In California, Minimum Hourly Wage For Fast-Food Workers Is Now $20
Will consumers eat the cost increase?
(Image via Getty)
I don’t eat fast food voluntarily these days. But over the past few months, I visited a few of my old favorites: Subway, McDonald’s, Burger King, and In-N-Out, a West Coast icon. Due to tax work, I haven’t had time to cook or sit down at a restaurant. But another reason is that the food at these places might become more expensive in the future.
On April 1, 2024, California raised the minimum wage for fast-food workers to $20 per hour, making them the highest paid in the United States. This is on top of California’s overall minimum wage increase to $16 per hour starting in 2024.
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The law gives a detailed definition of what is considered a fast-food restaurant.
- The restaurant must offer limited or no table service, where customers order food or beverage items and pay for them before being served.
- The restaurant is part of a chain of at least 60 establishments nationwide.
- The restaurant is primarily engaged in selling food and beverages for immediate consumption.
The law provides an exemption for restaurants located inside a large grocery or department store (for example Target or Walmart).
The law also exempts restaurants located in airports, hotels, theme parks, museums, and casinos. Restaurants in these locations traditionally charge more than their traditional counterparts.
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Lastly, one curious exemption exists for bakeries that produce and sell bread as a standalone item as of September 15, 2023. This very specific exemption was suspected to benefit one of California Gov. Gavin Newsom’s donors who owned 24 Panera restaurants. Due to public backlash, the donor has publicly stated that he would voluntarily increase his employees’ pay to $20 per hour.
While the definition of fast food seems to target the traditional large fast-food companies, the language may have unintended consequences. A press release from Greenberg Traurig expresses concern that the definition of fast food is vague and could capture businesses that are not typically considered “fast food.”
It may inhibit up-and-coming fast-food chains in California from establishing more than 59 restaurants.
Some established chains may try to get around this rule by using different names in California. While this idea may sound far-fetched, it is possible. For example, the fast-food restaurant Californians know as Carl’s Jr. is also known as Hardee’s on the East Coast. This is because the parent company of Carl’s Jr. known as CKE Restaurants Holdings, acquired Hardee’s in 1997.
This may discourage other nationally popular fast-food restaurants to expand into California. But it is questionable whether any natives would be interested in seeing a Whataburger or White Castle in their neighborhood.
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Who will benefit from the new law? Obviously, the fast-food workers who receive minimum wage will get a 25% pay increase. But some fast-food workers already receive more than the minimum wage, as the minimum wage of most major cities average between $17 and $18 per hour.
In-N-Out is also known for paying their employees competitively. According to Indeed.com, the average salary for an In-N-Out associate is almost $20 in addition to benefits. Whether the chain will raise their salaries in response to the law to maintain its competitive edge is not yet publicly known.
The state and federal governments will also benefit. The higher wages will result in additional payroll taxes collected. The state will also collect unemployment taxes at a faster rate although it is capped at the first $7,000 of an employee’s wages annually. California is one of the few states that borrowed money from the federal government to cover unemployment benefits due to the coronavirus-related shutdowns but was unable to pay it back. As a result, local businesses must pay an additional federal unemployment tax unless the surge in state taxes can allow the state to pay back the federal government.
It seems unlikely that major fast-food franchises will cut royalty fees to their franchisees. Independent franchisees will suffer unless they can cut costs, the owners are willing to accept less profit, or pass on the cost to customers. In response to the law, several California food chains, including Pizza Hut, Southern California Pizza, Round Table Pizza, and Vitality Bowls, have announced layoffs following the law’s enactment. Some restaurants may try to automate some tasks by using order-taking kiosks. On the other hand, a study shows that fast-food profits have increased and may be able to absorb wage increases.
The important question is whether consumers will eat the cost increase. California has a high cost of living. The median California household has $468 left after living expenses, which places the state 46th out of 50 on the amount of disposable income. The median Californian is living paycheck to paycheck and may not be able to absorb a price increase.
Only time will tell whether the new minimum wage law specifically aimed at fast-food workers will achieve its purpose. Businesses may try to find a creative way around the law or reduce employee headcount. But if the cost increase is passed on to the consumers, then they might consider other options.
Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at stevenchungatl@gmail.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.
