A recently signed California labor bill has some franchisees on edge, even after compromises were made during negotiations with restaurant industry officials. For franchisee advocates, those negotiations simply lacked enough input from owners.
The negotiating process came to a conclusion late last month when California Gov. Gavin Newsom signed into law a bill raising the minimum wage for employees at quick-service restaurants to $20 an hour starting in April 2024. In addition to raising the wages for brands with more than 60 locations nationwide, the legislation also establishes a new fast-food worker council.
The bill was the result of talks that included the National Restaurant Association, International Franchise Association, Service Employees International Union and Gov. Newsom’s office. According to IFA President and CEO Matthew Haller, franchisees were included in the discussion, but others in that community found the representation insufficient.
“We weren’t happy with the way it got to where it went,” said John Motta, chairman of the Coalition of Franchisee Associations. “That the franchisee involvement wasn’t there and how QSR franchisees now have to pay $20 an hour versus anybody else. It’s going to be a rocky road ahead. It’s going to be a huge impact on their bottom lines. I wouldn’t want to be in their shoes.”
“The groups I work with are most upset over the fact there wasn’t true franchisee representation in the room, yet they will bear the cost of it,” said Keith Miller, public policy director for the American Association of Franchisees & Dealers. “I understand there were a couple franchisees in the room, but they were hand-picked by a franchisor.”
Haller argued, though, that the wage increase was the best option when it came to finding a middle ground.
IFA President and CEO Matt Haller
“If you look at this agreement compared to what it could have been, it’s far superior,” Haller said. “The council is not as powerful as previously proposed. The tradeoff was agreeing with a prescribed increase in wages.”
In coming to a compromise, supporters of the new labor bill agreed to pull back on a previously introduced piece of legislation. Titled the Fast-Food Accountability and Standards Recovery, or FAST Act, the bill would have raised the minimum wage to $22 per hour and included a 3.5 percent increase per year after for brands with more than 100 units.
The California Legislature passed the bill in 2022, but it was later blocked by the state’s court. Through negotiations, on top of the FAST Act not moving forward, the SEIU also agreed to pull back on efforts to make franchisors legally liable for labor violations committed by franchisees.
“On the surface, it looks like the franchisors in general got rid of any joint liability or joint employer and saddled the franchisees with the higher minimum wage,” Miller said. “It will benefit the franchisor because if we increase costs, they get more royalties, and we’re going to have to increase costs.
AAFD Public Policy and Engagement Director Keith Miller
“The SEIU has said franchisors should always be liable and the IFA has pushed the side of never being liable for labor violations,” said Miller. “The reality is, franchisors should not always be liable, but should sometimes. I think they should be jointly liable, but let’s define when they are jointly liable.”
Haller, however, called the joint liability issue their “red line.”
“From our perspective, preserving the franchise business model is job No. 1,” Haller said. “If you have shared liability, which was what was proposed, you don’t have franchising… The enemy isn’t the one you’re in business with, it’s the one that wants to erode the model altogether.”
Motta said the move to withdraw the joint employer liability factor and the FAST Act overall were positives that came from the negotiations, but added another concern was how QSR brands were the only types of companies to have a wage increase.
“If I were in the room, I’d have fought hard not to single out franchise businesses,” Motta said. “If this was going to benefit businesses in general, then all businesses should have been part of the deal, not just QSRs.”
“The biggest problem is it segmented franchisees, specifically the fast-food franchises,” said Miller, also a multi-unit Subway franchisee with locations in California. “Why segment out a certain part of the business population? I would have argued to not have a differentiation for franchised businesses and non-franchised businesses.”
While both Miller and Motta have expressed concern over the minimum wage increase, they each noted that they weren’t against more pay for workers.
“We’re not trying to fight against employees getting paid more, but it has to work in the business model,” Miller said. “What people forget is with workers compensation, unemployment insurance and matching taxes all included, you have to add 10 percent to that wage increase.”
“We’re not against workers making more money, and every employee should make as much as they can,” Motta said. “What we fight for, when we talk about the minimum wage increases, is to have it be gradual, so restaurants can absorb that hit. It’s easier for a business to absorb the wage going up 50 cents an hour than it is with a $4.50 increase.”
Roland Spongberg, president and CEO of California-based WKS Restaurant Group which has a portfolio including Wendy’s, Denny’s, El Pollo Loco, Krispy Kreme and Blaze Pizza, also expressed concern with the increase. From his perspective, it comes at a time when owners are already dealing with economic challenges.
WKS Restaurant Group President and CEO Roland Spongberg
“We struggle with traffic because we’ve had hyperinflation the last two years and last year our margins got crunched,” Spongberg said. “We finally, I think us and most of the industry, said at the end of 2022 that we have to do price increases and hope that people come, and it’s been difficult from that.”
Because menu prices have already increased, Spongberg said supplementing the wage bump by raising item costs won’t be entirely effective.
“We have to figure out a way to deal with it using a combination of things,” Spongberg said. “Can we take any labor out and is it possible to put kiosks in? They’ve become more popular over time. We also have to look into if anything in the restaurant can be done in an automated way, something that’s built and sent to us from the franchisor so that it reduces labor and utilities.”