California Fast-Food Franchisees Trying to Hang on after Minimum-Wage Law Takes Effect: ‘The Pie’s Only So Big’

When Harris Liu was in his mid-20s in the late 1990s, he left the environmental-engineering industry for a career in fast food.

The construction industry is often cyclical, he said, and he saw some of his middle-aged colleagues being let go without notice and without anything to fall back on.

He didn’t want that to be him. He wanted to control his own financial future.

He spoke to his father-in-law, a McDonald’s franchisee, about opportunities in fast food. He ended up in business school, he said, and in 2001, he became the owner of his own McDonald’s restaurant in Sacramento, Calif.

“I was the general manager. I was the delivery guy. I was the maintenance guy. I was everything,” he said of those early days, when he sometimes used credit cards to make payroll.

More than 20 years later, Liu owns 21 McDonald’s restaurants in the Sacramento area. He has more than 1,000 employees. Some of his original staffers — some of whom spoke little English and started at $8 an hour — are now leaders in his company and make six-figure salaries, he said.

Liu is proud of the business he’s built and the good he’s been able to do with it, but he’s not sure he could have done it with today’s business environment in California.

“I don’t know if the 28-year-old me would be able to come into the business today. There’s just so many more roadblocks,” he told National Review.

The latest roadblock is a new $20 minimum wage, specifically for fast-food workers, that went into effect on Monday. It’s a 25 percent jump over the $16 minimum wage in place for virtually every other sector of the California economy.

While labor leaders have cheered the mandated pay increase as “life changing,” Liu said targeting his industry is “totally unfair” and a threat to businesses up and down the state.

“This is really hitting family-owned businesses,” Liu said. “You have to be a larger business to survive this kind of environment. If I was a one- or two-unit franchisee, I don’t know if I would be able to make it. Even as it stands, I’m not sure I’m going to make it long-term.”

The $20 starting wage is required at fast-food restaurants with 60 or more establishments nationwide, and is the result of a multi-year campaign by Big Labor leaders and their Democratic allies to target an industry they’ve long struggled to organize.

In 2022, California Democrats, passed what was known as the Fast Food Accountability and Standards Recovery Act, otherwise known as the FAST Act — a priority piece of legislation for the Service Employees International Union of California.

The legislation would have created an unelected council empowered to micromanage the fast-food industry, including hiking the minimum wage to $22 an hour. It also would have made fast-food franchisors jointly liable for labor violations committed by franchisees, a provision that industry leaders say would have essentially killed the franchise model in California.

The fast-food industry fought back, easily gathering enough signatures for a ballot initiative to challenge the FAST Act. But California Democrats had a fallback plan of their own — for the first time in almost 20 years they funded what is known as the Industrial Welfare Commission, or IWC, a long-dormant body that has the authority to regulate wages, hours, and working conditions for industries across the state.

If the FAST Act fell, they could push through the changes they wanted through the IWC.

In September, the two sides reached a compromise: in exchange for eliminating the most extreme aspects of the FAST Act, including the joint-liability provision, the fast-food industry agreed to drop its ballot initiative and to raise starting pay to $20 on April 1.

There have already been repercussions. Ahead of the wage hike, some pizza chains began laying off delivery drivers and farming out deliveries to third-party apps, according to the Wall Street Journal. Other companies are considering raising prices, slowing hiring, cutting back on employee hours, closing their doors during slower periods, installing more ordering kiosks, and pausing expansion plans or expanding in other states instead.

The owner of a chain of Auntie Anne’s Pretzels and Cinnabon restaurants in the Bay Area told the San Francisco Standard that he’s laid off his office staff and is relying on his parents to help him with payroll and human resources.

“I have to consider selling and even closing my business,” Alex Johnson told the news outlet.

Angelica Hernandez, a McDonald’s cook trainer who was appointed to the newly created Fast Food Council — now just an advisory council — was dismayed to find that some employers, facing rising labor costs, are cutting back on employee hours. “They’re utilizing one person to do the job of two, three or four people,” she told the Los Angeles Times.

Liu said that when he started as a franchisee, the food itself was his biggest cost. Now it’s labor. He said that “everything is on the table right now” to help him to stay afloat.

“Instead of the landscaper coming by once a week, that person may have to come by once a month,” he said, adding that could save him several hundred dollars a month. “When it comes to replacing equipment, unfortunately we’re just going to have to use a little more duct tape and kind of nurse the equipment along a little longer before we replace it.”

He’s turning to technology, he said, not to eliminate labor, but to free up his staff for customer service. “At the end of the day, we can’t be a vending machine,” he said.

“The only way to break even on this thing is we’ve got to serve more customers,” he said. “We’ve got to lean more heavily into the digital technology, capture more people that like to use the apps. But at the end of the day, you’ve still got to deliver it with somebody that’s got a great smile on their face, a clean uniform, and moving with urgency.”

Liu said that unfortunately, he’ll likely have to cut back a program he’s offered that helps his committed staffers to clean up their credit and to make down-payments on their first homes. The new law will generally compress wages and make it harder to reward his best performers.

“The pie’s only so big,” he said.

Jessica D’Ambra, a McDonald’s franchisee in the Los Angeles and Long Beach area, also told National Review that “anything and everything is on the table” in terms of keeping her business going. Because of the wage hike and other belt-tightening, she said she recently had to end a scholarship program that helped employees pay for school.

Because the new wage is so new, “it’s hard to say how hard it’s going to hit us,” D’Ambra said, but her preference is not to resort to layoffs. “You don’t let go of good people,” she said.

One positive, she said, is that some good workers who may not have had an interest in working in fast food could come into the industry because of the wage hike. “Maybe we have an opportunity here to hire some great people that we wouldn’t have had before,” she said.

D’Ambra is a third-generation McDonald’s franchisee. Her father and grandfather got into the business in the mid 1960s, when it was still a new concept, she said.

She said she wished that more people in California, including California lawmakers, understood that most fast-food franchisees are small business owners.

“People see the arches, it’s this giant corporation. But we run it like a small family business,” she said. “That’s the thing I wish people could see. It’s not just us. The majority of them are owned by these families, these generational families of moms and dads and grandparents.”

D’Ambra said that when she’s hiring, she targets people who are looking to use the job as a springboard into something else or people who are looking to grow with her company.

“We don’t really want to hire people who plan on being in one position for 20 years, because that’s not what this job was ever designed to do,” she said.

“We take people that maybe don’t know English or maybe are super shy or really nervous or have never been held accountable for anything in their life, and teach those really basic job skills to become successful,” she added. “That’s what we do.”

Jeff Hanscom, vice president of state and local government relations for the International Franchise Association, said it is clear that because of the mandated wage hike that “folks have already begun, leading up to Monday’s implementation, cutting back jobs and looking for ways to ensure they can keep the lights on.”

As a result of the fast-food wage increase, he suspects that other industries and businesses will have to raise their own wages to keep up and to avoid losing staffers to fast food.

While he said the compromise the industry agreed to in September is “not perfect,” it was “the best that we could do with a gun to our head.”

Speaking on CNBC recently, SEIU president Mary Kay Henry said the agreement wasn’t a backdoor unionization effort. “We’re coming in the front door,” she said.

She said they’re now looking to replicate their win in California in other states, including New York, Washington, Illinois, and in some Southern states. She said workers in other states have been “inspired by the progress” in California.

“When they see California workers achieve this, they think, ‘Why can’t I?’” she said.

Hanscom said they haven’t yet seen as many FAST Act copycats as they initially expected in other states, but they’re seeing some similar efforts in far-left cities.

“They’re not done,” he said of Big Labor. “We’re fully prepared to continue engaging in this fight whether it’s in California or beyond.”

Liu believes the negotiation over the wage hike should have gone much farther. “I mean, who does a 25 percent increase in the minimum wage? What is that, like triple the inflation rate? How do you do that in a rational world?” he said.

He and other franchise owners are investing more in the California Alliance of Family Owned Businesses, or CAFOB, to lobby lawmakers, to ensure their side of the story is heard, and to ensure “this doesn’t ever happen to us again.” In response to the wage hike, CAFOB has called for an “even playing field,” and said the “minimum wage for one should be the same for all.”

Liu said it’s unfortunate that California lawmakers are putting up barriers to entry into the business world. While fast-food was a path to success for him, he’s not sure he’d push others to follow in his footsteps. “Do I want my kids to get into this? I don’t know,” he said.

He also worries that by making it harder for franchisees like him to offer entry-level jobs and growth opportunities, it could make it harder for ambitious people with little means to get a foot in the door, to rise, and to maybe become business owners themselves.

“That’s what makes America such a great country,” he said, “you can come in at any level and top out at whatever you want. I really hope that people consider that.”