What Are the Economic Impacts of California’s New Fast-Food Law?

The fast-food industry in California is preparing for major changes this year—with bigger paychecks for employees and a new council to improve working conditions.

It’s all the result of legislation signed in September by Gov. Gavin Newsom. Under AB 1228, the minimum wage for fast-food workers will increase to $20 an hour starting April 1. The law also establishes the Fast Food Council, a government body that can boost the minimum wage annually and recommend new workplace standards.

Now the potential economic implications are in the spotlight as workers will get a pay raise and businesses will face higher labor costs, which they might pass along to consumers.

Some groups say the likely outcome is more automation and fewer job opportunities. Others have a rosier view, saying the law will improve employees’ finances and have little to no adverse impact on jobs.

Lengthy History

The path leading to this point was long and contentious. It started in 2022, when Newsom signed a law to establish a powerful Fast Food Council. The result could have been a $22-per-hour minimum wage.

Industry groups fought back by gathering enough signatures to place the issue on the November 2024 ballot.

Eventually, business groups and labor representatives reached a compromise in September 2023, paving the way for the new law.

Economic Impact

Both restaurant employees and operators are preparing for the changes.

About 500,000 workers will benefit from the law, according to the Service Employees International Union (SEIU). The union negotiated the compromise deal with a business coalition, with assistance from Newsom.

The SEIU also recently launched the California Fast Food Workers Union, which will help workers participate in the Fast Food Council process.

The legislation will help employees in many ways, according to Michael Reich, an economics professor and chair of the Center on Wage and Employment Dynamics at the University of California, Berkeley. For instance, higher pay can improve workers’ credit scores.

Other people also might benefit indirectly, as there could be “wage spillovers” to employees in other sectors, Reich said.

He cited an example of workers at full-service restaurants, which aren’t covered by the $20 wage law. Those employees might demand a pay raise, saying they’ll quit otherwise. Employers that want to keep the workers would then need to give them a raise.

On the other hand, many businesses are expressing concern about the developments.

Although the current version of the law is better than the previous version, the $20 minimum wage could have many repercussions, according to the International Franchise Association (IFA), which helped negotiate the deal. Those could include more automation, said Jeff Hanscom, vice president of state and local government relations at the IFA in Washington, D.C.

The law could also lead to store closures, he added. For example, a business with a few struggling restaurants might shut those down in response to higher costs.

The effect on jobs has been a subject of debate.

Earlier this year, a Fatburger restaurant operator said he’s cutting labor costs in response to the legislation. In an interview with Business Insider, Marcus Walberg said he would reduce employee hours and impose a hiring freeze at his four Los Angeles restaurants.

Economist Christopher Thornberg of Beacon Economics in Los Angeles said the wage increase likely will reduce the pace of growth in the fast-food industry. He predicts “less expansion in restaurants and the workforce.”

However, Bay Area lawyer Ruth Silver Taube expects the law to help workers—without any negative impact on employment levels.

Higher pay can boost employee morale and reduce turnover, said Silver Taube, who supervises the Workers’ Rights Practice Area at Santa Clara University School of Law.

She also cited academic research of the fast-food industry that examined large increases in the minimum wage. According to the studies, employment levels either increased or remained the same after the pay hikes.

Fast Food Council

Although the pay increase has been in the headlines, the new industry council is also significant, said Brian Justie, senior research analyst at the UCLA Labor Center. The council will have representatives from labor and business, with the aim of better working conditions.

Restaurant employees work in risky environments, dealing with hot beverages, slippery floors, and other potential hazards. Many employees also would like to have more input on their work schedules, Justie noted.

Employees face other concerns, such as retaliation and harassment, according to a 2022 report by the UCLA Labor Center. The study also found that 63 percent of fast-food workers in Los Angeles County have experienced wage theft.

The new council is intended to be collaborative, according to Silver Taube. Both workers and employers will discuss the problems they face, as well as potential solutions.

Employer Compliance

Here are some pointers on employer compliance with AB 1228:

• Covered businesses. The law applies to California restaurants that belong to a “national fast food chain.” This is defined as a group of restaurants with more than 60 establishments nationally. The legislation exempts certain bakeries, as well as restaurants within grocery stores. Under AB 610, a bill under consideration in the California Legislature, more places would be excluded. The bill would exempt restaurants in airports, hotels, museums, theme parks and certain other locations.
• Anti-retaliation provision. The law prohibits retaliation against employees who participate in Fast Food Council proceedings. Managers should receive training on this topic.
• Monitor new developments. Be ready for any changes that might occur, advised Kristina Launey, an attorney at Seyfarth in Sacramento. Stay updated on proposals to clarify which restaurants are covered. Also, monitor recommendations made by the council.

Toni Vranjes is a freelance business writer in San Pedro, Calif.