April 1 isn’t bringing any amusement for fast-food companies in California this year. The state’s FAST Act officially kicked in Monday, requiring quick-service chains that have at least five-dozen locations nationwide to raise their minimum wage for restaurant employees to $20 an hour. 

For some half a million workers, that’s a raise of 25 percent overnight, when the state’s minimum wage was $16 per hour, already among the highest in the country. 

The law (AB 1228) applies to restaurants offering limited or no table service that meet the 60-unit threshold, with exemptions for bakeries and businesses operating in nontraditional venues like grocery stores, airports, hotels, theme parks, and corporate cafeterias. Initially, it offered an exemption for restaurants like Panera that bake their own bread, but California Gov. Gavin Newsom later clarified the chain must conform to the new minimum wage after encountering opposition. 

AB 1228 caps a decade of work by Service Employees International Union (SEIU) and other labor groups to provide restaurant workers in the state with higher incomes and better benefits. They argued that a significant portion of California’s over 500,000 quick-service employees are adults responsible for supporting their families. 

Franchisors, operators, and industry advocates say the wage hike will further exacerbate an already challenging operating environment and force businesses to make tough staffing decisions that limit employment growth. They also say the regulation will negatively impact consumers, especially those with lower incomes, who disproportionately consume more fast food and spend a greater share of their earnings on food away from home.

Restaurants are turning to an array of strategies to manage higher labor costs–everything from cutting hours and freezing hiring to eliminating jobs altogether. 

Some have taken preemptive actions to limit the impact on profitability. Two Pizza Hut franchisees eliminated a total of 1,200 jobs earlier this year when they laid off all of their delivery drivers and switched to third-party aggregators. Similarly, a Round Table Pizza franchisee in the state laid off 70 workers last month. 

Many chains have indicated the wage hike will force them to raise prices more than they already have. McDonald’s, Jack in the Box, and Shake Shack are among the companies planning to pass along at least some of the costs to consumers. Chipotle rolled out a 3 percent price hike last fall and expects to take another mid-to-high single-digit increase to offset the impact of AB 1228.

“It’s going to be a pretty significant increase to our labor,” CFO Jack Hartung said during the company’s Q3 earnings call last fall. “We are definitely going to pass this on.”

Minimum wage experts at the University of California, Irvine, estimate that overall prices will spike between 2.5–3.75 percent. That may not seem too steep at first glance, but it comes on top of the significant inflation customers already are contending with. Prices for food away from home were up 5.1 percent year-over-year in January and up 30 percent on a four-year stack, according to national data from the Bureau of Labor Statistics. 

Some chains, like El Pollo Loco, are zeroing in on labor-saving initiatives to offset incremental labor costs. The fast casual expects AB 1228 to drive labor inflation as high as 12-14 percent this year, a sharp uptick from the 3.6 percent labor inflation it saw in Q4 of fiscal 2023. 

CFO Ira Fils said around a third of that impact will be offset by labor savings unlocked through self-order kiosks, automated dishwashers, and new kitchen equipment. The rest will be tackled through pricing actions. The company was carrying 6 percent of price in Q4 and is forecasting that figure to be in the mid-to-high-single digits throughout fiscal 2024.

“We’ll adjust that as we manage the impact of the minimum wage increase and our labor savings, because we’re cognizant of the impact pricing can have on traffic,” Fils said during El Pollo Loco’s Q4 earnings call last month. 

AB 1228 was signed into law by California Gov. Gavin Newsom in September. It reflects a carefully crafted compromise between the fast food industry and labor unions, which had been fighting over wages, benefits, and legal liabilities for the better part of two years. 

Representatives of the restaurant industry secured an agreement to kill an earlier version of the bill (AB 257) that would’ve upped the minimum wage to $22 per hour in exchange for accepting one of its key provisions–the creation of a panel to regulate wages and working conditions. The nine-person council includes both restaurant owners as well as workers. It has the ability to increase the minimum wage annually through 2029 by 3.5 percent or according to changes in the Consumer Price Index, whichever is lower.