Fast-food workers in California are receiving a pay increase, potentially prompting other businesses to follow suit.

• In California, employees at fast-food chains with over 60 locations are now paid $20 per hour.
• Restaurant operators not targeted by the law are observing the labor market to determine if they need to increase their wages to remain competitive.
• According to Glassdoor data from Oct. 1 to March 28, the average hourly wage for food service workers in California was $17.89.

Business owners in California are observing how fast-food chains are increasing their minimum wage and considering whether they will need to follow suit to remain competitive.

Fast-food workers in California at chains with more than 60 national locations will receive $20 per hour starting Monday, which is higher than the state's broader minimum wage of $16 per hour. This new pay floor is a result of a state law passed in September, which also established a nine-person council to determine future wage increases and propose other labor guidelines for the industry. Governor Gavin Newsom signed the law in September, stating that there are over half a million fast food workers in the state.

Some pizza chains, including Round Table and Pizza Hut, have responded to the mandated wage hike by laying off drivers and raising their menu prices.

Franchisees, who are small businesses, are facing mandated higher costs due to a new law, which will result in increased costs for customers and potentially lead to fewer jobs, according to Matthew Haller, president and CEO of the International Franchise Association.

While the law won't directly affect other restaurants in California, small coffee chains, mom-and-pop diners, and upscale steakhouses may still need to adjust their pay to remain competitive and retain employees. Similarly, industries that rely on hourly workers, such as retail and hospitality, may face pressure to match wages or risk losing their employees.

Daniel Zhao, Glassdoor's lead economist, stated that while we may observe spillover effects in the food service industry, we should anticipate even greater impacts on other competing industries for this talent, as reported by CNBC.

The slowdown in job growth in California has led to an unemployment rate of 5.3% in February, higher than the national rate of 3.9%, as per the Bureau of Labor Statistics.

California pay is already high

In California, employers are accustomed to paying higher wages for labor, with over 30 cities and counties having local minimum wages above the state's $16 an hour pay floor.

Restaurants often pay more than the minimum wage to attract hourly workers, despite not being required to do so. The industry has faced a labor shortage for years, with teens opting for internships and older workers leaving for better working conditions and benefits in other industries.

Before the law was implemented, the average wage for hourly food service workers in California was $17.89 per hour, based on self-reported Glassdoor data from October 1 to March 28. However, only 22% of the state's hourly restaurant workers were earning at least $20 per hour during that time period.

Fast-food joints in areas with lower costs of living, such as Fresno, will be more significantly impacted by the pay hike, according to Zhao. In major metropolitan areas, the difference between the previous pay rates and the new minimum wage is likely to be smaller.

At Andytown Coffee Roasters in San Francisco, non-tipped employees already earn more than $20 an hour, according to owner and CEO Lauren Crabbe. She expressed her excitement about the upcoming increase in minimum wage for fast-food workers in California, but believes the legislature could have done more to address wage disparities in other industries, such as retail.

If a multinational company cannot pay their employees at least $20 an hour in 2024, they do not have a viable business model, according to Crabbe.

The CEO of the restaurant chain is not concerned about the wage hike as they won't be obligated to pay their California workers $20 an hour. CEO Matthew Clark stated on the company's earnings call in February that the chain's tipped positions already make much more, and he believes that's the case for fast-food workers, too.

""The urban quick-service restaurants in California are already paying $19 and $20, which is why they agreed to do it," he said."

Fast food workers are not the only ones benefiting from the wage increase; businesses outside the restaurant industry are also taking notice.

Jennifer B. Perez is the founder and CEO of Growing Roots, a Long Beach-based company that has been in operation since 2002. The company specializes in designing, installing, and maintaining indoor plants for both commercial and residential clients. With a team of 13 employees, Growing Roots has established itself as a leading provider of indoor plant services in the area.

Perez keeps track of hikes in other industries to stay competitive. She gave workers raises this year before the fast-food hike. Workers with no experience are earning $19 an hour, which is the lowest end of her pay scale and more than two dollars above the local minimum. Additionally, they receive paid time off, vision, dental, and health insurance.

"Perez explained to CNBC that the fast-food increase is a ripple effect because he is not part of the industry. Although he is always paid above minimum wage, the continuous increase in wages, which is a 25% increase from $16 to $20, is something he must consider."

Many business owners, like Perez, must consider the impact of inflation on their company's labor expenses and their clients' budgets.

"Small businesses can't typically increase prices by 25% across the board," she stated.

Advocates prepare to go bigger

The California law, supported by the Service Employees International Union, has been a source of controversy from the beginning.

The restaurant industry and the SEIU reached a deal in September to abolish the joint-employer provisions in a law signed into law by Gov. Gavin Newsom more than a year ago. The referendum was initiated by the restaurant industry to decide on the matter.

In February, Newsom faced criticism after Bloomberg reported that a provision in a bill benefited his donor, Greg Flynn, owner of the Panera Bread franchisee Flynn Restaurant Group. Newsom's office denied the story, stating that Panera would be required to pay its workers at least $20 an hour. Flynn later announced that all his California locations would raise their pre-tip wages to $20 an hour or higher, effective Monday.

The SEIU is preparing for additional battles to secure similar raises for fast-food workers in several states, including New York, Washington, and Illinois, according to SEIU President Mary Kay Henry.

"After 10 years, we've reached this table, and the workers feel like they'll have a voice on the job that they've never experienced before," Henry stated.

The state of California will examine the impact of sector-specific minimum wages on workers, employers, and the broader labor market. Fast-food chains, industry experts, and economists will observe whether the dire predictions of job losses will occur or if higher wages will bring benefits to both workers and businesses.

Zhao from Glassdoor stated that offering a $20 wage could entice some workers to return to their restaurant jobs from working at an Amazon warehouse or driving for Uber, while also providing fast-food workers with more financial stability.

Those earning more money can also spend more money, which in turn gets reinvested in the economy, as stated.