New $20 Minimum Wage Requirement for California Fast Food Workers Coming April 1, 2024

Beginning April 1, 2024, California's minimum wage for fast food employees will increase to $20 per hour. This change is the result of Governor Newsom signing AB1228 (also known as the Fast Food Franchisor Responsibility Act) into law on September 28, 2023. In addition to increasing the minimum wage for fast food workers, AB1228 clarifies the authority of the Fast Food Council to make future minimum wage increases and adopt other standards for California fast food restaurants.

This new law follows years of negotiating and lobbying by employees, unions, and fast food companies and reflects a labor agreement struck between fast food companies and the Service Employees International Union ("SEIU") on September 11, 2023. The new law also puts an end to Governor Newsom's proposed $22 per hour minimum wage for fast food workers and fast food companies' November 2024 ballot measure to undo that law. AB 1228 will have far-reaching effects on the fast food industry as well as other service industries that pull from the same applicant pool. The fast food minimum wage is now higher than even the most generous city and county minimum wages in California.

Who Is Covered?

The new law applies to any California employee working for a "fast food restaurant" that is part of a "national fast food chain." To be covered, a location must meet all of the below criteria:

• Be a "limited service restaurant," meaning one that offers limited or no table service, where customers order food or beverage items and pay for those items before consuming them. A "limited service restaurant" includes, but is not limited to, an establishment with a North American Industry Classification System ("NAICS") code 722513.
• Be part of a national fast food restaurant chain of at least 60 establishments nationwide. The establishments must share a "common brand" or be "characterized by standardized options for decor, marketing, packaging, products, and services." If a national chain has a location that performs only administrative, warehouse, or food preparation work, this location does not count as an "establishment" towards the 60-establishment minimum.
• Be primarily engaged in selling food and beverages for immediate consumption, meaning more than 50% of the restaurant's gross income comes from customers eating or drinking at a table inside or outside the establishment, in their car, or as soon as they get home or to work with their order. Food sold to be cooked, baked, or heated at home is not "for immediate consumption."

The new law applies to a fast food restaurant's employees regardless of whether the employer is the business entity that owns that national brand or a franchisee of that national brand.

Are There Any Exemptions From the New Law?

AB1228 carves out two exemptions from the new requirements:

• First, restaurants operating a bakery that "produces" and then sells "bread" as a stand-alone menu item as of September 15, 2023. "Bread" is defined as a single unit item that weighs at least one-half pound after cooling and must be sold as a stand-alone item.
  • The following types of restaurants do not fall under this exemption:
    • Restaurants selling bread only as a part of a sandwich or burger but not a stand-alone menu item;
    • Restaurants selling stand-alone items weighing less than one-half pound after cooling, such as most muffins, croissants, scones, rolls, or buns, but do not sell bread weighing at least one-half pound after cooling; or
    • Restaurants that do not "produce" bread on the premises of the restaurant location where the customers purchase the bread. Baking pre-made dough that was mixed and prepared at another location does not constitute "producing."
  • This exemption does not require that a restaurant was primarily engaged in the sale of bread as a stand-alone item. It may apply even where the sale of bread constituted a small portion of total food sales. It is noteworthy, however, that the exemption is measured as of September 15, 2023; subsequent developments are irrelevant.
• Second, restaurants that are located within a "grocery establishment" where the "grocery establishment" is the entity that employs the individuals working in the restaurant. The law defines "grocery establishment" as a retail store in California that is over 15,000 square feet and sells primarily household foodstuffs for offsite consumption (e.g., fresh produce, meats, dairy products, canned foods, beverages, or prepared foods), and the sale of household supplies or other products is secondary to the primary purpose of food sales (meaning 50% or more of the grocery establishment's gross income is from the sale of household foodstuffs for offsite consumption).

Furthermore, the California Legislature recently passed—and on March 25, 2024, Governor Newsom signed—AB610, which exempts additional restaurants in certain locations from AB1228. Thus, fast food restaurants located in museums, airports, theme parks, gambling establishments, hotels, event centers, or corporate campuses (all as defined further by AB610) are now also exempt from AB1228. Also exempt are restaurants located within publicly owned ports, beaches, parks, historic districts, or piers that are operated pursuant to a concession agreement or food service contract. The reasoning behind these additional exemptions in AB610 is that many fast food workers in these locations already have a higher minimum wage. For example, fast food workers who work for tenants at San Francisco International Airport have a current minimum wage of $22.50 per hour.

What Are the Minimum Wage Requirements in the New Law?

Most critically, starting April 1, 2024, all fast food restaurant employees covered by AB1228 must be paid at least $20 per hour. Covered employers will need to post a supplement to the minimum wage order in the workplace. The supplemental posting is available here. Covered employers may not use tips or meal or lodging credits to count towards the minimum wage.

California cities and counties cannot pass an ordinance setting a higher minimum wage for only fast food restaurant employees covered by AB1228. However, cities and counties can establish a higher general minimum wage that applies to all workers.

The new minimum wage will not just affect hourly employees. Exempt managerial employees must earn at least two times the applicable state minimum wage to maintain their exempt status. Therefore, exempt employees at covered fast food restaurants must earn at least $83,200 per year starting on April 1, 2024; otherwise, they will no longer be considered exempt. This is higher than the general exempt salary threshold for California employees, which is $66,560 in 2024.

What Is the Fast Food Council, and What Is Their Role?

The Fast Food Council (the "Council"), established within the California Department of Industrial Relations, is composed of appointed representatives representing a variety of interests. It has nine voting members, including fast food franchisees or restaurant owners, fast food restaurant employees, employee advocates, and one unaffiliated member of the public. The Council will also have two non-voting members, one from the Department of Industrial Relations and one from the Governor's Office of Business and Economic Development. A current list of the Council members is available here.

The Council will meet regularly to develop minimum employment standards specific to the fast food industry. These standards may include future minimum wage increases, although those cannot occur until January 1, 2025, at the earliest. The minimum wage can increase each year by either 3.5% or the increase in the consumer price index, whichever is smaller. The Council can also develop and recommend to state agencies other workplace standards regarding working hours and conditions to maintain the health, safety, and welfare of fast food restaurant workers. However, any such recommendations will undergo rigorous administrative review by the appropriate California agency, and the Council does not have authority to implement standards by itself. The Council and its authority will sunset on January 1, 2029.

What Should Employers Do To Prepare?

As California employers know, failure to adhere to minimum wage standards can lead to steep damages and penalties. Employers should take the following steps to ensure that they are complying with AB1228.

• Review the establishments' NAICS code(s) – different locations may have been assigned different codes. If the code is 722513, then the establishment is likely subject to the new requirements if it meets the other coverage criteria. Employers with other NAICS codes may also be subject to the new requirements if they meet the definition of a "national fast food chain" and the other coverage criteria outlined above.
• Determine whether an exemption applies to one or more of the establishments and consider AB610, which has added additional exemptions. If you are unsure if an exemption applies, contact employment counsel for guidance.
• If the new law applies and there is no applicable exemption, make sure to pay non-exempt employees at least $20 per hour and exempt employees at least $83,200 starting April 1, 2024.
• Be on the lookout for any future fast food worker minimum wage increases by the Fast Food Council starting January 1, 2025, and check for any other updates regarding minimum standards from the Fast Food Council.

If you have any questions about your company's coverage under or compliance with the new requirements regarding California's fast food minimum wage, please contact DWT's employment services group, which is available to advise and assist. In the meantime, DWT will continue to monitor and provide updates as they occur.