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McDonald’s franchisee group says California fast-food bill will cause ‘devastating financial blow’

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A McDonald’s fast food restaurant is seen in Belmont, United States on April 03, 2023.
Tayfun Coskun | Anadolu Agency | Getty Images

After California lawmakers passeda landmark fast-food bill, an independent advocacy group of McDonald’s

The bill, AB 1228, was passed by the state Senate late Thursday and heads to Gov. Gavin Newsom’s desk for signature. He has already pledged to sign the bill into law. It includes a wage floor of $20 for California workers at fast-food chains with at least 60 locations nationwide, starting April 1.

Labor groups pushed for even higher wages in previous legislation, but the resulting $20 an hour floor prevailed. Even in a state where the minimum wage is $15.50 and the pay floor is even higher in some municipalities, the deal will bring a significant raise for many workers. But despite support from franchisee and restaurant advocacy groups, some owners are concerned about what the bill means for operations in a challenging labor market and during a period of high inflation.

The National Owners Association, an independent advocacy group of more than 1,000 McDonald’s owners, projects in the memo the bill will cost each restaurant in the state $250,000 annually. The group said the costs “simply cannot be absorbed by the business model.” It also warned similar legislation will follow in other states.

Further, 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) independently w/o franchisee involvement, negotiated a deal with the [Service Employees International Union]; causing the legislative outcome to now become certain.”

McDonald’s sent its own letter to its restaurant system on Monday, which was viewed by CNBC. Responding to the bill,the company said it and other franchisee groups “worked tirelessly over the past year to fight these policies and protect Owner/Operators’ ability to make decisions for their businesses locally and protect their restaurants and their crew.”

“This included forming a coalition of brands to refer [an earlier version of the bill] to California voters in November 2024 — while expensive and unexpectedwe felt we had no other choice. We also significantly increased our political engagement in the state. This included a newly established North America Impact Team to work horizontally, new lobbyists and campaign consultants, and a dramatic step-change in our political activity,” it wrote.

The company declined to comment further 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 “protect” the business model from what he called “an all-out attack.”

“That involved countless conversations and meetings, and a discussion with the Governor’s office directly,” he said. “Anyone who is suggesting this was not a collaborative and successful effort to protect the franchised business model in California, or that franchisee involvement was absent, was either not involved or is contorting the facts.”

In its systemwide letter, the fast-food giant also outlined changes made to the final version of the bill that are considered better for owners than the initial proposed legislation. The new legislation eliminated the threat of joint franchisor-franchisee liability, which McDonald’s said would “destroy the franchise model in California and strip thousands of restaurant owners of the right to run their business.”

In addition, it said the bill unwinds the reconstitution of the Industrial Welfare Commission, which would have “sweeping powers” over decisions on wages and workplace requirements for restaurants. The letter said the commission would have been able to make immediate and unchecked decisions on wages and working conditions in the state.

Other franchise and restaurant groups had a more positive outlook on the compromise.

The International Franchise Association CEO Matt Haller 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.” He added in an interview with CNBC, that “franchise brands that were involved in the negotiations had their franchisees first and foremost in front of minds as they were considering deal terms.”

The National Restaurant Association’s EVP of Public Affairs, Sean Kennedy, added in a statement, “This agreement provides a predictable future for California restaurant operators and includes a tremendous investment in the [quick-service restaurant] workforce, while eliminating regulatory and legislative threats endangering their businesses. We recognize the work from all sides that went into getting this legislation written and appreciate the legislature’s support to get it passed.”

Both Kennedy and Haller are co-chairs of the Save Local Restaurants coalition that worked on the negotiations.

Some critics of the deal have said costs will fall solely on small business owners in the state. In its letter, the NOA outlined ways for members, suppliers and McDonald’s corporate office to support owners in the state of California. It said anticipated menu prices hikes will create a “significant revenue windfall” for the company, and said the projected $80 million rent and service fees collected from those sales directly tied to price hikes should be reinvested in California restaurants. It asked that any and all requests for financial support made by owners in the state be considered.

“Everyone has a stake in this and nobody can afford to stand on the sidelines,” the NOA letter said.

Meanwhile, worker advocates — who won wage hikes but not increases as large as they first sought — said their work is just getting started.

“Fast-food workers’ fight in California isn’t close to over — it has only just begun as they prepare to take their seat at the table and help transform their industry for the better,” Service Employees International Union President Mary Kay Henry said in a statement to CNBC.

She added, “California’s Fast Food Council brings together every stakeholder in this industry, including franchisees. At this table, workers and franchisees alike will be heard by global franchisors and will have a direct role in shaping improved standards in the industry. This groundbreaking, sector-wide approach is the path to making fast-food jobs safer and the industry more sustainable for everyone.”

— CNBC’s Amelia Lucas contributed to this report.

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