McDonald’s and other top fast food chains are being sued for unpaid wages and undocumented work. And while frontline employees struggle to earn fair wages, fast food CEOs are earning more profits than ever before while evading paying proper taxes.
In recent months, the questions about the fairness of fast-food workers’ pay have reached a fever pitch. In California, Michigan and New York, for example, McDonald’s and several of the company’s franchisees are being sued for wage theft. The lawsuits are claiming that hours were erased from employees’ timecards, the employees were required to pay for and clean their own mandated uniforms, employees were not paid overtime wages and employees were ordered to work off the clock. The lawsuits allege that most McDonald’s franchises use company-provided software that directs restaurants to reduce staffing should sales drop below certain levels.
These lawsuits reflect a common experience among fast-food workers. According to a March Hart Research poll for the Low Pay is Not OK campaign, 89 percent of all surveyed fast food workers reported being forced to do off-the-clock work, being denied required breaks or overtime pay or being made to work in situations where their effective pay was reduced or compromised. With the average fast food worker making $18,330 per year — or more than $1,000 less than the 2014 poverty threshold for a family of three — frustration about the treatment of quick-service restaurant workers has led to strikes and protests around the nation.
It has also led to discussions on the morality of such low wages; an October 2013 University of California, Berkeley study found that fast food workers — with 52 percent being on public assistance — are twice as likely to rely on public assistance as other workers, that 68 percent are the main wage earners in their families and that the top 10 fast food companies are responsible for $7 billion in public cost subsidizing the care of their employees.
A new report from the Institute for Policy Studies shows, however, that the public is not only subsidizing the fast food industry’s front-line employees, but its executives, too. McDonald’s, for example, relies on approximately $1.2 billion in public assistance to subsidize its low-wage employees, per the National Employment Law Project. In 2013, the company’s CEO Donald Thompson received approximately $9.5 million in executive compensation, per the company’s Securities and Exchange Commission filing — almost 1,000 times the average wages of a McDonald’s franchise employee. Of this, only $1,225,000 is cash and taxable as income.
The remainder is in the form of stock options, which — due to their status as “delayed compensation” and as “performance pay” — are both tax-deductible to McDonald’s and offers Thompson a means to lower or even fully eliminate his income tax obligation. This “performance pay” loophole — in which the chief executives of the National Restaurants Association’s 20 largest members pocketed more than $662 million in “performance pay” in 2012 – 2013, which lowered these companies’ tax obligation by approximately $232 million — is causing a “double whammy” for taxpayers, who are now made to both subsidize these restaurants’ lowest-paid workers and endure a loss of tax revenue with the compensation of the restaurants’ best paid employees.
Starbuck’s CEO Howard Schultz, for example, made $236 million in exercised stock options and “performance pay” in 2012 -2013, resulting in a $82 million tax write-off for Starbucks. As this “performance pay” is unlikely to be affected by the company’s actual performance, the use of “performance pay” is a way to get around the Internal Revenue Service’s $1 million cap on corporate tax deductions on executive salaries.
This is far from being just a fast food phenomenon — Facebook’s Mark Zuckerberg received $3.3 billion in exercised stock options in 2013, while LinkedIn CEO Jeffrey Warner received nearly $180 million in stock options.
However, the fast food industry’s use of these devices represents a situation in which these companies’ leaders have a personal stake in making their annual profit figures look good — regardless the cost. This is compounded by active lobbying toward legislatively defeating efforts to raise the minimum wage and to deny benefits, such as paid sick leave. This gives these corporate officers moral justification to underpay their employees or to ignore the use of public funds to subsidize compensation for private employees, and it may offer these CEO the motivation to inflate corporate figures through means that are ultimately destructive or immoral.
“Taxpayers are losing billions of dollars; shareholders are being taken for a ride,” saidRobert Reich, the secretary of labor under former President Bill Clinton.
In 1993, Clinton passed the executive compensation cap and agreed to the performance award exemption with the understanding that the IRS would set up rules for the exemption enforcement. The IRS’ rules, however, proved to be so vague that the company itself was free to define its own standards for performance.
“Officers can receive payments that satisfy the exemption even if the stock price is falling, revenues are falling and earnings are falling,” said Michael Doran, a Georgetown law professor and lawyer in the Office of Tax Policy under Clinton and George W. Bush. “Failure can be treated as success for purposes of the exemption.”