Michaela Mendelsohn expects her six El Pollo Loco locations in Los Angeles County will take a $600,000 hit annually starting in April when the minimum wage for fast-food workers goes up to $20 an hour. That’s $4.50 more than the current minimum wage in the state.
“That is going to make it nearly impossible to function on the surface,” said Mendelsohn, who is chief executive of Pollo West Corp., based in Agoura Hills.
Mendelsohn said she expected to see transactions decrease by 10% this year due to reduced visits because of increased prices. Sales are expected to drop by 4.5%, she added.
When she takes that additional $600,000 off the company’s bottom line, that doesn’t leave much to pay middle management or to make loan payments, she added.
“We certainly can’t continue operating unless we find a resolution,” Mendelsohn said.
The increase in the minimum wage for fast-food workers was the result of a compromise reached between Gov. Gavin Newsom’s office, industry trade groups and several large franchisors. The compromise bill, AB 1228, was signed into law by Newsom on Sept. 28.
In addition to the wage increase, the bill also created a Fast Food Council. The council is established within the Department of Industrial Relations with equal representation of employers and employees, as well as a neutral chairperson. The council’s main job is to set wages in the future.
“It isn’t perfect by any means, but it is better than what we could have been facing as franchisees,” said Mendelsohn of the compromise bill.
It was a sentiment shared by Michael Whatley, vice president for state affairs and grassroots advocacy at the National Restaurant Association, a Washington, D.C. trade group.
“It’s a tough deal but at the end of the day it is the best possible deal under the situation that we could have had,” Whatley said.
Previous attempts
The situation mentioned by Whatley was the previous bill signed into law by Newsom on Labor Day of last year. AB 257, also known as the FAST Act, was much more “unprecedented” and “scary,” he said.
For one, it included the Fast Food Council but gave it binding, legal authority to create new regulations for the industry.
One provision taken out of the previous bill and reintroduced in the just-signed bill holds both franchisors and franchisees jointly responsible for liability of employment violations at stores.
Newsom had also proposed in his state budget to resurrect the Industrial Welfare Commission. That body would have had the ability to do “all sorts of things to the industry in terms of raising wages significantly, and potential scheduling issues and leave issues, without any guardrails or precautions put around it,” Whatley said.
And finally, there was the expense to the industry trade groups and franchisors for a referendum fight over AB 257.
In December, a Superior Court judge in Sacramento County blocked the implementation of the FAST Act based on how the California constitution dictates as part of the referendum process laws cannot be enforced until voters have a chance to vote on the proposed legislation.
The Save Local Restaurants Coalition and its partners, including the restaurant association, collected more than 1 million signatures to get the law on the 2024 ballot as a referendum.
“In the context of all these unprecedented other policy ideas that were out there – the original FAST Act, the Industrial Welfare Commission, the joint employer bill – this represents the best possible deal for the industry in light of those other challenges,” Whatley said of the bill signed into law.
But the compromise bill eliminated some of those provisions, namely by repealing AB 257 entirely and getting rid of the joint employer language. The Industrial Welfare Commission provision was also taken out.
Additionally, the law also states that the Fast Food Council can only make recommendations to the Department of Industrial Relations and other state agencies. After next April’s minimum wage increase, the council can only rase worker wages by 3.5% or the consumer price index, whichever is lower.
“The original FAST Act would have given it binding authority over different aspects of the industry, like training practices and health and safety standards,” Whatley said. “This new council only has advisory authority.”
Franchising locally
Franchising is an approach to entrepreneurship for a large number of Americans, with many women and people of color opting into the practice. According to International Franchise Association research, the minority franchise ownership rate is 26%, compared to 17% of independent businesses generally.
Mendelsohn, a franchisee of Costa Mesa-based El Pollo Loco Holdings Inc., said that if all the changes that the legislature wanted to make had come to pass, she would have had to close her doors and do business in another state or find another profession.
“There would have been no way to operate in the state of California,” she said.
Anthony Lomelino, a partner at the CaliGroup, which owns CaliBurger, a burger restaurant franchisor in Canoga Park, said he wasn’t sure how the new law would affect the business since most of the company’s franchisees are already paying close to the new minimum wage.
“By the time they make it up to a cook they are making close to $20 an hour,” Lomelino added.
But it is getting ready to open a fully automated restaurant in Pasadena in the next couple of weeks.
CaliBurger will use a robot it developed in conjunction with sister company Miso Robotics to make fries while another robot that it is licensing will cook the burgers. There will be a few human employees on site, Lomelino said.
The automated location is in response to young people not wanting to work in restaurants anymore, he said. There are a lot of people who would rather make less money working in another job as opposed to somewhere “where it is hot and greasy and you get burned and all that kind of stuff,” Lomelino said.
Mendelsohn said she would have to find ways to reduce labor hours after the wage increase comes into effect in the spring.
“We would rather put that $600,000 one time in technologies that would reduce the labor hours and would solve the problem,” Mendelsohn added. “That’s what we are looking at right now.
