Big whopper economics: want fast-food workers to get a raise? Let local restaurant owners form a union to fight their corporate masters.

• Author: Freedman, Josh

In August, Larry and Kathryn Baerns and their son, Christopher, filed court papers charging that the two new Steak 'n Shake restaurants they had just opened in the Denver area were under siege. Suppliers refused to make deliveries. Their computer system went dark. Desperate, they bought old-school cash registers and took orders by hand while seeking a restraining order against the forces trying to shut them down.

The Baernses were up against Steak 'n Shake's own national corporate offices, from whom they had bought their two Steak 'n Shake franchises. The franchisor was taking actions designed to "cut them off at the knees," the Baernses alleged, over a dispute about whether their two restaurants had to offer a $4 value menu.

The Baernses claimed that they been misled about the profitability of Steak 'n Shake franchises, and that their business would fail if they sold items at the promotional price. In the middle of the legal battle, the two sides even turned to espionage: the chain sent an undercover operative into the franchisee's stores to try to prove that they were not selling at approved prices. In response, the Baernses sent their own undercover agents to St. Louis to investigate prices at other Steak 'n Shake outlets.

Two weeks later, the Baernses lost their restaurants--and, with them, their investment. A court found them in breach of their contract with Steak 'n Shake. The restaurants closed in the first week of September, leaving behind only handwritten notes that read "Sorry closed."

The Baernses' story might seem distinct from the mounting strikes and protests over low wages in the fast-food industry that have received so much national attention in recent months. But there is a strong and revealing connection. As the Baernses' experience shows, the owners of fast-food franchises often have very little power over how their businesses are run. They must pay the prices franchisors demand for supplies and equipment, and usually have no control over the prices they charge customers in turn.

This means that they also have little control over how much they can afford to pay their workers. While being a franchisor is often highly lucrative, being a franchisee often means living on very small, or no, margins. Biglari Holdings Inc., for example, which owns the Steak 'n Shake company, last year paid its chairman and CEO, Sardar Biglari, just shy of $11 million in total compensation. But due to adverse court decisions, changing patterns of corporate ownership, and other factors, many franchisees, like the Beamses, lose money or barely get by. Until the growing imbalance of power between franchisors and franchisees is corrected, there is little chance that wages for fast-food workers can be substantially improved. For workers to get a raise, we need to reform the franchised fast-food industry from top to bottom.

Most fast-food restaurants are not owned by the company with its logo on display. The signs might say McDonald's or Burger King or Steak 'n Shake, but the restaurant itself is typically owned by local businesspeople under a franchise arrangement. These franchisees pay for the use of the franchisor's brand, starting with an upfront fee per location, which can range from $15,000 for a Subway sandwich shop to $50,000 if you want to put Burger King's name on your restaurant. Franchisees also pay for the entire cost of constructing and equipping the restaurant, which in the case of a new McDonald's requires an investment of $1 million to $2 million Franchisees then pay a fixed percentage of their revenues every month in royalty and advertising fees, while also often having to buy most of their supplies through the franchisor.

Done correctly, franchising can work well for everyone. Franchisees, many of whom are first-time entrepreneurs...