On September 5, 2022, California’s Governor Newsom signed into law the Fast Food Accountability and Standards Recovery Act, otherwise known as the FAST Recovery Act or the FAST Act. The FAST Act creates a 10-member fast food council comprised of restaurant workers, union representatives, state officials, franchisors and franchisees, with a stated goal of setting new minimum industry standards for “fast-food restaurant” chains, in the areas of wages, working hours, workplace health, safety and security conditions, and other employee protections.
The FAST Act defines a “fast food restaurant” as an establishment that, in its regular business operations, primarily provides food or beverages (1) for immediate consumption either on or off the premises; (2) to customers who order or select items and pay before eating; (3) with items prepared in advance, including items that may be prepared in bulk and kept hot, or with items prepared or heated quickly; and (4) with limited or no table service.
This definition embraces almost all food and beverage (“F&B”) establishments in the State of California. While bakeries and restaurants that operate within grocery stores are specifically excluded, there is no similar carve-out for juice bars, coffee shops, candy shops, ice cream shops or other similar F&B establishments never previously considered restaurants.
Further, the FAST Act makes no distinction between franchised and non-franchised restaurant chains. The only requirements are that a chain have at least 100 locations nationally and that those locations share a common brand or are characterized by standardized options for décor, marketing, packaging, products and services. Despite this equal application, non-franchised fast food restaurants chains will have no representation on the fast food council. While this may have been a drafting oversight, it is likely due to an assumption that non-franchised restaurant chains are more likely to be unionized than franchised chains. Independent franchise ownership has long been one of the biggest hurdles for labor unions – a hurdle that the FAST Act is designed to overcome. This preference for unionization is further highlighted by the FAST Act’s exclusion of fast food restaurants that are already covered by union or collective bargaining agreements with their employees. This exclusion applies regardless of whether those agreements provide lower minimum wages than those provided under the FAST Act.
One of the most eye popping provisions in the FAST Act is the council’s authority to raise the minimum hourly wage for fast-food workers to $22 in 2023, and to increase the wage each year thereafter in line with inflation. This $22 minimum hourly wage would represent a $6.50 increase from the $15 per minimum hourly wage currently in effect in California for large employers, or a 47% year-over-year increase in the minimum. It is difficult to imagine a fast food restaurant being able to prepare for such a dramatic increase in costs in such a short period of time, particularly given that labor costs are one of a restaurant’s most significant operating costs.
Many anticipate that the FAST Act will ultimately result in the opposite of its goal; fast food restaurants will inevitably institute cost cutting measures and increases in menu prices – both of which will directly impact the very workers the FAST Act is designed to protect. To cut costs, restaurants likely will implement new technologies, like self-ordering kiosks/iPads, automated cooking procedures, and other tools aimed at reducing/eliminating employee head count. Of course, many restaurants began rolling out these new technological developments long before the passage of the FAST Act, spurred in part by the COVID-19 pandemic; however, a drastic increase in labor costs will undoubtedly expedite this process even further. It is also anticipated that restaurants will pass down these costs to the ultimate consumer through price increases, which may be a risky proposition in our current inflationary and recessionary environment. If customers are unable or unwilling to pay the increased prices, they may simply cut their outside spending and increase the frequency of their eating at home, thereby decreasing restaurant revenue and increasing the risk of restaurant closures and unemployment.
While the FAST Act will have a direct and immediate impact on the restaurant industry at large (as noted above, the FAST Act applies to both franchised and non-franchised fast food restaurant chains), it may have a unique impact on the franchise industry. The FAST Act makes no distinction between the revenue of a franchisee and a franchisor. According to Burger King’s Franchise Disclosure Document issued September 7, 2022, the mean average sales for franchisee-owned restaurants in 2021 was $1,471,492 – a far cry from the approximately $19 billion market cap of Burger King’s parent company, Restaurant Brands International Inc. Nevertheless, under the FAST Act, fast food restaurant franchisees who – notwithstanding obtaining a license to operate under the franchisor’s brand name and system, are often just average small business owners – will essentially be penalized for their affiliation with a large national brand. In addition to increased wages, these small business owners will now be subject to increased regulations, operational costs and penalties for non-compliance.
These increased costs risk driving franchisee-owned fast food restaurants out of California. If fast food restaurant franchisors wish to support and grow their franchise systems in California, changes may be required to their standard methods of operation, such as adding or increasing table service operations to avoid the application of the act (the FAST Act does not currently define “limited table service”); increasing menu prices; developing new technologies to reduce employee headcount; and, exempting California franchisees from maximum price requirements and other promotional price campaigns. In short, franchisors may need to either re-think their models to avoid the application of the FAST Act altogether, or increase their focus on initiatives designed to support their California franchisees’ different unit economics.
Importantly, challenges to the FAST Act are already underway. Not more than two days after the FAST Act was signed into law, Californians filed a referendum to reject the FAST Act. If enough signatures are collected, Californians will be able to vote on potentially repealing the FAST Act.