Lawrence Cheng, the owner of seven Wendy’s locations in southern Los Angeles, found himself making adjustments to his operations to cope with the increased labor costs resulting from a recent California law. Previously, Cheng employed nearly a dozen staff members for the afternoon shift at his Fountain Valley branch in Orange County. However, he had to reduce the number to seven employees per shift after the hourly wage for fast food workers was raised from $16 to $20 on April 1.
In order to manage the higher labor expenses, Cheng implemented cost-cutting measures, such as reducing staff numbers and personally working additional hours to cover the gaps. Despite these efforts, Cheng remains hopeful that the upcoming summer season, which typically sees increased business due to the absence of school and more people eating out, will yield higher profits to offset the added costs.
According to experts, it is still too early to determine the long-term effects of the wage increase on fast food restaurants and whether there will be widespread layoffs and closures. Previous wage hikes have not necessarily resulted in job losses. A study conducted by the University of California, Berkeley found that when California and New York nearly doubled their minimum wage to $15, job growth continued, despite the federal level being $7.25 per hour.
Currently, the industry is still experiencing job growth. According to the U.S. Bureau of Labor Statistics, in the first two months after the law was passed on April 1, the industry gained 8,000 jobs compared to the same period in 2023. Unfortunately, there are no available figures for June at this time.
Joseph Bryant, the executive vice president of the Service Employees International Union, has stated that the raise in wages has not only led to job creation in the industry but has also attracted higher-quality job candidates, thereby reducing turnover. However, many major fast food chain operators are facing challenges and have resorted to cutting hours and increasing prices to remain viable. For instance, Juancarlos Chacon, an owner of nine Jersey Mike’s locations in Los Angeles, mentioned that he had to raise prices in April more than he ever had in his 25 years in the business. As a result, a turkey sub that used to cost under $10 now costs $11.15. While customers are still visiting his establishments, they are cutting back on extras such as drinks, chips, and desserts. To adapt to the changing environment, Chacon has reduced staffing during non-peak hours and has let go of a few part-time employees, resulting in a total reduction from 165 to about 145 employees.
Not only did entry-level workers receive a pay raise, but shift leaders, assistant managers, and other higher-level employees also had to receive raises. Labor costs account for approximately 35% of overall expenses.
“I’m feeling very anxious,” expressed Chacon.
Aaron Allen, the founder and CEO of a global restaurant consulting firm, has received distressed calls from restaurant operators and suppliers in California who are still recovering from the COVID-19 lockdown. He foresees a growing disparity between large corporations like McDonald’s, which have the financial means to invest in automation and reduce costs through menu reconfiguration, and smaller regional chains that may go out of business or experience significant store closures.
Cheng, on the other hand, has no intentions of laying off any of his 250 Wendy’s employees. Instead, he has implemented measures such as reducing overtime and decreasing the number of workers on each shift. Additionally, he raised menu prices by approximately 8% in January in anticipation of the new law.
As per his books, he revealed that he exceeded his budget by $20,000 during a two-week pay period.
Jot Condie, the president and CEO of the California Restaurant Association, which opposed the minimum wage bill, stated that businesses are currently facing the pressure of increasing rents and food costs simultaneously.
Condie mentioned, “When labor costs suddenly rise by more than 25%, restaurants with already narrow profit margins are left with no choice but to cut expenses in other areas. Increasing prices, reducing operating hours, or downsizing the workforce are the limited options available.”
Julieta Garcia, an employee at a Pizza Hut in Los Angeles for over a year, mentioned that she now works five days a week instead of six. However, she sees this as a positive change as it allows her to spend more time with her 4-year-old son. With the extra income, she can pay her cellphone bill on time and afford to take her son for a tonsil check-up.
Howard Lewis, a 63-year-old retiree employed at a Wendy’s in Sacramento, has been utilizing his surplus funds for investment purposes. On his recent payday, Lewis purchased stocks amounting to $500. In addition to his investments, he is also providing assistance to his ex-wife by helping her fix the brakes on her car.
The decision to increase the minimum wage was justified by Governor Gavin Newsom, who emphasized the importance of providing a livable income for the state’s fast food workers, who number over half a million. In his state-of-the-state address, Newsom expressed the state’s commitment to supporting fast food workers, particularly women, who often work multiple jobs to make ends meet.
However, for Enif Somilleda, a general manager at a Del Taco in Orange County, the wage hike has had both positive and negative effects. While it has been beneficial for her financially, allowing her to improve her economic situation, the reduction in staff has increased her workload. Previously, she had four employees per shift, but now she is left with only two, requiring her to take on additional responsibilities.