How California’s Huge Raises for Fast-Food Workers Will Ripple Across Industries

(Bloomberg) — Michaela Mendelsohn, who owns six El Pollo Loco locations serving grilled chicken and tacos in California, recently found herself raising managers’ pay by over 10% to more than $83,000 a year.

With the state’s new law mandating a $20 minimum wage for fast-food workers taking effect April 1, a separate rule requiring salaried staff to earn double the minimum wage has triggered a chain reaction.

“They’ve gotten a big pay increase,” Mendelsohn said of her managers, who had typically made just over $70,000 a year.

When California Governor Gavin Newsom touted the effects of the landmark wage law, he said it would lift pay for 500,000 low-income employees throughout the state. That’s looking like a vast understatement now. The law is already creating spillover effects from janitors to hotel cleaners, as well as higher-paid workers within the fast-food business.

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That’s just the start. As many as 5 million of the state’s low-wage workers, both in fast food and adjacent industries not covered by the law, could also get raises, according to Bloomberg Economics. Given California’s huge population — No. 1 in the country — that would amount to about 3% of the entire US workforce.

The likely effects are big enough to play a possible role in boosting a national gauge of labor costs, Anna Wong and Estelle Ou said in a Bloomberg Economics report. That could add to pressure on the Federal Reserve to delay interest-rate cuts, while acting as a drag on President Joe Biden’s push to bring down inflation — a key pitch to voters in his reelection campaign.

“What happens in California fast-food restaurants likely won’t end there,” Wong and Ou said.

There are early indications that pay raises are spreading from fast-food joints to other California employers. School cafeteria workers in Sacramento will be paid $20 an hour come July, a raise spurred in part by anticipated competition for labor from restaurant workers, a move reported earlier by the Associated Press.

That’s a glimpse of what’s to come as lower-paid workers throughout the job market use the new fast-food benchmark as leverage with their employers, said Joseph Bryant, an executive vice president at Service Employees International Union, or SEIU, which championed the wage law.

“The floor has been lifted,” he said. “Lower-wage workers across the board are saying, ‘We deserve the same.’”

Potentially blunting the impact are layoffs and reductions in work hours. In one example, a McDonald’s worker in Southern California who used to average about 25 hours a week is now scheduled for 10 to 18. The employee, who asked not be named for fear of being fired, is weighing whether to look for another job to make up for the lost income.

Companies are also rushing to boost productivity to mitigate the historic wage hike. Mendelsohn said she’ll be testing an AI chatbot to take orders from drive-through customers. McDonald’s Corp. reintroduced bagel sandwiches as part of a plan to boost traffic that also includes $15 million for advertising. It’s rare for the burger chain to invest in promoting its products in a single state.

Price increases are another big way the new law’s effects are rippling through the economy, which is adding to inflationary pressures for consumers. McDonald’s franchisee Scott Rodrick, whose 18 restaurants are mostly in the San Francisco area, has raised prices between 5% and 7%. He’s also contemplating putting off some repairs to afford the pay raises.

“This is just so extraordinary, with the repercussions of what might happen to businesses small and medium-size, up and down the state of California, unknown,” he said.

At California locations of Chipotle Mexican Grill Inc., the price of a chicken burrito or bowl averaged $10.27 as of April 3, up from $9.50 on March 29, KeyBanc Capital Markets said in a report. Prices at Burger King rose about 2% from February to early April while Wendy’s started charging about 8% more, according to Kalinowski Equity Research, which surveyed 25 locations of each chain.

Owners and executives throughout the industry are starting to adapt in other ways as well, even if it means gritting their teeth. Given the rules about how much managers have to make relative to the minimum wage if they don’t get overtime, salaried fast-food supervisors now have to be paid a minimum of $83,200, up from $66,560, the state’s labor department said.

That means restaurant chains suddenly face higher costs than other employers, even as many of their customers are struggling.

“The biggest concern that we have is being singled out as an industry,” said Kerri Harper-Howie, a McDonald’s franchisee with stores in Los Angeles County.

At Mendelsohn’s Pollo Loco locations, while she increased her managers’ pay, she also curtailed a bonus package to help weather the raises. “They really have to show us that they can salvage the profitability of the stores” to get a bonus, she said.

Others are taking a different approach. Many franchisees are reclassifying their managers to hourly employees to sidestep the regulation that would require a salary boost, said Richard Reinis, a lawyer who represents employers on a newly established fast-food council that could shape rules on working conditions.

The answer is “to convince them that they can keep their title of assistant manager or even general manager, but they will work hourly and be treated like hourly employees,” he said.

As for the people in challenging low-paid jobs that the law was aimed at, many of them are getting a meaningful boost.

Angelica Hernandez, a McDonald’s worker who’s also on the fast-food council, said she’s able to “breathe a little easier” thanks to the wage increase.

“In all of my years, 19 years working in this industry, I can only remember getting around 10-cent raises, maybe 25 cents,” she said at a press event organized by SEIU, the labor union. “So this is a huge raise.”

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