receive payment on the basis of truckloads com- pleted (or on a similar basis for other output- based metrics). But labor sub- contractors must pay their workforce for achieving those output goals. Prior to , subcontractors at the Mira Loma facility paid workers on an hourly basis. Beginning in , however, a new pay system and related policies

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were created at PWV and Impact that compensated workers on a piece rate, based on the number of trucks loaded or unloaded by the workforce. Th e formula for loading was a complicated one that allegedly adjusted for both individual and group eff ort. Like the method Schneider used to compensate its subcontractors, the piece- rate system did not pay for hours worked, but for work completed. A change in scheduling policy coincided with the shift in pay policy, adjusting hours from a standard eight- hour, fi ve- day weekly sched- ule to four ten- hour- per- day shifts. Separate policies required workers to be present at the distribution center several hours before work commenced (with- out compensation) in order to reduce potential interruptions from not having enough people ready to load or unload trucks. Th e new policies also made it diffi cult for workers to take legally mandated breaks.

In October  the Mira Loma facilities were inspected by the California Labor Department. Th e company’s murky and opaque payroll rec ords and pay stubs associated with the compensation system and the inability of PWV and Impact to produce rec ords verifying hours for workers violated state record- keeping standards. As a consequence, the state levied substantial penalties on Impact ($, for failure to provide itemized wage statements for record- keeping violations) and PWV ($, for similar and related record- keeping violations). At the same time, a group of workers fi led a class action suit against Schneider and the three subcontractors for back wages.

However, the worker complaints leading to the October  investigation and penalties did not end the saga. Four days after the investigation, workers who met with investigators and subsequently fi led a complaint for lost wages were told not to come to work (despite the fact that the investigation occurred in October, during the peak season for the facility). Th is led to a series of court rulings that directly addressed the question of the respective roles of Schneider and its subcontractors at the facility. I return to the rulings in this case in Chapter .

Th e number of workers in the logistics industry rose from , in  to , in  and is projected to reach , by , an annual growth rate . times faster than the overall growth rate in employment for the economy as a whole. Th e practice of retailers hiring third- party manag- ers to operate distribution facilities who in turn draw on temporary agencies for staffi ng has spread quickly since  and has been reported across the country.

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su pply ch a ins a nd t h e f i s sur ed wor k pl ace 

Implausible Deniability?

Walmart has responded to inquiries about the violations in Mira Loma and other facilities handling the company’s local distribution center needs by point- ing out that none of the workers involved were employees of the company. With respect to health and safety standards, it cites its codes of conduct for suppliers that, if violated, would lead to repercussions for those contractors. Before the most recent injunctions fi led against Schneider Logistics, in , that company similarly cited the fact that labor contractors working within its facilities were “separate corporate entities. Th e only legal avenue which Schneider has to enforce their compliance would be to terminate the contract with these vendors. We have no plans to terminate the contracts with our ven- dors; our expectation is that they will comply with all applicable statutes, regu- lations and orders.”

As with the subcontracting cases discussed in Chapter , ceding authority to multiple organizations creates complexity, so that enforcement of impor- tant workplace policies falls through the cracks— notably safety practices in the case of AT&T and other cell phone carriers, immigration policies for Hershey, and basic labor standards in the Walmart/Schneider case. It also illustrates how these changes alter the wage- setting environment, shifting it ever outward and into increasingly competitive environments, often into la- bor markets characterized by workers with limited opportunities, fear of job loss, and sometimes precarious immigration status.

Supply Chains, Outsourcing, and Off shoring

Supply chain strategy and management became a major topic in business schools in the s. And for good reason: more and more industries reassessed how products could be made as a result of new information technologies, the falling cost of computers, adoption of common communication standards, im- provements in international logistics, and new sources of global manufactur- ing. Underlying supply chain strategies is the decision whether to build things inside or outside corporate boundaries.

Outsourcing goods— deciding to purchase parts or subassemblies from other companies rather than producing them internally— was the fi rst step in the pro cess. Manufacturing industries core to the U.S. economy— notably

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