On September 11, 2023, labor unions and the California restaurant industry reached an agreement that promises to significantly impact the fast-food chains throughout California. This deal involves, among other things, raising the minimum wage for fast food workers to $20 an hour and eliminating an industry-supported referendum scheduled for the 2024 ballot. The deal also removes language that would have held franchisors jointly liable for labor violations of franchisees. Thus, while this deal is seen as a win for workers, it also includes welcome news for fast-food restaurant chains and their franchisees.

Minimum wage and increased labor costs

One of the most immediate effects of this decision is the increase in labor costs for fast-food franchisees. The current state minimum wage is set to increase to $16 an hour in 2024. Under the recent deal, the minimum wage for fast-food workers across California will be $20 an hour by April 2024 at fast-food restaurant chains with more than 60 locations in the United States. This 25 percent wage increase in just a few years could pose challenges for franchisees already operating on tight profit margins. To remain competitive, franchisees may need to find ways to absorb these increased labor costs, such as raising menu prices or exploring more cost-effective operational strategies.

The agreement also establishes a council with the authority to further raise the minimum wage for fast-food workers by up to 3.5 percent annually. This provision introduces uncertainty for franchisees, as they must now consider the potential for ongoing wage hikes. These incremental increases could compound labor costs over time, impacting franchisee profitability and business sustainability.

While the new legislation seeks to create uniformity by preventing local governments from setting higher minimum wages for the fast-food industry, it allows local governments to raise the minimum wage for all workers. This means that franchisees operating in areas with a high cost of living may face additional pressure as they compete for talent in a market with higher minimum wages for all employees.

Liability relief for franchisors

One notable change in the agreement is the removal of language that would have held fast-food chains liable for labor violations at franchisee-operated restaurants. Critics argued this provision would have had far-reaching consequences for the entire industry. By removing this language, the agreement seeks to protect the franchise business model, providing reassurance to franchisors who may have been concerned about the potential of joint liability.

Closing thoughts

The decision to raise the minimum wage for fast food workers in California and eliminate the 2024 referendum has far-reaching implications for franchisees in the state. While it presents opportunities for workers to earn higher wages and potentially improve their working conditions, franchisees will need to navigate higher labor costs, potential annual increases, and a changing regulatory landscape. The removal of joint liability language also helps assuage some of the concerns the restaurant industry expressed in light of the original proposed language. As this agreement progresses through the California legislature, fast-food chains and franchisees will be closely watching and adapting to ensure their businesses remain viable in the face of these changes.