Last month, labor unions and the California restaurant industry reached an agreement that promises to significantly impact the fast-food chains throughout California.
This deal involves, among other things, raising the minimum wage for fast food workers to $20 an hour and eliminating an industry-supported referendum scheduled for the 2024 ballot. The deal also removes language that would have held franchisors jointly liable for labor violations of franchisees. Thus, while this deal is seen as a win for workers, it also includes welcome news for fast-food restaurant chains and their franchisees.
One of the most immediate effects of this decision is the increase in labor costs for fast-food franchisees. The current state minimum wage is set to increase to $16 an hour in 2024. Under the recent deal, the minimum wage for fast-food workers across California will be $20 an hour by April 2024 at fast-food restaurant chains with more than 60 locations in the United States. This 25 percent wage increase in just a few years could pose challenges for franchisees already operating on tight profit margins. To remain competitive, franchisees may need to find ways to absorb these increased labor costs, such as raising menu prices or exploring more cost-effective operational strategies.
Last year, Governor Gavin Newsom signed AB 257 into law. The law created a “Fast Food Council” within the Department of Industrial Relations (DIR). The Council was given the authority to impose binding sector-wide minimum standards on wages, working hours, and other conditions related to the health, safety, and welfare of fast-food restaurant workers. In response, industry groups were able to qualify a referendum for the November 2024 election, which put a hold on implementation of the Council.
Earlier this year, a new bill was introduced that further targeted the industry. AB 1228 would have imposed joint liability on a fast-food franchisor for its franchisee’s violations of a host of laws, including the Fair Housing and Employment Act, wage and hour laws, and the Private Attorneys General Act (PAGA).
Meanwhile, in this year’s state budget act, the Industrial Welfare Commission (IWC) was re-funded, after nearly 20 years without funding. The IWC was allocated three million dollars to convene industry-specific wage boards and adopt orders specific to wages, hours, and working conditions in any industry, with specific direction to prioritize for consideration industries in which more than 10 percent of workers were at or below the federal poverty level.
Since then, representatives of the fast-food industry and labor unions have been involved in a series of meetings and discussions, facilitated by the governor’s office, to develop a compromise and a way forward.
The agreement also establishes a council with the authority to further raise the minimum wage for fast-food workers by up to 3.5 percent annually. This provision introduces uncertainty for franchisees, as they must now consider the potential for ongoing wage hikes. These incremental increases could compound labor costs over time, impacting franchisee profitability and business sustainability.
While the new legislation seeks to create uniformity by preventing local governments from setting higher minimum wages for the fast-food industry, it allows local governments to raise the minimum wage for all workers. This means that franchisees operating in areas with a high cost of living may face additional pressure as they compete for talent in a market with higher minimum wages for all employees.
One notable change in the agreement is the removal of language that would have held fast-food chains liable for labor violations at franchisee-operated restaurants. Critics argued this provision would have had far-reaching consequences for the entire industry. By removing this language, the agreement seeks to protect the franchise business model, providing reassurance to franchisors who may have been concerned about the potential of joint liability.
“This agreement creates the best possible outcome for workers, local restaurant owners and brands, while protecting the franchise business model in California,” Matt Haller, CEO of the International Franchise Association (IFA), said in a statement.
The IFA has been the staunchest opponent of legislating a joint-employer standard in the state and on a national basis. It maintains that redefinition of the franchisor-franchisee relationship as a joint-employer situation would destroy the franchise business and dramatically slow chains’ expansion. The IFA was also a leader in forming the coalition that succeeded in getting a go/no-go vote on the Fast Act on the 2024 referendum .
Although the provision is now dead in California, the National Labor Relations Board is widely expected to institute the standard on a federal level through a change in its interpretations of long-standing labor laws. That reinterpretation is expected in a matter of weeks or months.
Sean Kennedy, EVP of public affairs for the National Restaurant Association-NRA, added in a statement, “This agreement provides a predictable future for California restaurant operators and includes a tremendous investment in the QSR workforce, while eliminating regulatory and legislative threats endangering their businesses.”
The decision to raise the minimum wage for fast food workers in California and eliminate the 2024 referendum has far-reaching implications for franchisees in the state. While it presents opportunities for workers to earn higher wages and potentially improve their working conditions, franchisees will need to navigate higher labor costs, potential annual increases, and a changing regulatory landscape. The removal of joint liability language also helps assuage some of the concerns the restaurant industry expressed in light of the original proposed language. As this agreement progresses through the California legislature, fast-food chains and franchisees will be closely watching and adapting to ensure their businesses remain viable in the face of these changes.
