California’s Implementation of $20 Minimum Wage Sparks Confusion, Layoffs, and Price Increases

California’s $20 minimum wage for fast food workers became law Monday and quickly caused chaos, with pizza chains preparing to cut hundreds of employees, ice cream and pretzel shop franchisees struggling to learn if the law applies to them, and industry leaders eyeing price hikes in the state.

California governor Gavin Newsom (D.) last week signed more carve-outs for the law, which already exempted bakeries and chains inside grocery stores, adding increased confusion over which franchisees must comply with the mandate.

The chaos over the law could deal a political blow to Newsom, who became the face of negotiating the $20 fast food wage as a “compromise” between unions and business interests. Newsom, whose approval ratings have tumbled in recent months, signed the legislation last September after a rushed and secretive process, but critics say the fallout is only beginning.

It’s still unclear whom the law applies to. The owner of an ice cream franchise, for example, has tried for months to learn from Newsom and other state officials whether she has to pay her mostly part-time, high school and college student workers $20 an hour, KCRA reported last week. The Democratic state assemblyman who wrote the law directed her to the Service Employees International Union (SEIU), one of the state’s most powerful labor groups and the driving force behind the legislation, which ultimately told her to find a legislator to pass a new bill exempting her.

“I think there’s going to be a big backlash,” the state assembly’s Republican leader James Gallagher said. “The whole thing is just making it more expensive to live in California.”

Newsom’s office declined to comment, but a spokesman has told other outlets that who’s subject to the law will ultimately be decided by the state labor commissioner’s office, a fast food council made up of political appointees, and “potentially the courts.” The legislation’s author, Democratic assemblyman Chris Holden, did not respond to a request for comment. The SEIU did not respond to a request for comment.

Starting Monday, franchises are supposed to start paying $20 hourly to their workers and if they don’t, can be taken to the state labor agency responsible for its enforcement. Yet many of these franchises do not know if the law applies to them. It’s not clear, for example, if Panera Bread is exempt from the mandate even after allegations that Governor Newsom negotiated a carve-out for chain bakeries to benefit a billionaire donor and former schoolmate who owns Panera franchises. Newsom denied the report after days of bad press and insisted that Panera didn’t qualify as an exempted bakery after all—a claim disputed by others in the industry that will likely need to be litigated in court.

Chain ice cream parlors, pretzel counters, and doughnut shops are in the same boat.

The state’s department of industrial relations, which is tasked with answering the hard questions about the law, has issued a fact sheet saying that chain ice cream shops, pretzel and doughnut bakeries, and even boba tea joints may have to comply—even though the federal government explicitly exempts such places from its definition of fast food restaurants.

Keith Miller, a California Subway franchisee and consultant to other fast food franchises, said ultimately, even if owners find technical exemptions, “I don’t think it’s a good feeling with your employees to say, ‘I don’t have to pay you $20.’”

Widespread layoffs in the industry are already underway because of the law, and fast food prices are set to rise—as fast food corporations warned investors months ago would happen. Starting this month, pizza chains will permanently fire hundreds of workers, state records show. Jobs in California’s fast food sector fell by 1.3 percent from last September—when the law passed—to January of this year, the Wall Street Journal reported, compared to an overall 0.2 percent decline in private employment. This comes as California clocks the nation’s highest unemployment rate at 5.3 percent, according to the latest federal figures, and has seen stagnating job growth compared to the rest of the country.

The legislation “will prove that the law of unintended consequences will always run amok—and get ready for amok,” said Michael Lotito, a California attorney and co-chair of the Workplace Policy Institute.

Lotito noted that the legislation was passed under SEIU pressure without any evaluation of how an unprecedented 25 percent minimum wage increase would affect food prices, labor costs, worker hours, hiring, business closures, and inflation.

“I think that when you’re in the fifth or sixth largest economy in the world … that is probably not the right thing to do,” he said.

Miller said the legislation will test whether the small franchise model is sustainable and that the state likely won’t see the full picture of who can stay in businesses until leases end. He noted that California’s past minimum wage hikes have forced owners to keep staff as lean as possible, and it’s unclear how they will manage the higher costs, now that additional price hikes may not be sustainable given already-high prices. The revenue-share model of franchises means that the fast food corporations will benefit most from higher food prices, without the pain of higher labor costs.

“You’re enriching the corporation and driving out your local business owner,” Miller said.