August 25, 2021 14 min read
Jason Day’s restaurants were packed. But back in April, he saw trouble coming.
Day is a Penn Station East Coast Subs franchisee in Nashville, and after a year of pandemic cabin fever, his newly vaccinated customers were out in force. They had stimulus checks in their pockets and were thrilled to be stuffing their mouths with Philly cheesesteaks. But Day’s staff? Not so much.
“You could see the stress getting to some of the employees,” he says.
Meanwhile, all over Nashville, help wanted banners fluttered over drive-throughs, touting signing bonuses and beefed-up pay not typically associated with fast-casual jobs. Nationwide, media reports were rife with stunts to lure in workers — a $10,000 hiring bonus for an assistant manager at a California Jersey Mike’s, free college tuition for Chipotle employees (even part-timers) after only four months on the job, massive “hiring parties” in Taco Bell parking lots.
Day was opening new restaurants — five since October 2020 — but he’d found that he had to start the hiring process twice as early to attract a qualified applicant pool. Now he was beginning to worry about keeping the workers he already had.
“How do we compete to prevent them from going up and down the street?” Day remembers thinking. “Because you have to realize that anyone is going to hire them in two seconds if they walk out the door.”
He had reason to worry. The “quit rate” for food-service and accommodations workers nationwide hit 5.6 percent this April, the highest it had ever been and twice the rate of other sectors. April also marked a year of the ongoing federal government’s extended unemployment insurance, which added $300 to $600 a week to existing state benefits — a critical safety net for millions, but something many employers believe has dragged on far too long and helped create the worst labor market they’ve ever seen.
That includes people like Dawn Nielsen, COO and second-generation owner of the bakery and café brand Kolache Factory, which has 56 locations, mostly in Texas. When the pandemic hit and sales tanked but labor costs remained, Nielsen says she did everything she could to keep people employed — but it was impossible to recoup that cost on such thin margins. “There’s only so much we can charge for a kolache,” she says. “When the government is giving them $14, $15 an hour, we’re losing people.”
David Barr, a franchisee of 39 Taco Bell and KFC locations across Georgia, Alabama, and South Carolina, agrees — but says he doesn’t blame the workforce. “They’ve made economic decisions that are smart for them, and I don’t begrudge them,” he says. “What I begrudge is that the competition for our employment, for the first time ever, turned into the federal government. I can compete for applicants. I can’t compete against a federal government that incentivizes people to sit home.”
In April, the International Franchise Association surveyed more than 30 franchise brands and found that around 60 percent were still struggling to rehire workers. That same month, job openings were at a record 9.3 million high, and eating and drinking establishments were short 1.7 million workers. And yet, 9.3 million Americans remained unemployed in May. Some of it is likely due to the unemployment benefit, experts say, but there’s also the childcare struggle, fear and trauma among a workforce disproportionately impacted by a deadly virus, and the ongoing battle over the federal minimum wage, which hasn’t seen a raise in 12 years.
Now we’re heading into fall, and although the current federal unemployment benefit is expiring in September, many believe the labor issues the pandemic has highlighted are here to stay. This leaves franchisees, particularly in fast-casual restaurants, between two opposing forces: an influx of customers, still expecting a cheap, quick meal — and a dearth of workers showing up to serve them.
So what’s the solution? Entrepreneur spoke to franchisees and franchisors on how they’ve approached staffing throughout this time and where they think the industry is headed. Some wonder if franchise brands can simply wait it out. Others believe the hiring crisis has revealed seismic shifts — and that for QSR franchises to attract and retain workers, much more change is needed.
Rosemary Batt is a human resource studies and international and comparative labor professor at Cornell University, and she makes no bones about her assessment: The restaurant industry is overdue for an overhaul.
“My question to you: Why would workers want to return to restaurant jobs?” she says. “Employers need to completely rethink their employment policies for restaurant workers and be creative about a range of policies.”
In 2020, Batt and three colleagues published a paper in the MIT Press that surveyed a random sampling of 1,150 restaurants — the first national survey of human resource policies in restaurants that they’re aware of — with government and industry data, academic research, and investigative reports. The conclusion was bleak: “Eight out of the 10 lowest-paid occupations in the country are in restaurants,” they wrote. “The Department of Labor has singled out fast-food franchisees as among the worst violators of wage and hour laws…Many workers also face understaffing, no paid sick leave, erratic schedules, occupational segregation, sexual harassment, job instability, and barriers to career advancement.”
One factor is that so-called entry-level jobs were once primarily occupied by teenagers looking to make pocket money. Now they’re filled by adults, many of whom are trying to support families. Between 2005 and 2017, the median age for restaurant workers rose to 29. Batt says there’s been a dramatic drop in teenagers who are willing to work in fast food, plummeting to 17.8 percent of the restaurant workforce before the pandemic and helping set the stage for the current hiring crunch. This shift in the QSR labor force — from teenagers to adults — is a crucial piece of the equation, though the causes are complicated. One is that college has become unaffordable for many families, so competition for scholarships has driven an increased focus on education and extracurriculars.
Franchise executive coach Rick Grossmann saw this shift happen during his own career. His first job was as a McDonald’s crew member at age 15, and by 17 he’d become a manager. Eventually, he left to become a franchisee himself. “It was intended to be an entry-level job. It wasn’t really intended to be a lifetime career,” says Grossmann. “It’s kind of evolved into older adults staying in the job for a long time, and then that becomes a non-livable wage when they’re having children and a mortgage payment and things like that.”
It’s clear that the industry must adapt to this, but so far there’s no consensus on how. Luis San Miguel captures the tension well. He owns 60 Auntie Anne’s, Cinnabon, and Carvel locations in spots along the Eastern United States. He thinks the “living wage” conversation is complex, and includes components like public education, healthcare, and retirement. But in the near term, what he’s sure about is that he can’t compete with restaurants paying $15 an hour — and especially the government unemployment subsidies. In some markets, he pays his lowest-wage employees just $1 to $1.50 above minimum wage. So instead, he invests in rewarding long-term employees with larger retention bonuses, and pays smaller bonuses for employees who step up to cover shifts. He also pays referral bonuses.
“There’s a disparity taking place right now that we’ve tried to avoid, and that is ‘Here’s a $10,000 sign-on bonus for a guy to come in and manage a store,’” he says. “That’s fine and dandy, but what are you doing for the people who have been working for you? Are you paying them $10,000 bonuses as well? I suspect not.”
While many restaurant jobs are now filled by adults, Taco John’s franchisee Tamra Kennedy still recruits teenagers. It’s not just a cost issue, she says. It’s because teenagers’ youthful energy has led to an overall positive culture and longevity among the 100-plus employees at her seven locations in Minnesota. She, too, invests in retainment more than hiring and says it has sheltered her somewhat from the worst of the labor crisis.
“Our goal is we have 90 days to capture the hearts of our new employees. I have employees who started as crew people and have been here 20 years,” says Kennedy, who never closed or laid off employees during the pandemic. Still, some staff left out of necessity, and Kennedy came out of the pandemic with a 15 percent hiring gap. It was scary, as other businesses touted big signing bonuses. Even though her average wage is $13.25 an hour, the unemployment benefit was a tough competitor.
But Kennedy didn’t implement any stunts; she just leaned harder on the systems already in place, like a generous employee discount on Mondays that extends to families and friends (especially popular during the early pandemic, when groceries were scarce and budgets were tight) and performance-based raises twice a year. “We had to love and respect the fact that people wanted to work during that time,” Kennedy says. “We did everything we could to keep them.”
Kennedy herself started young, as a secretary for a Taco John’s and Burger King franchisee nearly 40 years ago. She worked her way up and bought her boss’s company in 1999 — so she knows the value of investing in young workers.
“I have a fundamental belief that the best employee we’re ever going to have is somebody who is just entering the workforce,” says Kennedy, who works with high schools, churches, and other local organizations to recruit teens looking for their first jobs — a group unaffected by the extended unemployment benefits, she points out, because they have no job history.
Kennedy also tries to offer as much flexibility as possible; that’s a rarity in hourly work but may become more common as employers look to stand out. Kolache Factory California-based franchisee Kathy Skaff also offers flexibility and says it’s the most important tool in her tool box. “Sometimes it’s not about the money, although everybody thinks it is,” says Skaff. “I think for these hourly workers, that flexibility is underrated.”
Skaff has only one location, just 1,400 square feet — but she has 16 employees on the payroll and builds her schedule around employees’ ideal shifts. Maybe someone wants to work only from 3 a.m. to 7 a.m. so they can be home to care for children throughout the day and still have dinner as a family. Maybe someone is looking to bank as many hours as possible, or work only a few hours a night. It takes some juggling, but the shifts are covered and employees are happier. While businesses around her battle the hiring crisis like everyone else, Skaff has an employee waiting list.
Of course, systems like this are difficult to scale. Kolache COO Dawn Nielsen, who oversees 27 company-owned locations, loves Skaff’s flexible schedule but can’t implement it herself.
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“With the issues we have, being so short-staffed, and how hard it is for us to just get people who want to come in for an interview, we don’t have that luxury,” Nielsen says. “I hope one day we will, because that definitely is where the culture is going. Restaurants are going to have to figure out how we can become more flexible in a nonflexible environment.”
Instead, Nielsen has increased starting pay to $12 an hour and added signing bonuses. She also implemented a new program that pays bonuses for good grades earned by employees who’ve been with the company at least 90 days.
“We’re kind of a stepping stone for their careers,” she says. “We can have maybe a couple of really good years with them and help them on their path to the future.”
Even when government unemployment benefits go away, higher wages may not. In May, Chipotle (though not a franchise) announced it was raising average hourly wages to $15. McDonald’s raised average hourly wages to more than $13 in company-owned restaurants, with some restaurants getting to an average of $15 an hour this year, and all by 2024. That doesn’t apply to its franchises, but the company released a statement saying, “We encourage all owner/operators to make this same commitment to their restaurant teams in ways that make the most sense for their community.”
As higher wages become the norm, some workers are likely to face another problem: They may get paid more per hour but struggle to get full-time hours. Batt says that while the average wage for nonmanagement workers had grown to $13.14 an hour before the pandemic, the average hours worked per week was just 26 (in part because some employers are scheduling to keep workers below the 30-hour-per-week threshold that determines full-time status). By this math, a worker paid almost $6 higher than minimum wage would still only make $17,765 per year. For many, it just doesn’t add up.
That’s what Day, the Penn Station East Coast Subs franchisee, is trying to solve for now. After he realized that his staff was at risk of burning out, he reworked his entire pay structure to reward people who worked the most hours.
“We looked at our crew and said, ‘The more you want to be in the building, the more we’re going to pay,’ ” Day says. All 156 current employees across his 12 locations received an hourly raise of about $2, bringing the lowest-paid crew members from $9 to $11. But the real shift was in how they were paid. Crew members who work more than 25 hours a week and managers who work more than 30 hours a week now make more than those who work fewer hours — bringing shift leaders to that magic $15 wage at full-time hours. “We saw a big morale boost,” Day says. “People who have been with us for a while, I mean, they cried.”
Restructuring wages not only revitalized existing employees; it caused word to spread through the hiring pool. Within a month, Day cut his spending on Indeed ads by 65 percent — even as he opened a new location in June (where new hires benefited not only from the higher pay but $500 to $1,000 sign-on bonuses paid out after 45 and 90 days).
“The wage situation isn’t going anywhere,” Day says. “It’s not like, ‘Oh, we can hold out; everyone will be looking for jobs shortly.’ Because I don’t think the [extended] unemployment benefits thing was the full reason. I think a lot of workers have gotten jilted by the industry in general.”
Craig Dunaway, president of Penn Station — which has 313 locations in 15 states, all but one of which are franchisee-owned — applauds Day’s move. It’s up to each individual franchisee to decide what’s best for their business, he says, but he thinks business owners need to be realistic about where the labor market is. “The days of $9 and $10 wages are long gone,” he says. “We’ll never go back to that.” It’s time to look forward, to where the industry is going.