The Impact of Franchising on Labor Standards Compliance

Recent studies document pervasive noncompliance with basic labor standards in industries with high concentrations of low-wage workers. The authors examine how franchising, a common form of business organization in low-wage industries, affects compliance. They estimate the effect of franchise ownership on compliance with federal minimum wage and overtime standards in the fast food industry using unique data on Top 20 branded restaurants. Franchised outlets have far higher levels of noncompliance than comparable company-owned establishments. The authors argue that observed differences arise from internal incentives facing franchisees versus franchisors rather than from external enforcement pressures facing the parties.