Fast food chains, workers are bracing for California's minimum wage increase: What to know

In California, more than half a million fast food workers are set to get a major raise on Monday.

Democratic Gov. Gavin Newsom signed the Fast Act back in September to require fast food chains with 60 or more locations nationwide to meet that wage increase.

"This is a big deal," Newsom said alongside union members in September. "That's 80% of the workforce."

Most of California's fast-food workers will be paid at least $20 an hour, up from $16 an hour. The bill also establishes a fast food council that will develop standards, rules, and regulations for the fast food industry.

Chains such as Chipotle and McDonald's have already said they plan to raise menu prices as a way to offset the costs of higher wages in California.

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Proponents of Assembly Bill 1228 say it will set standards for minimum sectorial wages, working hours and workplace conditions. The Service Employees International Union, a champion of the law, said that California fast-food workers are more than twice as likely to live in poverty than other workers, and are more likely to rely on public assistance.

In a statement from December, SEIU said, "The establishment of a Fast Food Council represents an opportunity for workers, employers and state officials to come together to help communities across the state address the rising cost of living and improve health and safety conditions on the job."

More than half a million fast-food workers will feel the effect of a pay bump – a majority of those workers being people of color, immigrants, and women. The SEIU estimated the law will apply to about 3,000 employers.

Fast food industry says expect increased costs, layoffs

Advocates for the restaurant industry fear that operating hours will reduce, prices will increase and jobs will be cut as employers deal with new labor costs. International Franchise Association President and CEO Matt Haller said restaurants are facing $250,000 in increased operating costs with the four-dollar minimum wage bump.

Jot Condie, President and CEO of the California Restaurant Association said the restaurant industry has notoriously low profit margins. "It's going to be tough to absorb these labor costs without making some adjustments." Condie said, "Their survival depends on it."

Very few of these quick service restaurants in California are corporate owned stores, Condie emphasized. "These are mostly small business owners who run these franchises."

Condie anticipates that some restaurants will adopt technologies like kiosk counters or robotics in the food prep areas in order to reduce costs.

Brian Hom is the franchise owner of two Vitality Bowls in San Jose, California. He's been operating for seven years with the help of his wife, two sons, and extended family. "We're a family business, it's not like we make big profits," said Hom.

In order to offset costs associated with the minimum wage increase, Hom is raising menu prices five to ten percent. "It's a good thing we'll bring in more revenue, but at the same time, I might have less sales because customers can't afford to eat out now," Hom said.

About 80% of Hom's employees are high school and college students. While he's happy his employees will make more money, Hom is also worried about keeping business open. "We'll have to see come Monday what the real impact is."

Advocates say there is no one-size-fits-all approach for franchises and small businesses. Those with more market leeway have more flexibility to raise prices while others fear losing customers to raised prices. They say the only alternative is to cut labor costs more. 

Restaurants making cuts are mostly pizzerias, according to a report published by The Wall Street Journal. Multiple businesses have plans to axe hundreds of jobs, as well as cut back hours and freeze hiring, the report shows.

Pizza Hut announced cuts to more than 1,200 delivery jobs in December.

A case for higher minimum wages without job cuts

A report from The Roosevelt Institute, a progressive think tank, found that some of the largest fast-food firms in the nation raked in record level profits over the past decade. The researchers argue that the fast-food industry's profits provide sufficient room to absorb the operating costs associated with higher wages.

Fast food prices have increased a lot faster than overall inflation, said Alí Bustamante, Deputy director of Roosevelt Institute's worker power and economic security program and co-author of the report. At the same time, the fast food industry has substantially grown since 2014: fast-food establishments in California increased by about 27.8% since 2014. And fast-food jobs increased about 20.1% between 2014 and 2022.

As the industry grew, Bustamante found that markups –the price difference between what businesses are charging and the actual cost of operating– increased over the past decade. The researchers said that profit markups paved the way for increasing profit margins in the fast-food industry.

"The industry is raking in record level profits," Bustamante said. "It really paints this picture- this has been a growing industry. But it's growing in a way that has largely focused on practices that characterize as profiteering– raising prices unnecessarily and passing those profits on to stockholders."

Economists weigh into minimum wage debate

Some economists say that raising wages for the lowest paid workers can lead to their upward mobility. The negative effects of a higher minimum wage are minimal – when wages increase by 10%, production costs in the restaurant industry usually increase by about 2% to 3%, one economist told Cal Matters.

Other economists say the cost of raising the minimum wage is job loss: while a corporation like McDonalds can afford to pay their workers higher wages, it doesn't mean they won't respond to price changes, said David Neumark, a professor of economics at the University of California, Irvine.

"These places can't function with no low-skilled labor, but they can function with less low-skilled labor," said Neumark.

The professor said that some workers will continue to keep their jobs and have minimal hours cut. Others may lose their jobs all together or see a substantial decrease in work hours.

Which workers are impacted by the California minimum wage law?

The Department of Industrial Relations published an 18-item FAQ  in March outlining which businesses will be required to pay the new fast food minimum wage.

Those who work at a national fast food chain or coffee shop are entitled at least $20 an hour starting Monday. Here's the catch: If an employee works at a fast food establishment located inside a grocery store, they are not entitled the same pay under the law, Cal Matters reported.

“The vast majority of fast-food locations in California operate under the most profitable brands in the world,” Joseph Bryant, SEIU’s executive vice president said in a statement. “Those corporations need to pay their fair share and provide their operators with the resources they need to pay their workers a living wage without cutting jobs or passing the cost to consumers," as reported by Cal Matters.

Contributing: Emilee Coblentz