When California Gov. Gavin Newsom signed AB 1228 — a law that raised the state’s minimum hourly wage for fast food workers from $15.50 to $20 — last September, members of the fast food industry were left with plenty of questions before the bill officially went into effect on April 1.
To answer some of these questions, the California Department of Industrial Relations set up a Q&A forum. Topics ranged from general topics, like what constitutes a “fast food” restaurant under the new law (the state defines it as a “limited-service restaurant” that sells food or beverages for immediate consumption, and has more than 60 locations nationwide), to more arcane topics, like whether employers can simply increase the amount of meal or housing credits they give employees so they count toward the minimum wage (no).
However, the law did not answer one of the biggest questions for fast food employers: How would they actually pay their staff under the new law?
While the move was welcomed by many labor activists as part of broader efforts to improve working conditions and address pay disparities, some California franchise owners have begun preemptively reducing their employees’ hours ahead of the minimum wage increase.
For example, two days after the bill went into effect, Business Insider reported that two Pizza Hut franchisees in the state said they “plan to eliminate in-house delivery” and rely on third-party services instead, leading to the layoff of about 1,200 workers. Days before that, in March, Alex Johnson, who owned 10 Auntie Anne’s Pretzels and Cinnabon restaurants in the San Francisco Bay Area, laid off his office staff and told The Associated Press that he now plans to rely on his parents to help with payroll and welfare payments.
“I try to do the right thing for my employees,” Johnson told the publication at the time. “I pay them as much as I can, but this law is hitting our business hard.”
Many economists and franchisees had predicted that AB 1228 would cause an unequivocal collapse of the California fast food industry. However, according to new state and federal employment data, the California fast food industry has actually added jobs every month this year — including 11,000 new jobs since the wage increase officially went into effect in April. In a statement, Newsom’s office said that since the wage increase for workers, every month this year has seen consistent job gains in fast food, and nearly every month has recorded more jobs than the same month last year.
“What’s good for workers is good for business, and as California’s fast food industry continues to thrive each month, our workers are finally getting paid the wages they deserve,” Newsom said in a written statement. “Despite those who peddled lies about how this would doom the industry, California’s economy and workers are proving them wrong once again.”
It’s not really a surprise. Michael Reich, an economics professor at the University of California, Berkeley, said history doesn’t bear out many of the doomsday predictions about the future of fast food in California.
“The problem is that raising the minimum wage would cause businesses to close, lay off workers and raise prices,” Reich told Public News Service. “That’s the problem with every minimum wage increase since 1938. In fact, a large body of research has shown that the minimum wage does not reduce employment in fast food restaurants.”
Despite this positive job growth, the implications of AB 1228 have also proven complex. As expected, higher wages have contributed to higher menu prices at fast food chains, with many companies passing this cost on to consumers.
This summer, the nonprofit Employment Policies Institute surveyed owners or managers of 182 limited-service restaurants in California. Ninety-eight percent of them said they had already raised menu prices, and 93 percent of them expected to have to raise menu prices again next year to keep up with rising costs. Similarly, 92 percent of owners believe that “raising menu prices will negatively impact customer traffic.”
It’s important to note that this phenomenon isn’t unique to California: Fast food giants across the country have adjusted their pricing strategies to cope with rising labor costs, sparking what some have called the “bargain meal wars.” Companies are competing fiercely to offer the most affordable meals, balancing the need to maintain profitability with attracting price-conscious customers.
On the other hand, higher wages had an unexpected effect: lower employee turnover. With an hourly wage of $20, fast-food jobs in California became more attractive to more qualified candidates, which would translate into a more stable and more skilled workforce.
Joseph Bryant, executive vice president of the Service Employees International Union, a leading proponent of AB 1228, recently told NBC Bay Area that not only has the industry created jobs, but “many franchisees have also noted that the higher wages are already attracting better candidates, reducing turnover.”
This stability could allow some franchises to streamline their operations and improve the quality of their services, which could offset some of the increased costs. However, the pressure on franchise owners remains intense as they balance remaining competitive with managing new operational expenses.
