McDonald's franchisee group says new 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 passed a landmark fast-food bill, an independent advocacy group of McDonald’s owners is pushing back against what it says will be a “devastating financial blow” to its franchisees in the state, according to a memo to its membership viewed by CNBC.

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 promised to sign it into law. The bill includes a minimum wage of $20 per hour for California workers in fast-food chains that have at least 60 locations across the country, beginning April 1. The deal will benefit many workers, even in states where the minimum wage and pay floor are higher than $15.50. 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 stated that the costs were “unable to 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

; causing the legislative outcome to now become certain. “[Service Employees International Union]McDonald sent a letter to its restaurants on Monday that was seen by CNBC. In response to the bill

, the company stated that it and other franchisee group “worked relentlessly over the last year to protect Owner/Operators ability to make local decisions and protect their restaurant and their crew.” “ This included forming an alliance of brands to refer the

to Californian voters in November 2024 – although expensive and unexpected[an earlier version of the bill]we thought we had no choice. 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. 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. “

This involved countless meetings and conversations, as well as a direct discussion with the Governor’s office,” Delph said. “Anyone who suggests that this was not a successful collaborative effort to protect California’s franchised business model, or that there was no franchisee involvement, is either not involved, or has twisted the facts.” In its systemwide email, the fast food giant also detailed changes that were made to the final bill version which are considered more beneficial for the owners than the original 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. The bill also unwinds the reconstitution the Industrial Welfare Commission which had “sweeping powers” to make decisions about wages and workplace conditions 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.” In an interview with CNBC he said that the “franchise companies that were involved in negotiations put their franchisees at the forefront of their minds when they were considering deal conditions.” Sean Kennedy, the National Restaurant Association’s EVP for Public Affairs and Sean Kennedy’s statement added, “This agreement offers a stable future to California restaurant operators, and it includes a significant investment in

workers, as well as eliminating legislative and regulatory threats that threaten their businesses. We acknowledge the hard work that was done by all parties to write this legislation and we appreciate the support of the legislature in getting 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. The NOA’s letter outlined how members, suppliers, and McDonald’s Corporate Office can support California owners. The NOA letter said that all requests for financial support from owners in the state should be considered. 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.[quick-service restaurant]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. The California Fast Food Council brings together all stakeholders in this industry, including franchisees. This sector-wide, groundbreaking approach will make fast-food jobs more safe and the industry sustainable for all. Amelia Lucas, CNBC’s Amelia Lucas, contributed to this report.