Flags are raised at a car caravan and rally by fast food workers and supporters for the passage of AB 257, a health and safety law for fast food workers, in the Boyle Heights neighborhood on April 16, 2021 in Los Angeles, California .
Mario Tama | Getty Images
Fast food workers in California are set to get pay increases next year after the restaurant industry and unions reached a compromise on a controversial bill.
The deal, negotiated with help from Gov. Gavin Newsom’s office, also calls for the creation of a nine-member council that will decide future wage increases for California’s fast food industry through 2029. The agreement ends a dispute between the two sides that threatened to drag on for years. The restaurant industry prepared to spend more than $100 million fighting.
The agreement imposes a $20 wage floor beginning April 1 for California workers at fast-food chains with at least 60 locations nationwide. And from 2025 to 2029, the appointed council will have the authority to increase the hourly minimum wage annually by any amount less than: 3.5% or the annual change in the consumer price index.
The council includes four representatives from the fast food industry, four representatives from the labor side and a neutral party that assumes the chairmanship.
While fast-food operators will have to pay higher wages, the agreement prevents worse consequences, according to industry analysts.
“I certainly wouldn’t say it’s catastrophic, and certainly not as bad as what could have happened in the next year or two,” said Mark Kalinowski, CEO of Kalinowski Equity Research.
California lawmakers rushed to finalize the matter before the legislative session ends at midnight Friday. The state Senate passed the bill Thursday, and the state Assembly approved the upper house’s changes. Newsom, a Democrat, has already pledged to sign the bill.
California’s Fast Food Battle
Newsom signed AB 257, also known as the FAST Act, into law in January. The legislation would have created a 10-member council that would govern fast-food chains with more than 60 locations and set guidelines for working conditions and wages. The initial wage increase could have been as much as $22 an hour.
But the fast food industry attacked the bill before it even reached Newsom’s desk. State records show Chipotle Mexican Grill, Chick-fil-A, Yum Brands and Restaurant Brands International were among the chains that spent money to persuade California lawmakers to oppose the law.
McDonald’s U.S. President Joe Erlinger posted a letter on the company’s website, making a rare public statement on a political issue. Erlinger called the bill “one-sided” and “ill-considered” and accused lawmakers of not targeting all restaurants. According to Citi Research, nearly 10% of U.S. McDonald’s restaurants were located in California in 2022. Most are operated by franchisees.
A “Join Our Team” sign detailing employee benefits is posted outside a Chipotle location 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 let California voters decide the issue. The Service Employees International Union, which supported the FAST Act, claimed in a lawsuit that the industry misled signatories, but a judge ruled against the union. The referendum should take place in November 2024.
In response to the referendum, the SEIU supported another bill, AB 1228. The bill would impose shared employer liability on franchises – including the restaurant chains that loudly opposed AB 257.
Under the law, franchisors like McDonald’s would be held liable for violations by their franchisees. Opponents said the bill attacks the nature of the franchising model. AB 1228’s provisions were originally included in AB 257 but were removed before Newsom signed them into law.
The California State Assembly passed AB 1228 in early June. However, the state Senate never had the opportunity to vote on that version.
Instead, the restaurant industry and unions reached an agreement, replacing the joint employer provisions with the terms of their agreement, which also includes repealing the FAST Act and withdrawing the referendum by January 1st.
What’s next for workers?
Fast food workers employed at affected restaurants will receive wage increases of up to 25% in their paychecks starting in April. The current minimum wage in California is $15.50 an hour, with an increase to $16 planned for January.
Employees of smaller fast food restaurants and other restaurants could also benefit from the legislation.
“If you look at the $20 minimum wage, that’s a new bar,” Joe Pawlak, managing director of restaurant consulting firm Technomic, told CNBC. “This will make the restaurant industry a lot more competitive for employees, so other industries will have to follow suit.”
In recent years, Amazon warehouses and retailers like Walmart and Target have poached workers with higher hourly wages. Now they will be forced to compete with fast-food chains, which have traditionally been slower to raise wages because of operators’ razor-thin margins.
If you look at the $20 minimum wage, that’s a new bar.
Joe Pawlak
Managing Director of Technomic
Other states, such as Minnesota or New York, could also follow California’s lead and set up similar councils to manage restaurants or other industries, Pawlak said.
“[The deal] provides a model with a structure that everyone can digest,” he said.
Still, the union side had to make some compromises to get the deal in California. An important concession is that the council will not have the power to set working conditions. Instead, the Fast Food Council can only recommend proposed standards to state authorities.
But that doesn’t mean unions won’t continue to try to push for better conditions.
“The fight of fast food workers in California is far from over – it has just begun as they prepare to take their place at the table and help change their industry for the better,” said SEIU- President Mary Kay Henry in a statement to CNBC.
What does this mean for restaurants?
Faced with the obligation to pay higher wages, fast food operators must decide how to deal with increased labor costs. Some may increase menu prices, although customers may balk at paying the bill. Others may try to get by with fewer workers or invest in automation to handle more tasks.
But it’s not all gloom and doom for restaurants.
“This agreement protects local restaurant owners from significant threats that would have made it difficult to continue operating 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 In-N-Out Burger parking lot next to Los Angeles International Airport (LAX) on August 31, 2023 in Los Angeles, California.
Mario Tama | Getty Images
The biggest uncertainty eliminated by the agreement is the referendum scheduled for November 2024. According to California records, the industry had already spent more than $64 million on the referendum and was preparing to spend much more. But it would be difficult to predict which side voters would choose.
“[The agreement] “It shows how worried the industry was,” Kalinowski said. “It would have been a huge challenge to push through the referendum.”
Additionally, restaurant chains like In-N-Out are now saving some money that otherwise would have gone to the industry’s war chest.
The agreement also avoids the change to employer joint liability feared by the entire franchising industry.
“This allows the franchise model to exist,” said Dana Kravetz, a Los Angeles-based employment lawyer at Michelman & Robinson.
Fast food companies with a strong franchise presence, such as McDonald’s, KFC, Taco Bell and Domino’s Pizza, will be largely spared from the impact of the law unless they have company-owned locations in California.
Instead, their franchisees must grapple with the question of how to pay higher wages. The National Owners Association, an independent advocacy group for McDonald’s franchisees, wants to take action. In a memo seen by CNBC, the NOA estimates the bill will cost every restaurant in the state $250,000 annually.
Non-franchised restaurant businesses must foot the bill for higher 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 to reporting on this story.
Source : www.cnbc.com