A McDonald’s fast food restaurant is seen in Belmont, USA on April 3, 2023.
Tayfun Coskun | Anadolu Agency | Getty Images
After the California legislature passed An independent advocacy group representing McDonald’s owners is pushing back against a landmark fast-food bill against what they say will be a “devastating financial blow” to their franchisees in the state, according to a memo to its members seen by CNBC.
The bill, AB 1228, passed the state Senate late Thursday and heads to Gov. Gavin Newsom’s desk for his signature. He has already pledged to sign the bill. It imposes a $20 wage floor beginning April 1 for California workers at fast-food chains with at least 60 locations nationwide.
Labor groups pushed for even higher wages in previous legislation, but the resulting floor of $20 an hour prevailed. Even in a state where the minimum wage is $15.50 and in some communities the wage floor is even higher, the deal will provide a significant pay increase for many workers. But despite support from franchisee and restaurant advocacy groups, some owners are concerned about what the bill means for businesses in a difficult labor market and a time of high inflation.
The National Owners Association, an independent advocacy group of more than 1,000 McDonald’s owners, estimates in the memo that the bill will cost every restaurant in the state $250,000 a year. The group said the costs “simply cannot be absorbed by the business model”. It also warned that similar laws will follow in other states.
Additionally, the organization claimed in the letter that “a small coalition of franchisors, including McDonald’s, the National Restaurant Association (NRA), and the International Franchise Association (IFA), negotiated a deal with the company independently and without the franchisee’s involvement. “ [Service Employees International Union]; whereby the legislative result is now certain.”
McDonald’s sent its own letter to its restaurant system on Monday, which was seen by CNBC. In response to the bill, The company said it and other franchisee groups have “worked tirelessly over the past year to combat these policies and protect owner-operators’ ability to make on-site decisions for their stores and protect their restaurants and crew.”
“This also included forming a coalition of brands that we could recommend [an earlier version of the bill] to California voters in November 2024 – although expensive and unexpected We felt like we had no other choice. We have also significantly increased our political commitment in the country. “This included a newly formed North America Impact Team to work horizontally, new lobbyists and campaign consultants, and a dramatic shift in our political activities,” it said.
The company declined further comment on the NOA’s letter or position.
Roger Delph, a McDonald’s franchisee from California who served on the state’s owner-operator task force, said in a statement to CNBC that he worked with McDonald’s, other franchisees and separate companies to develop the business model before to “protect” what he called an “all-out attack.”
“This included countless conversations and meetings as well as a discussion directly with the governor’s office,” he said. “Anyone who claims that this was not a concerted and successful attempt to protect the franchise business model in California, or that there was no involvement by the franchisee, either was not involved or is misrepresenting the facts.”
In its system-wide letter, the fast food giant also outlined changes to the final version of the bill that are considered better for owners than the original proposed law. The new legislation eliminated the threat of joint liability between franchisor and franchisee, which McDonald’s said would “destroy the franchise model in California and deprive thousands of restaurant owners of the right to operate their businesses.”
Additionally, it says the bill reverses the reconstitution of the Industrial Welfare Commission, which would have broad authority to make decisions about wages and workplace requirements for restaurants. The letter said the commission could have made immediate and uncontrolled decisions about wages and working conditions in the state.
Other franchise and restaurant groups viewed the compromise more positively.
Matt Haller, CEO of the International Franchise Association, said in a statement that the bill “creates the best possible outcome for workers, local restaurant owners and brands while protecting the franchise business model in California.” In an interview with CNBC, he added that “franchise brands involved in the negotiations had their franchisees in mind first and foremost when considering the terms of the agreement.”
Sean Kennedy, EVP of public affairs for the National Restaurant Association, added in a statement: “This agreement provides a predictable future for California restaurant operators and includes a tremendous investment in the future.” [quick-service restaurant] Protect workers while eliminating regulatory and legal threats that put their business at risk. We appreciate the work that went into drafting this legislation and thank the Legislature for their support in passing it.”
Both Kennedy and Haller are co-chairs of the Save Local Restaurants coalition, which worked on the negotiations.
Some critics of the deal said the costs would fall solely on small business owners in the state. In its letter, the NOA outlined opportunities for members, suppliers and McDonald’s corporate headquarters to support owners in the state of California. It says that the expected price increases on the menus will result in a “significant loss of revenue” for the company, and that the expected $80 million in rent and service fees collected from these sales directly linked to price increases in California Restaurants should be reinvested. It was requested to consider all applications for financial assistance submitted by property owners in the state.
“Everyone is involved and no one can afford to sit idly by,” the NOA letter said.
Meanwhile, labor representatives who pushed through wage increases but didn’t see as much increase as they initially sought said their work is just beginning.
“The fight of fast food workers in California is far from over – it has just begun as they prepare to take their place at the table and help change their industry for the better,” said Mary Kay Henry, president of the Service Employees International Union in a statement to CNBC.
She added: “The California Fast Food Council brings together all stakeholders in this industry, including franchisees. At this table, workers and franchisees alike will have their voices heard by global franchisors and will play a direct role in shaping improved standards in the industry. This groundbreaking, industry-wide approach is the way to make fast food jobs safer and the industry more sustainable for everyone.”
—CNBC’s Amelia Lucas contributed to this report.