This article originally appeared on Business Insider.
Marcus Walberg and his family operate four Fatburger franchises in Los Angeles. Over the years, the restaurants have survived economic downturns, state labor laws that increase operational costs, and the COVID-19 pandemic.
But doing business in California “has been more strained now than any time I can remember,” Walberg told Business Insider.
The main reason: California fast-food workers are getting a big bump in pay to $20 an hour under a new state law that goes into effect in April. That new wage is nearly 30% more than most employers pay fast-food workers. The law affects 557,000 fast-food workers at 30,000 restaurants in California.
Fast-food franchisees are bracing themselves for the increased labor costs by trimming staff or implementing hiring freezes.
Some moves are drastic.
Two Pizza Hut franchisees, who own hundreds of stores in California, are eliminating their in-house delivery fleets. The labor-gutting strategy has left 1,200 drivers without jobs.
“I feel that there will be a lot of pain to workers as franchise owners are forced to take drastic measures,” Walberg said.
Walberg said he was making changes to ensure the new wage wouldn’t “bring us down.” Some changes are surprising, including the type of fast-food worker he expects to hire in the future.
Here’s a closer look at what he’s doing to ensure his restaurants stay afloat come April.
1. Raising menu prices, again
Walberg said raising prices was the No. 1 thing every California fast-food food owner was talking about.
“It’s a scary thing because customers are already complaining that prices are too high,” he said.
Year over year, prices were up 8% at his four restaurants, he said. When fast-food wages increase to $20 an hour in April, “we’ll have to take another 8-10%” increase, he told BI.
He said he was checking menu prices at rivals to ensure Fatburgers’ price increases were in line with “everyone else.” Still, he said he was nervous about jacking up prices to customers who are already “feeling the strain” of higher prices due to inflation.
He’s not alone.
Over the past two years, chains such as Starbucks, McDonald’s, and Chipotle have raised menu prices to combat high commodity costs and wages. McDonald’s, which has raised prices by 20% over a two-year period, said late last year that it was starting to lose low-income customers.
2. Cutting employee hours and implementing a hiring freeze
Walberg isn’t laying off workers like Pizza Hut, but he is reducing his labor costs in other ways.
He said he was trimming employee hours and implementing a hiring freeze.
“We’re not hiring new people to fill jobs,” he said. “We’re being very tight on schedules.”
Seth Lederman, CEO of the Florida franchise-consulting firm Frannexus, said fast-food chains only had a few options to offset higher wages.
“If the minimum wage goes up, they either have to increase prices so that they can cover the increased expenses for labor, or they’re going to have to consolidate their labor and let people go,” Lederman told BI.
3. Scrapping employee vacation time
Walberg said he used to offer paid time off to eligible workers. The average worker earned about 48 hours of paid time off, capped at 72 hours a year, he said.
But he eliminated the PTO program, first launched in 2021, at the start of the year “to prepare for the increase in wages in 2024,” he said.
He said employees liked the program because it gave them flexible time off for family days.
“We just can’t afford to do that anymore,” he said, adding that it “is a real shame.”
4. Raising wages for managers and shift leaders so they won’t flee
The minimum wage in California is $16 an hour. In Los Angeles, where Walberg operates his restaurants, the minimum hourly wage is slightly higher at $16.78.
“This program should have been phased in over time instead of jumping the California minimum wage for our staff by 25% in one single day,” he said.
Walberg said that with the minimum wage starting at $20 an hour for entry-level workers, he’d be forced to raise wages for shift leaders and managers who are making about the same amount of money but have much more responsibility.
“If you’re the shift leader and you’re responsible for making sure everyone got their breaks, you’re not going to do all that extra work for the $20 minimum wage,” he said, noting that the same would be paid to “the guy who cooks the burger and goes home.”
As a result, he said there was going to be a “domino effect” on the upper ranks, who are going to demand more money or flee.
“An entry-level manager is now going to want more than $20 an hour,” he said. “All that translates back to the customer having to pay more money because the landlords aren’t going to drop the rent. The money has to come from somewhere.”
5. Hiring patterns will change, and casual-dining workers will jump ship to fast-food
Even though he’s not hiring, Walberg said he expected to get an influx of applications come April from casual-dining workers looking for more money. The new California law doesn’t apply to employees at full-service chains such as Chili’s or Cheesecake Factory.
Lederman, the veteran franchise consultant, agreed. He said he fully expected casual-dining workers to “jump ship” and go over to fast-food locations because the pay is better.
“They’re going to go where they’re going to get the most money,” he said.
Walberg said there was an upside and a downside to this expected new hiring development.
He said he would consider someone who had worked at Chili’s or Applebee’s because they would have more hospitality experience. As a result, labor shortages of the past could be behind him as more people apply for fast-food jobs.
“You’re going to get a better grade of employee — maybe not immediately but over a short period of time,” he said. “We’ll be able to be fully staffed with very committed service-oriented employees.”
The downside? Franchisees would probably be less inclined to hire an inexperienced teenager, Walberg said. “What you will lose — the kids getting their first job at McDonald’s.”
