Flags are flown at a automobile caravan and rally of fast food employees and supporters for passage of AB 257, a fast-food employee health and safety bill, on April 16, 2021 within the Boyle Heights neighborhood of Los Angeles, California.
Mario Tama | Getty Images
Fast-food employees in California are set to receive pay hikes next yr after the restaurant industry and unions reached a compromise over a controversial bill.
The deal, brokered with the help of Gov. Gavin Newsom’s office, also creates a nine-person council that may settle on future wage hikes for the fast-food industry in California through 2029. The agreement ends a fight between the 2 sides that threatened to stretch out for years. The restaurant industry was gearing up to spend greater than $100 million on the battle.
The deal will mean a wage floor of $20 for California employees at fast-food chains with at the least 60 locations nationwide, starting April 1. And from 2025 through 2029, the appointed council can have the authority to raise the hourly minimum wage annually by whichever is lower: 3.5% or the annual change in the patron price index.
The council will include 4 representatives from the fast-food industry, 4 from the employees’ side and one neutral party who will function chair.
While fast-food operators can have to address paying higher wages, the agreement thwarts more dire consequences, according to industry analysts.
“I actually would not say it’s catastrophic, and definitely not as bad because it could have played out over the following yr or two,” said Mark Kalinowski, CEO of Kalinowski Equity Research.
California lawmakers rushed to conclude the matter before the legislative session ends midnight Friday. The state senate passed the bill Thursday, and the state assembly has concurred with the upper house’s amendments. Newsom, a Democrat, has already pledged to sign the bill into law.
California’s fast-food fight
Newsom signed AB 257, also generally known as the FAST Act, into law in January. The laws would have created a 10-person council that might govern fast-food chains with greater than 60 locations, including setting guidelines for working conditions and wages. The initial wage hike might have been as high as $22 an hour.
However the fast-food industry was attacking the bill before it even made its way to Newsom’s desk. State records show that Chipotle Mexican Grill, Chick-fil-A, Yum Brands and Restaurant Brands International were among the many chains that spent money to lobby California lawmakers to oppose the laws.
McDonald’s U.S. President Joe Erlinger wrote a letter posted on the corporate’s website, making a rare public statement on a political issue. Erlinger called the bill “lopsided” and “ill-considered,” attacking lawmakers for not targeting all restaurants. As of 2022, just below 10% of McDonald’s U.S. restaurants were situated in California, according to Citi Research. Most are run by franchisees.
A ‘Join Our Team’ sign is displayed outside a Chipotle location, listing worker advantages, on June 2, 2023 in Los Angeles, California.
Mario Tama | Getty Images News | Getty Images
The restaurant industry retaliated, gathering enough signatures to create a referendum that might make California’s voters settle on the matter. The Service Employees International Union, which backed the FAST Act, alleged in a lawsuit that the industry misled signatories, but a judge ruled against the union. The referendum was supposed to be on November 2024 ballots.
In response to the referendum, the SEIU backed one other bill, AB 1228. The bill would impose joint-employer liability on franchised businesses — including the very restaurant chains that loudly decried AB 257.
Under the bill, franchisors like McDonald’s could be held answerable for infractions committed by their franchisees. Opponents said that the bill attacked the very nature of the franchising model. AB 1228’s provisions were originally included in AB 257 but removed before Newsom signed it into law.
The California State Assembly passed AB 1228 in early June. However the state’s Senate never had the prospect to vote on that version.
As an alternative, the restaurant industry and the unions struck a deal, replacing the joint-employer provisions with the terms of their agreement, which also includes repealing the FAST Act and withdrawing the referendum by Jan. 1.
What’s next for employees?
Fast-food employees employed by affected restaurants will see pay increases of as much as 25% hit their paychecks starting in April. The present California minimum wage is $15.50 an hour, with a bump to $16 set for January.
Employees of smaller fast-food joints and other restaurants could also reap some advantages from the laws.
“Whenever you take a look at the $20 minimum wage, that is a bar that is being set,” Joe Pawlak, managing principal of restaurant consulting firm Technomic, told CNBC. “That is going to make the restaurant industry loads more competitive for workers, so other industries are going to have to also step up.”
In recent times, Amazon warehouses and retailers like Walmart and Goal have lured employees away with higher hourly pay. Now they’ll be forced to compete with fast-food chains, which have traditionally been slower to raise wages due to operators’ razor-thin margins.
Whenever you take a look at the $20 minimum wage, that is a bar that is being set.
Joe Pawlak
Technomic managing principal
Other states, like Minnesota or Latest York, could also follow California’s lead and craft similar councils to govern restaurants or other industries, Pawlak said.
“[The deal] puts a model in place with a structure that everyone is ready to digest,” he said.
Still, labor’s side had to make some trade-offs to get the deal in California. One key concession is that the council won’t have the facility to set working conditions. As an alternative, the Fast Food Council will only give you the option to recommend proposed standards to state agencies.
But that doesn’t suggest that unions won’t keep trying to push for higher conditions.
“Fast-food employees’ fight in California is not close to over — it has only just begun as they prepare to take their seat on the table and help transform their industry for the higher,” SEIU President Mary Kay Henry said in a press release to CNBC.
What does it mean for restaurants?
Faced with a mandate to pay higher wages, fast-food operators can have to resolve how they plan to take care of elevated labor costs. Some may raise menu prices, although customers may balk at having to foot the bill. Others may try to make do with fewer employees available or to spend money on automation to handle more tasks.
But it surely’s not all gloomy for restaurants.
“This agreement protects local restaurant owners from significant threats that might have made it difficult to proceed to operate in California. It provides a more predictable and stable future for restaurants, employees, and consumers,” Sean Kennedy, executive vice chairman of public affairs on the National Restaurant Association, said in a press release.
A Delta Airlines plane lands as people gather within the parking zone of In-N-Out Burger next to Los Angeles International Airport (LAX) on August 31, 2023 in Los Angeles, California.
Mario Tama | Getty Images
The chief uncertainty resolved by the deal is the referendum slated for November 2024 ballots. The industry had already spent greater than $64 million on the referendum, according to California records, and was preparing to spend far more. But it surely could be difficult to predict which side voters would take.
“[The agreement] shows just how concerned the industry was,” Kalinowski said. “The referendum would have been very difficult, to have it come out their way.”
On top of that, restaurant chains like In-N-Out now avoid wasting money that otherwise would have gone toward the industry’s war chest.
The deal also avoids the change to joint-employer liability that was feared by the broader franchising industry.
“This permits the franchise model to exist,” said Dana Kravetz, a Los Angeles-based labor attorney at Michelman & Robinson.
Fast-food corporations with heavily franchised footprints, like McDonald’s, KFC, Taco Bell and Domino’s Pizza, will largely escape the consequences of the bill, unless they’ve company-owned locations in California.
As an alternative, their franchisees can have to grapple with how to pay higher wages. The National Owners Association, an independent advocacy group of McDonald’s franchisees, plans to ward off. In a memo viewed by CNBC, the NOA projects the bill will cost each restaurant within the state $250,000 annually.
Restaurant corporations that do not franchise can have to foot the bill for increased labor costs themselves. That features Chipotle Mexican Grill, which has 457 locations — or 14% of its total footprint — in its home state of California.
— CNBC’s Kate Rogers contributed reporting for this story.