It’s been about two months since the new California fast-food worker minimum wage law went into effect. Restaurant owners immediately felt the effects. Right out of the gate restaurant locations shut down. On April 1, a Fosters Freeze in Lemoore, which is over 30 miles south of Fresno, closed their restaurant. The employees thought it was an April Fool’s joke but it was very much real. The owner handed out their final paychecks. The location had been in Leemore for over 35 years. The gloves need to come off before more restaurants go out of business.
The governor of California signed the California Fast Food Accountability and Standards Recovery Act or FAST Act in September 2023. It raised the fast-food worker minimum wage from $16 per hour to $20 per hour. It went into effect on April 1, 2024. Within six months fast food workers got a 25 percent increase in pay per hour.
There are some details in the law that you may not be aware of. The new law applies to restaurants that own 60 or more locations. That is why you are seeing many well-known fast-food restaurants like MOD Pizza close five locations in California. Although it doesn’t apply directly to smaller restaurants that have 60 or less locations, it’s indirectly affecting them because now their current employees are more likely to quit and make a lateral change in jobs for a higher wage per hour.
Another indirect effect of an increased fast-food minimum wage is taxes. When a restaurant hires an employee, they have to pay the wages per hour and payroll taxes. The restaurant will pay a higher 7.65 percent federal payroll employer portion and Unemployment Insurance and Employee Training Tax for their California employer portion. The federal and California taxes add up quickly per employee. However, this benefits California as they make more revenue with the higher minimum wage, for them to use on unsavory government spending.
California has a budget deficit of at least $45 billion as of the latest announcement in May 2024. The budget will need to be passed by June 15 or the governor and lawmakers don’t get paid. Historically, the three biggest revenue sources are from personal income, corporate, and sales tax. According to Forbes, 817,669 residents left California in 2022. Raising the minimum wage on small business is an indirect way to make up for the shortfall in tax revenue, and are eyeballing small businesses to carry the load.
Many customers have been outraged by the high prices. To try to alleviate the pain, McDonald’s is planning to roll out a $5 meal deal starting June 25th. Unfortunately, it will only be around for one month. Just as consumers thought they would get relief it will most likely go back to the high prices. Wendy’s already has a $5 meal deal. People will go there for the meal deal. If a restaurant owner is a franchisee of McDonald’s their business will evaporate. It’s already too expensive to run a franchise on top of the new minimum wage. Customers will most likely eat at home. This effects local government as well. As restaurants close, cities lose revenue from city business licenses, business property taxes, and real estate taxes.
The financial burden on restaurants is tremendous. The bigger restaurants have other restaurants to absorb the higher minimum wage and can afford to close a restaurant. Independent restaurants will need to do a combination of increase prices, layoff more employees, and explore automation. Rather than doing that, the gloves need to come off and restaurants need to fight back.
Trying to repeal it on the ballot in the next election takes time and money. In the meantime, small businesses will need to band together to voice their frustration. Contact your local Congress person and complain. It’s time to stand up and fight. Be vocal, be bold, and let everyone know who is at the helm driving small business ship to the ground. Not doing anything will lead to the destruction of restaurants and small businesses in California.
Rene Carlos is an Enrolled Agent with nearly 20 years of experience in the tax and accounting industry and business coaching. He, and his wife, Julia, own Summit Tax & Accounting Advisors and Western Premier Business Coaching in Orange County, California. He specializes in corporate tax preparation, accounting, business coaching, and leadership development for small businesses.
