Hot Out of the Oven: Fast Food Council to Be Reinstated

Last year the California Legislature enacted Assembly Bill 257, with a declared purpose of improving the terms and conditions of employment of fast food workers who, according to the bill, “are the largest and fastest growing group of low-wage workers in the state.”

Entitled the Fast Food Accountability and Standards Recovery Act, the FAST Act sought to establish a new “Fast Food Council” authorized to establish a new industry minimum wage (up to $22 per hour) and new standards concerning “working hours, and other working conditions related to the health, safety, and welfare of … fast food restaurant workers….” The FAST Act expanded joint liability of restaurant industry franchisors with franchisees, invalidated provisions in their franchise agreements, and imposed other obligations for franchised establishments that satisfied the definition of a “fast food restaurant.”

Governor Gavin Newsom signed the FAST Act into law on September 5, 2022. The law was set to go into effect on January 1, 2023, but was halted in December 2022, after businesses and restaurant trade groups managed to submit enough signatures to put a measure on the 2024 ballot to overturn AB 257.

In July 2023 Governor Newsom signed the Budget Act of 2023, which allocated $3 million dollars to refund and reinstate the Industrial Welfare Commission. The IWC regulated the wages, hours, and working conditions of California employees, but was defunded about 20 years ago. With its reinstatement, the Legislature sought to prioritize rule making for “industries in which more than 10 percent of workers are at or below the federal poverty level.”

In addition to reinstating the IWC Governor Newsom signed Assembly Bill 421 to address, in part, the AB 257 ballot initiative. Per AB 421, if a measure is to overturn a state law (for example, the Fast Act), voters must be asked if they want to “keep the law” or if they want to “overturn the law.”  It was the avenue labor groups needed to shift the referendum effort on AB 257.

To resolve the dispute, proponents and opposition to AB 257 reached an agreement to repeal the existing FAST Act, revise its provisions, and suspend the reinstatement of the IWC (at least for now), but only if the AB 257 referendum is withdrawn by January 1, 2024. This agreement is partly manifested in Assembly Bill 1228.  Supporters include the International Franchise Association and the National Restaurant Association, who argue that the compromise “reflects the best interest of workers, local franchised restaurant owners and restaurant brands…” 

So what would AB 1228 do? Its original incarnation essentially turned fast food franchisors into de facto employers of their franchisees by shifting responsibility for complying with the state’s employment laws and allowing franchisees to bring claims against their franchisor if a system standard or contractual provision prevented compliance with state law. In the amended version, gone are the far-reaching provisions that effectively transformed franchise agreements into employment agreements and imposed joint employer liability among franchisors and franchisees.

If signed, AB 1228 will increase the minimum wage for fast food restaurant employees to $20 per hour, starting April 1, 2024.

The bill will also revive the Fast Food Council originally included in AB 257, for the purpose of establishing minimum standards on wages, working hours, and other working conditions for fast food restaurant employees. However, the council is not permitted to develop rules creating new paid time off benefits to fast food restaurant employees, such as paid sick leave or paid vacation.

Starting 2025, the Council may increase minimum wage annually, depending on various factors. The council will consist of:

Nine voting members:

(A) Two representatives of the fast food restaurant industry (appointed by the Governor).

(B) Two representatives of fast food restaurant franchisees or restaurant owners (appointed by the Governor).

(C) Two representatives of fast food restaurant employees (appointed by the Governor).

(D) Two representatives of advocates for fast food restaurant employees (appointed by the Speaker of the Assembly and the Senate Committee on Rules).

(E) One unaffiliated member of the public who is not an owner, franchisee, officer, or employee in the fast food industry; who is not an employee or officer of a labor organization or a member of a labor organization representing fast food restaurant employees; and who has not received income from the fast food industry or any labor organization for a period of two years prior to appointment (appointed by the Governor).

And two nonvoting members:

(A) One representative from the Department of Industrial Relations.

(B) One representative from the Governor’s Office of Business and Economic Development.

To avoid a multitude of rules for fast food restaurants, AB 1228 does not permit cities or counties to create local ordinances or regulations applicable to fast food restaurant employees. Local jurisdictions, however, may still establish a minimum wage that is generally applicable to all industries.

Fast food franchisors can expect to contend with an unelected local council that has the authority to dictate working conditions and related employment mattes. At most two of nine seats are available to the restaurant franchisor constituency, suggesting the council will impose requirements and standards that only increase labor and operating costs. That invariably translates to higher menu costs for consumers and will likely challenge franchisees to stay profitable and viable.

The true economic impact of such decisions on franchisees and franchisors remains to be seen, but they can certainly expect to factor into their budgets a steadily increasing cost of administrative compliance over time.

Matthew J. Soroky is a California Bar Certified Specialist in Franchise & Distribution Law. Tal Burnovski Yeyni is an employment lawyer experienced in defending wage and hour claims.