California fast food workers bill: why it’s more than meets the eye and how to prepare

Summary:

• California signs bill establishing a “fast food council” that has the power to raise the industry’s minimum wage to $22 and set fair labor standards

• The bill marks major advances for joint liability and sectoral bargaining in the U.S. — More

• Fast food franchise owners should prepare for rising labor costs and tighter regulations by reevaluating how they schedule and track employee hours — More

If you live in California, there is slightly more going on behind the counter of your local Burger King than just your order of medium fries being dumped into a vat of hot oil. 

The local fast food industry has been embroiled in a fierce debate over labor issues in recent years. It seems to have reached a conclusion earlier this month…somewhat. 

On Labor Day, Democratic Governor Gavin Newsom signed into law a bill passed by the California State legislature that effectively increases the collective bargaining power of nonunionized fast food workers throughout the state via the establishment of a “fast food council.” Since the signing, a referendum spearheaded by the International Franchise Association and the National Restaurant Association has been filed in an attempt to delay the bill’s enactment until the November 2024 ballot when voters can have a say in the matter.

Assembly Bill 257, or the “Fast Food Accountability and Standards Recovery Act” (FAST) creates a council of 10 unelected stakeholders representing California’s fast food industry, including workers, franchisors, franchisees, and government officials. The council will have the power to set various standards and protections for minimum wage, maximum work hours, and labor conditions.

If the referendum fails, AB 257 will go into effect on January 1, 2023. The National Restaurant Association says similar legislation in New York, Oregon, Washington, and Illinois could very well be on the horizon. 

The signing of the bill marks a pivotal moment for low-wage fast food employees facing persistent wage and hour violations and poor working conditions. But the ramifications for franchisors and franchisees go much deeper. 

While many of the headlines surrounding the bill point to the council’s ability to raise the minimum wage from $15 to as high as $22 next year, the more significant story here is the bill’s impact on wage and hour liability and the relationship between franchisees and their corporate overlords. 

Why the bill came to be

The history of labor violations in California’s fast food sector is a long one. Put simply, many workers over the years have experienced ongoing instances of wage theft – the goal of the council is to stamp out these violations. 

According to a study from earlier this year, nearly 85% of California fast food workers surveyed claimed to be victims of wage theft. Of this group, 59% reported denial of sick pay and 27% reported violations in overtime and minimum wage. And thanks to California’s notoriously complex break laws, 53% reported having their rest breaks withheld or interrupted without proper compensation. 

This disturbing trend has been the norm for a while now. A similar study conducted in 2014 across multiple states found that 89% of fast food workers experienced various forms of wage theft. To make matters worse, franchise owners and frontline managers apparently are not helping matters. 

According to a McDonald’s employee featured in “Skimmed and Scammed: Wage Theft from California’s Fast Food Workers,” managers consistently engage in “fixing” timesheets to avoid instances of wage and hour violations.

“Meal and rest breaks are impossible when it’s busy. Instead of paying us for missed breaks, management goes into the timekeeping system and changes the time records to make it look like we took breaks that we weren’t able to take. Additionally, the time machines do not properly log overtime on certain shifts.”

Frontline reports such as these have fueled the fire for labor reform across the state.

What proponents say

Some see AB 257 as the answer to California’s battle with labor violations. Supporters believe the fast food council will provide Californian workers with more of a voice in the fight for labor rights. By convening all stakeholder voices into a single body representative of the industry as a whole, it will be easier to implement new minimum standards to limit wage theft and workplace harassment. 

Supporters also argue that the bill will ease the financial burden hourly workers face with rising inflation and California’s high cost of living. The likely minimum wage increase will be a welcome relief for low-income families relying on frontline QSR jobs throughout the state. 

What opponents say

A major concern with Sacramento’s passing of the FAST Act is that it will spike the cost of labor for employers. Even without a minimum wage increase, local franchise owners can expect to pay much more for labor with rules in place to monitor variable costs typically swept under the rug like break premiums and overtime hours. Assuming the $22 minimum wage is implemented, The National Restaurant Association reports that California fast-food restaurants could face an additional $3 billion in costs per year; this could cause chains to shut down locations, lay off workers, and avoid opening future locations in the state. 

Before Newsom’s signing, McDonald’s USA President Joe Erlinger criticized the FAST Act for being “lopsided, hypocritical and ill-considered legislation,” pointing out that targeting fast food restaurants with unfair bureaucratic restrictions would do more harm than good for the industry. “California’s approach targets some workplaces and not others. It imposes higher costs on one type of restaurant while sparing another.”

Another point of contention is that with increased labor costs, consumers can expect higher prices. A recent UC Riverside School of Business study found that increasing the minimum wage to $22 could cause menu prices to climb by as much as 17%.

An increase in the minimum wage and overall labor costs for fast food employers who already experience extremely tight profit margins could have some severe consequences according to Sean Redmond of the U.S. Chamber of Commerce. Not only will consumer prices go up, but employers might be forced to seek technological alternatives to automate away typically human roles – a consequence quite contrary to the pro-labor narrative of AB 257. 

Opponents are also quick to point out that the fast food industry does not experience higher than average wage and hour violations when compared to other industries in California. On the contrary, fast food restaurants actually only account for 2.2% of the total average wage claims filed annually with California’s Division of Labor Standards Enforcement from 2017 through 2022. 

Based on the figure above from the Employment Policies Institute, it almost appears that in the grand scheme of things, wage violations in California’s fast food industry may not be as prominent of an issue as proponents of AB 257 would have the public believe. However, the question then shifts to whether or not California should stand for labor violations of any kind, regardless of what they may look like between industries. After all, a staggering majority of fast food workers suffer from wage theft, even if they only make up 2.2% of total wage claims – surely that means something. But maybe it doesn’t mean enough to the business and livelihoods that could go under due to increased bureaucracy. It’s a heated debate that won’t be settled any time soon, even with the recent legislation. 

Joint Liability

Perhaps the most fundamental change brought about by AB 257 is the enforcement of joint liability. Now, instead of just the franchisees being liable for wage and hour violations, the franchisors themselves can also be held accountable as joint employers.

In the U.S., the franchise model has become so successful due in part to its limited liability. While franchisors control food prices, menus, uniforms, and the number of workers scheduled, they leave wages, working conditions, and all labor liability in the hands of local franchise owners.

This separation of liability creates a dichotomy between franchisor and franchisee interests. According to a 2021 study by the University of Miami and Cornell University, franchisees have a “free-rider” interest in increasing profit margins by “shirking on franchisor standards that reduce profit.” Franchisors, on the other hand, would rather build customer loyalty and maximize store revenue. 

“Franchisor pressure can sometimes lead franchisees to violate employment law,” an economist from the study says. “Franchisees can respond to intensive franchisor monitoring and tight profit margins by unlawfully chiseling wages as the only cost variable that the franchisor does not directly monitor.”

So what does this all mean? Well, it means that the franchise model has long been a breeding ground for wage and hour infractions. The FAST Act is an attempt to fix the misalignment between franchisor and franchisee by holding them both accountable. 

In fact, AB 257 would actually allow a franchisee to sue a franchisor if their contract contains conditions that leave them no choice but to violate employee wage and hour rights. 

While joint liability is not settled at the federal level, enforcing it is nothing new in California. Both the Cheesecake Factory in 2018 and Tesla in 2019 were held responsible alongside their janitorial contractors for underpaying workers. Since settling the two cases, joint liability for contract companies and their clients has generally been recognized in California. 

So, why is it such a big issue for joint liability to be established for fast food franchises? Well, doing so would bring to light an even larger discussion, this time surrounding unions. 

Sectoral Bargaining

In the U.S., unions practice enterprise-based bargaining. This essentially means that they only negotiate wages and working conditions with individual organizations. In contrast, sectoral bargaining is when a union negotiates labor standards with multiple companies across an entire industry. Sectoral bargaining is common practice in places like Europe and Australia.

So, AB 257’s fast food council is effectively a pseudo-sectoral bargaining body within the fast food industry because its policies will impact a vast range of organizations, not just one. This is a massive shift in the way collective bargaining is achieved, not only in California but in the nation as a whole. 

While doubtlessly a big step, bureaucratic wage and hour boards are not entirely new to this country. Similar legislation straddling the line of sectoral bargaining was passed in New York back in 2016. An “all-industry” wage board was convened by Governor Cuomo to increase the state minimum wage to $15. 

What to expect moving forward

If the concerns surrounding AB 257 materialize, consumers can expect menu prices to rise at their favorite fast food chains, and perhaps even see some locations shut down. On the flip side, wages will almost certainly increase for employees, and instances of wage theft will hopefully become less common. 

For business owners, labor costs will most likely rise. A higher minimum wage and stricter enforcement of break penalties and overtime rates will put a strain on profit margins. Compliance measures will also become tremendously important for avoiding costly lawsuits and penalties. Luckily franchisees should be able to fall back on holding their franchisors accountable for unfair contracts, reducing the pressure to cut corners. 

With the increase in costs, franchisees will be looking to higher fewer people going forward, opting instead for the use of technology. Utilizing automation in this way will hopefully cut down on human error, wage costs, and compliance risks. 

On a larger scale, major fast food chains will most likely be hesitant to open up new locations in the state. Outside of fast food, other industries can probably expect similar labor-regulating legislation to come their way in the next few years. 

What employers should do to prepare

In light of the changes brought about by AB 257, it’s important that fast food chain managers understand what they can do to keep wage costs low and comply with labor laws. Here are a few things to consider:

1. Audit the payroll process

Gone are the days of calculating inaccurate overtime and break penalties. Employers need to be on top of making sure all timesheets are correct, no matter what happens during a pay period. The best way to make sure your payroll runs as smoothly and accurately as possible is to catch all wage and hour errors BEFORE they even reach payroll. Employers can do this by prioritizing how they go about tracking time and attendance. Timesheets should be automatically calculated and reviewed every day by both managers and employees to prevent simple errors from compounding into major lawsuits. 

2. Keep detailed paper trails

These paper trails don’t need to be made of paper. In fact, they really shouldn’t be. Franchise owners should make sure they have an online system in place that automatically maintains wage and hour records for every pay period and every employee in order to hedge against labor liability. 

3. Review scheduling and timekeeping practices

Correctly scheduling and recording employee hours is a foolproof way to prevent labor law violations. Franchisees should look into automated employee scheduling systems built around strict compliance engines – technology like this makes it tremendously easy to schedule fair and cost-effective hours for workers. It’s not enough to just schedule employees correctly, however; employers need to have a time tracking system in place that accounts for all kinds of complications like break rules, overtime rates, and tardiness. 

4. Seek out automation

With the looming rise in labor costs, employers should look to workforce management automation to improve their margins and eliminate wasted time and money. Using AI to automate scheduling, forecasting, and timekeeping not only decreases admin time and human error, but also optimizes how labor is distributed, reducing things like overstaffing, wage theft, and overtime accruals.