Workforce

The impact of the fast-food wage compromise in California won't be limited to fast food

Limited-service restaurants may have avoided an existential threat, but a $20 per hour minimum is expected to have a profound impact on wage rates across all segments and up the salary ladder.
Fast Act California
Even full-service restaurants are expected to feel the impact of an increase in the minimum wage for limited-service chains. | Photo: Shutterstock.

In California, the battle over fast-food chain regulation appears to have reached detente, but the impact of the compromise is expected to ripple across the industry to all segments—and, some say, all industries.

In a complex compromise announced last week, labor organizers and key restaurant industry representatives reached an agreement on legislation that is expected to be signed by the governor in coming weeks.

Under the agreement, the Fast Act will be repealed and the effort to establish a joint-employer relationship between franchisors and franchisees is dead.

Assembly Bill 1228 was rewritten to create a modified Fast Food Wage Council that will establish minimum standards on working conditions for the industry.

And the state’s minimum wage will increase to $20 per hour, starting in April 2024, which will be a 25% increase from the $16 per hour wage that is scheduled to begin in January.

AB 1228 is described as a fast-food law. But the bill specifically targets any limited-service chain with more than 60 units nationwide, so it applies to fast-casual operators like Chipotle and Sweetgreen as much as quick-service concepts like McDonald’s or Burger King—though bakeries that sell bread as a stand-alone menu item, like Panera Bread, for example, are still exempt, as would have been the case under the Fast Act.

Fundamentally, however, increasing the minimum wage for limited-service workers forces other segments to follow suit.

Michael Lotito, a shareholder with law firm Littler Mendelson who runs the Workplace Policy Institute, based in San Francisco, estimated there are roughly 17.6 million people working in California and about 7.6 million make less than $20 per hour.

“When you have that as a starting rate in an industry like QSR that has close to 100% turnover and 500,000 people in that industry, there are always openings. That means anyone who’s making less than $20 [per hour] will very well want those jobs,” he said. “So I think restaurants that are below the $20 [per hour wage] are going to find they have a huge problem on their hands in keeping and attracting people.”

In other words, if an hourly worker at McDonald’s is earning $20 per hour as a base, then the full-service restaurant down the road will be forced to pay that and more to win that worker—and so will the retailer, the auto repair shop and manufacturing plant.

And, under the compromise legislation, the Fast Food Wage Council will have authority to increase the minimum wage each year by up to 3.5% through the year 2029.

And, adds Lotito, that shift in the minimum wage will also radiate up the salary ladder in the restaurant industry.

In California, the salary rate at which workers can be deemed exempt from benefits like overtime, for example, is based on the state minimum wage.

So to be considered exempt, workers must earn at least a minimum salary of no less than two times the minimum wage for full-time employment in California, which is currently about $64,480 per year based on the current state minimum wage of $15.50.

The amended AB 1228, however, includes language indicating the benchmark salary for workers in the limited-service industry would be based specifically on the new fast-food minimum wage, Lotito said.

So with a $20 minimum wage, it appears that minimum salary for exempt workers will become $83,200 per year for those working in the quick-service or fast-casual world.

“These kinds of dramatic changes that are unprecedented will absolutely put in play the law of unintended consequences. And that law of unintended consequences will create a ripple effect throughout the labor market in California,” said Lotito. “This could be quite profound.”

Jot Condie, president and chief executive of the California Restaurant Association, agreed that wage pressure is likely to be felt across the restaurant sector as a result of the compromise, but the alternative presented by the Fast Food Act, had it been allowed to come to fruition, would have been far worse, he said.

"In the full-service sector, where total compensation far exceeds $20 per hour, such pressure is less clear, as these continue to be attractive jobs for service employees," he said. "It is difficult to know how quickly these pressures will cascade throughout the industry as the continuing tight labor market and differing regional minimum wages cloud the crystal ball."

Still, restaurateurs like Andrew Gruel, founder of American Gravy Concepts in Southern California, believe the compromise on AB 1228 will have more of an impact on larger chains.

Gruel, who also founded and sold the Slapfish seafood chain, opened a full-service concept called Calico Fish House in Huntington Beach, Calif., earlier this year, where tipped workers already make between $16 and $24 per hour, and kitchen workers make “way over” $20 per hour to start, he said.

“I do, however, budget my business to run 35-40% labor, which is 10% higher than when I ran a fast casual,” said Gruel. “The only way I can ensure profitability is by hitting above-average sales.”

What really scares Gruel about the compromise on AB 1228 is the creation of the nine-member Fast Food Wage Council, he said.

“I think this will eventually distill all the way down to single-unit restaurants,” said Gruel. “Having the state make decisions related to a restaurant’s largest expense will break many restaurants.”

And, he added, “I will never open another restaurant in California.”

UPDATE: This article was updated to add additional comment from the CRA.

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