California Gov. Gavin Newsom signed a bill into law (AB 1228) Thursday that will raise the state’s minimum wage to $20 for fast-food workers starting in April.
The move comes a little more than two weeks after foodservice representatives and labor groups reached a compromise to kill the Fast Act, which was scheduled to go on the 2024 ballot as a referendum. Signed into law by Newsom last year, it would’ve created a 10-person Fast Food Council comprised of two franchisors, two franchisees, two employees, two advocates of workers’ rights, and two government representatives. The group would’ve had the power to raise minimum wage to $22 per hour next year and up to 3.5 percent annually every year after.
As part of the compromise, a Fast Food Council will still be created, but it will be nine people. Four of them will be either fast-food employees or advocates of workers’ rights and another four will come from franchisees, operators, or franchisors. The ninth person will be an independent voice. This Council could raise the minimum wage by 3.5 percent or according to changes in the Consumer Price Index, whichever is lower. Additionally, labor leaders agreed to cut out a proposal that would’ve held franchisors responsible for labor violations committed by their franchisees, otherwise known as the joint-employer rule.
The impact of the $20 minimum wage will extend far beyond the restaurants specifically targeted by the law. It is expected to ripple across the industry and affect employee compensation at restaurants of all sizes across all segments in the state. Other sectors, like retail and manufacturing, could be forced to pay more to win workers, too.
“If a line cook is making less than $20 at a place like Applebee’s, and then somebody across the street at Carl’s Jr. is making $20 all of the sudden, that casual-dining restaurant has to face the fact that they’re going to lose employees if they don’t raise wages,” said Andy Barish, a Wall Street analyst at Jeffries, during a leadership forum held earlier this week. “I don’t think this is just a quick-service and fast-casual impact. It will have an impact on the full-service industry as well.”
He predicted smaller players will struggle to expand as quickly in California as they would’ve liked, while larger chains with the financial wherewithal and human capital to operate their way through the changes will continue to grow.
“From a franchisee perspective, folks are going to have to look at this and determine if it’s really worth spending more capital in the state,” Barish said.
Many restaurants in California already pay workers more than the current $15.50 minimum wage, so the increase for those operators will be less than the 30 percent it would appear to be on the surface. Still, restaurants across the board will feel pressure to increase compensation for both new and experienced employees if they want to continue attracting and retaining team members.
“Every time there’s a minimum wage increase, everybody has to make more money,” said Joshua Stone, CEO of Fat Sal’s Deli, which operates a handful of locations in Southern California. “If you’re a seasoned veteran that’s currently making $24 an hour and minimum wage becomes $20 an hour, now you need to make $28 an hour.”
Consumers will likely end up footing the bill for those changes, he added. How they respond to higher prices–especially in a landscape that already has seen higher menu prices to offset wage inflation coming out of the pandemic–remains to be seen.
“This all trickles down to the consumer,” Stone said. “There’s no other way around it. If we don’t pass along these expenses to the consumer, we’ll be out of business. End of story.”
The agreement also addresses a major issue highlighted by big chains. The Fast Act originally applied only to restaurants with a minimum of 100 locations across the country. This will be revised to include restaurants with 60 or more units, ensuring that both regional and major chains meet the same wage and workplace standards set by the Council. In addition, the deal prevents the Council from deliberating on matters like predictable scheduling, paid leave, or vacation time.
There’s a unionization exemption for restaurants that have struck collective bargaining agreements with their workers. There also is a bakery exception for chains that make and sell their own bread.
“Does that mean we all start baking and avoid this? Probably not,” said Riley Lagesen, chair of Greenberg Traurig’s global restaurant industry group, during the restaurant leadership forum hosted by the law firm. “That’s a loophole that may be closed.”
Although the Fast Act allowed municipalities of 200,000 or more residents to form their own councils, this new arrangement limits other regions in the state from setting up local boards or enacting further wage hikes. Also, the two sides decided to not revive the Industrial Welfare Commission, another appointed board that would oversee wages, hours, and working conditions for certain industries.
The law caps a decade of work by Service Employees International Union (SEIU) and other labor groups to provide more than half a million workers in California with higher incomes and better benefits, SEIU president Mary Kay Williams said in a statement. That work included 450 strikes across the state in the past two years alone.
“California fast-food workers are showing the world what it looks like when working people seize their power and rewrite the rules to work for them,” Williams said. “Their efforts reflect a broader trend across the service sector.”
The compromise prevented a ballot fight that could’ve topped $100 million in campaign spending.
“California is home to more than 500,000 fast-food workers who—for decades—have been fighting for higher wages and better working conditions. Today, we take one step closer to fairer wages, safer and healthier working conditions, and better training by giving hardworking fast-food workers a stronger voice and seat at the table,” Newsom said in a statement.
The restaurant and franchise communities were strongly opposed to the Fast Act because of how it would impact expenses and margins.
That includes the International Franchise Association, which applauded the restructured law.
“Signature of AB 1228 preserves the franchise business model in the state and solidifies the best possible outcome for workers, local restaurant owners, and brands,” IFA president and CEO Matt Haller said in a statement. “Common sense has prevailed, as franchising is responsible for creating opportunities for hundreds of thousands of people to become small business owners, and this agreement eliminates the existential threats our members faced.”
Labor group representatives showed strong support for the law as well.
“After 10 years of vibrant and courageous activism, which included raising the minimum wage for all workers in the state and bringing billions of dollars into working families’ pockets, fast food workers have now achieved something historic,” David Huerta, president of SEIU California and SEIU USWW, said in a statement. “We extend our deepest gratitude to the Governor for his leadership in fighting poverty, empowering workers, and moving us toward a more just and equitable society.”