Think Fast: Fundamental Changes Coming for Fast Food Chains

Although the writing has been on the wall, fast food chains need to prepare for fundamental changes in how they do business in California. In an agreement between labor and fast-food companies, the FAST Act (AB 257) has been repealed, but replaced with other terms under AB 1228.

Some key takeaways are that a $20/hour minimum wage will go into effect on April 1, 2024, for workers at limited-service restaurants that are part of chains with over 60 locations nationally. A Fast Food Council will be established under the California DIR, with the authority to adjust the hourly minimum wage each year (subject to caps) until 2029.

Those who may fall under the law need to think fast—will you change how you operate your business to avoid this law, or will you be budgeting for the higher minimum wage and considering personnel restructuring as needed? Unfortunately, we are still waiting on regulations to provide much-needed clarification on the bill. Below is what we know so far:

What is the History Behind AB 1228?

The FAST Act (AB 257) was repealed and replaced with an agreement between labor and the fast food industry that was incorporated into AB 1228. The FAST Act was viewed as unprecedented legislation, creating a council that would set wages, working hours, and other working conditions for many fast-food restaurant workers. For those of you that followed the controversy surrounding this bill last year, you may recall it was put on hold after a successful ballot referendum, which would have allowed California voters to decide on it. The California legislature then signaled it was going to revive the Industrial Welfare Commission to pass regulations on fast food (and other) industries, in the event the FAST Act was voted against by Californians. Hence, the proposed compromise under AB 1228. The Governor signed the bill on September 28, 2023. It will go into effect in 2024.

Who is Covered Under the Law?

AB 1228 applies to all “limited-service restaurants” that are part of chains with over 60 locations nationally. Limited-service restaurants are those primarily engaged in providing food and beverages for immediate consumption on or off premises where patrons generally order or select items and pay before consuming, with limited or no table service. A limited-service restaurant includes, but is not limited to, an establishment with the North American Industry Classification System Code 722513.

There are exceptions for qualifying bakeries and grocery stores.

What are the Key Highlights?

Although it is certainly a victory for labor, there is compromise on both sides.

Pro-labor terms include:

• As of April 1, 2024, all covered businesses must pay a minimum wage of $20/hour.
• The Fast Food Council will be established under the Department of Industrial Relations, which includes the authority to adjust the hourly minimum wage each year, subject to caps.

Pro-employer terms include:

• Fast food franchisers will not share in liability for a franchisee’s civil violations (provision removed from AB 1228).
• The Industrial Welfare Commission will not be revived, which would have been able to pass regulations on fast food and other industries.
• Local municipalities will not be able to set higher minimum wage specific to fast food employees than what is mandated by the Fast Food Council.

What are the Practical Considerations?

As noted above, it is important that businesses who may be covered determine whether they will change their business operations. For example, will you consider becoming a “sit down” restaurant with table service, where the customer is served and pays after dining? Will you be budgeting for the higher $20/hour minimum wage and does this mean you will have to operate with a leaner staff?

Employers should also be aware that the minimum wage has ripple effects. For example, overtime (in California, more than 8 hours in a workday or more than 40 hours in a workweek) must paid at time and half, amounting to $30/hour.

What are the Open Questions?

Arguably, the bill leaves many open questions. What is meant by the term “primarily engaged?” For restaurants that operate within a different business (e.g., a Starbucks inside a Target, or a Subway inside a gas station), how will the fast food minimum wage apply to workers at those businesses?

Given the broad wording of the bill, it is advised that businesses unsure of their coverage consult legal counsel. Hopefully, regulations will be forthcoming soon to provide clarification.