Flags are flown at a car caravan and rally of fast food workers and supporters for passage of AB 257, a fast-food worker health and safety bill, on April 16, 2021 in the Boyle Heights neighborhood of Los Angeles, California.
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Fast-food workers in California are set to receive pay hikes next year 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 will decide on future wage hikes for the fast-food industry in California through 2029. The agreement ends a fight between the two sides that threatened to stretch out for years. The restaurant industry was gearing up to spend more than $100 million on the battle.
The deal will mean a wage floor of $20 for California workers at fast-food chains with at least 60 locations nationwide, starting April 1. And from 2025 through 2029, the appointed council will have the authority to raise the hourly minimum wage annually by whichever is lower: 3.5% or the annual change in the consumer price index.
The council will include four representatives from the fast-food industry, four from the workers’ side and one neutral party who will serve as chair.
While fast-food operators will have to cope with paying higher wages, the agreement thwarts more dire consequences, according to industry analysts.
“I certainly wouldn’t say it’s catastrophic, and certainly not as bad as it could have played out over the next year 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 known as the FAST Act, into law in January. The legislation would have created a 10-person council that would govern fast-food chains with more than 60 locations, including setting guidelines for working conditions and wages. The initial wage hike could have been as high as $22 an hour.
But 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 chains that spent money to lobby California lawmakers to oppose the legislation.
McDonald’s U.S. President Joe Erlinger wrote a letter posted on the company’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 under 10% of McDonald’s U.S. restaurants were located in California, according to Citi Research. Most are run by franchisees.
A ‘Join Our Team’ sign is displayed outside a Chipotle location, listing employee benefits, 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 would make California’s voters decide 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 another 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 would be held liable 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. But the state’s Senate never had the chance to vote on that version.
Instead, 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 workers?
Fast-food workers employed by affected restaurants will see pay increases of as much as 25% hit their paychecks starting in April. The current 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 benefits from the legislation.
“When you look at the $20 minimum wage, that’s a bar that’s being set,” Joe Pawlak, managing principal of restaurant consulting firm Technomic, told CNBC. “That’s going to make the restaurant industry a lot more competitive for employees, so other industries are going to have to also step up.”
In recent years, Amazon warehouses and retailers like Walmart and Target have lured workers 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.
Other states, like Minnesota or New 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 everybody is able 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 power to set working conditions. Instead, the Fast Food Council will only be able to recommend proposed standards to state agencies.
But that doesn’t mean that unions won’t keep trying to push for better conditions.
“Fast-food workers’ fight in California isn’t close to over — it has only just begun as they prepare to take their seat at the table and help transform their industry for the better,” SEIU President Mary Kay Henry said in a statement to CNBC.
What does it mean for restaurants?
Faced with a mandate to pay higher wages, fast-food operators will have to decide how they plan to deal with 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 workers on hand or to invest in automation to handle more tasks.
But it’s not all gloomy for restaurants.
“This agreement protects local restaurant owners from significant threats that would have made it difficult to continue to operate in California. It provides a more predictable and stable future for restaurants, workers, and consumers,” Sean Kennedy, executive vice president of public affairs at the National Restaurant Association, said in a statement.
A Delta Airlines plane lands as people gather in the parking lot 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 more than $64 million on the referendum, according to California records, and was preparing to spend much more. But it would 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 challenging, to have it come out their way.”
On top of that, restaurant chains like In-N-Out now save some cash 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 allows the franchise model to exist,” said Dana Kravetz, a Los Angeles-based labor attorney at Michelman & Robinson.
Fast-food companies with heavily franchised footprints, like McDonald’s, KFC, Taco Bell and Domino’s Pizza, will largely escape the effects of the bill, unless they have company-owned locations in California.
Instead, their franchisees will have to grapple with how to pay higher wages. The National Owners Association, an independent advocacy group of McDonald’s franchisees, plans to push back. In a memo viewed by CNBC, the NOA projects the bill will cost each restaurant in the state $250,000 annually.
Restaurant companies that don’t franchise will have to foot the bill for increased labor costs themselves. That includes 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.