California fast food industry could serve as test ground for minimum wage debate

Raising the federal minimum wage is a political and economic debate that has been raging for years, but we’re going to witness a test case play out in one of the nation’s largest states.

In April, the minimum wage for fast food workers in California will be raised to $20 after Gov. Gavin Newsom signed legislation last year that also brought the minimum wage for all workers to $16, which went into effect on January 1. In response, several chains, including McDonald’s and Chiptole, have announced that price hikes are coming.

• Chipotle has increased prices four times over the past two years and said Californianans should expect to see a 5%–9% bump.

Andy Wiederhorn, chair and founder of Fat Brands, which owns 18 restaurant brands including Fatburger and Johnny Rockets, told Retail Brew that the margins for franchisees are very slim, which very likely could mean higher prices for consumers.

“Everyone wants their employees to make more money, but operators have to make money as well,” Wiederhorn said. “There’s no room in the restaurant operator’s margin to pay 20% higher minimum wage in some cases.”

Calling an audible: Wiederhorn said Fat Brands franchisees in California are already paying close to the $20 minimum wage, so price increases will have a minimal effect for now—but that could change. Franchisees, however, do have other options to offset costs, like adjusting portion sizes or integrating new technology, Wiederhorn said.

• Sweetgreen’s margins reached over 20% during Q2 last year as the company introduced its two-tiered loyalty program Sweetpass in April and started “upstreaming” its salad dressings—making them regionally and delivering them to locations.
• CFO Mitch Reback said the chain’s California workers make close to $20 per hour, but a 2% price increase could be implemented to offset the gap.

Wiederhorn explained that while the law only applies to chains with 60+ locations in the United States, it could inadvertently affect independent operators since workers will want the higher-paying roles at the larger chains, forcing them to match the pay.

“They don’t have some of the benefits that a chain might have in terms of scale—to give them lower food costs and things like that,” he said. “I think it actually backfires and hits the independent operator harder.”

The Great Divide

Brian Justie, senior research analyst at the UCLA Labor Center, told Retail Brew he’s a proponent of operators finding new ways to offset costs other than raising prices. Under the franchise model, he said owners could adjust their royalty fees—the percentage of net sales they charge franchisees to operate under their banner.

“The last thing that they would want people to know about is that there’s other bargaining chips in play,” Justie said. “The franchise model is a well-honed thing that achieves certain outcomes, but nothing about it is inevitable.”

More than meets the eye: In January 2022, Justie co-authored a report highlighting challenges more than 400 fast food workers in Los Angeles County faced during the height of the pandemic, and continue to. Among them is wage theft, which 63% of respondents said they’ve experienced.

• Nearly half (45%) of workers said they had to buy a uniform or equipment without reimbursement; 23% experienced interrupted meal breaks; 13% were denied meal or rest breaks; and 12% said they received late paychecks.
• Additionally, of the 20% of workers who worked overtime, more than half (55%) weren’t paid time-and-half for that work.

“A worker who’s desperate to get a job is maybe a little bit less willing to push back if they think they’re being wronged,” Justie said. “It’s very easy to overlook in the individual case, but when you zoom out and see how systemic it is, it…makes it pretty clear how little power these workers have and how at the mercy of their employers they are.”

Looking forward: Wages are only part of the equation when it comes to improving conditions for workers. The law also established a 10-person council that governs fast food chains in California and will have the power between 2025 and 2029 to raise the minimum wage annually by either 3.5% or the yearly change in the consumer price index—whichever is lower, per CNBC.

• The council can also recommend other workplace regulations to address issues with health and safety, the right to take time off, and protections from harassment and discrimination.

And just last week, workers in the state officially formed the California Fast Food Workers Union, which is part of the Service Employees International Union (SEIU). The union’s goals include raising the minimum wage 3.5% over the next three years, protecting workers from being fired “without a valid reason,” and ensuring workers are scheduled enough hours to support themselves, per the Washington Post.