5 Things To Know About CA's $20 Fast Food Minimum Wage

LOS ANGELES, CA — Hundreds of thousands of minimum wage workers in California will wake up to a 20 percent raise Monday morning when the state's $20 minimum for the fast food industry kicks in.

The $20 minimum wage applies to larger chains with at least 60 locations — namely the big chains such as McDonald’s, Wendy's, Burger King, Jack in the Box, Del Taco and Subway.

The $4 minimum wage raise comes thanks to Assembly Bill 1228 signed by Gov. Gavin Newsom last year. The statewide minimum wage will remain $16. However, a number of cities and industries already have higher minimum wages with more increases to go into effect in the healthcare industry in June.

Paychecks And Poverty

According to the U.S. Bureau of Labor Statistics, about 540,000 people work in fast food in the Golden State, and a majority of them earn less than the $20 minimum wage that kicks in on Monday. On average, fast food workers in California earn $16.60, or about $34,000 per year, according to the U.S. Bureau of Labor Statistics. That's well below the state's $39,900 California Poverty Measure for a family of four. The new minimum wage will raise full-time fast food worker's annual salary to at least $41,600.

Who Pays?

Several major chains including Starbucks, Jack in the Box, Shake Shack, Chipotle, and McDonald's announced plans to pass the increased labor costs onto customers, but customers may not have much of an appetite left for more price hikes.

"It's going to be a pretty significant increase to our labor," Chipotle CFO Jack Hartung said during the company's earnings call in October. "We are definitely going to pass this on."

Hartung said he expects Chipotle's prices to go up as much as 9 percent at its approximately 450 California stores, saying the increase would be somewhere in the "mid-to-high" single digits.

According to Nasdaq, Jack in the Box CEO Darin Harris forecasted menu price increases ranging from 6% to 8%.

Similarly, McDonald's predicted price hikes last year but appeared to back off the plan recently.

"There is going to be a wage impact for our California franchisees," CEO Chris Kempczinski said during a company earnings call last year. "Certainly, there's going to be some element of that that does need to be worked through with higher pricing."

At the time, McDonald's leaders said they expected the company to increase the cost of its food by just over 10 percent annually in 2023 on top of the 10 percent price hike in 2022.

However, in February, Kempczinski acknowledged that lower-income customers have been cutting back in response to the price hikes of the last two years. He then predicted the company would relax price increases.

"I think what you're going to see as you head into 2024 is probably more attention to what I would describe as affordability," Kempczinsk told investors, Scripps News reported. "So think about that as being absolute price point being probably more important for that consumer in a lower absolute price point to get them into the restaurants than maybe a value message, which is a two for six or something like that. Those probably are going to resonate a little bit less in 2024."

More recently, McDonald’s has signaled that the company will explore other cost-cutting options before settling on specific price increases.

Cost-Saving And Revenue-Generating Alternatives

Price hikes and layoffs aren't the only options being considered by fast food chains.

El Pollo Loco told investors it would automate salsa-making and Jack in the Box is testing fryer robots and automated drink dispensers, according to the Wall Street Journal.

In February, Wendy's announced plans to invest $20 million into high-tech digital menu boards that could use AI for dynamic pricing and menu changes.

Some franchisees predicted they would cut worker hours. Still, other chains have indicated that in addition to price hikes, they may also expand their value menus or special offers to lure back the low-income customers who have been priced out recently. It's an approach designed to increase revenue through higher prices at one end of the menu and increased sales at the lower-priced end of the menu.

This year, Taco Bell introduced its Cravings Value Menu with new items, more vegetarian offerings and prices under $3.

Can Fast Food Chains Afford To Pay Workers More?

If revenue is an indicator, the fast food industry is booming.

With inflation cooling, price increases for groceries and sit-down restaurants have slowed dramatically from their 2022/23 peaks, but fast food price increases remain elevated, according to a report by Barron's. On average, fast food prices in January were nearly 6 percent higher than in the previous year.

According to Macrotrends, a stock research firm, McDonald's annual gross profit for 2023 was $14.5 billion, a 10.26 percent increase from 2022, which saw a 5 percent increase from 2021.

Macrotrends reports that Chipotle's annual gross profit for 2023 was $2.59 billion, a 25 percent increase from 2022, which saw a 21 percent increase over 2021.

Still, many chains have decided that they can't afford to absorb the increased labor costs and have announced layoffs or threatened closures.

Round Table Pizza plans to lay off 73 drivers in April while shifting to third-party delivery services, the Los Angeles Times reported.

Pizza Hut also announced plans to lay off more than 1,200 delivery drivers in Southern California, namely in Los Angeles, Orange and Riverside counties ahead of the minimum wage increase. The Hut is also shifting to third-party delivery apps.

Similarly, a Bay Area owner of several Auntie Anne’s and Cinnabon locations told the Times he is considering layoffs as a result of the minimum wage increase.

Ripple Effect

In an already tight labor market, the $20 fast food minimum wage is expected to draw minimum wage workers from retailers and restaurants with starting salaries as low as $16 an hour. To compete for workers, they may have to raise their wages, too.

“It’s kind of a fallacy that this impacts only fast-food workers,” Keith Miller a Subway franchise owner and spokesman for the American Association of Franchisees & Dealers told LAist. “It kind of creates a market rate. In effect, the minimum wage for a lot of people will be $20.”

Patch staffer Chris Lindahl contributed to this report