Fast-Food Operators Mobilize Against California Wage Bill

The effort is being pushed by franchise owners, including many who would have to take on the cost of paying workers a minimum wage as high as $22 an hour starting next year, set by a government-run council created by the bill. Chains that operate their own restaurants, such as

Starbucks Corp.

,

Chipotle Mexican Grill Inc.

and In-N-Out Burger, would also be affected.

Groups representing restaurant companies and owners said they plan to launch an advertising campaign and deploy franchisees and business leaders to attempt to persuade Mr. Newsom, a Democrat, to veto the bill, which they say is the latest evidence of California making it difficult for businesses to thrive.

“Every resource at our disposal will be used to ensure our entire membership is asking the governor to veto this bill,” said

Jot Condie,

president of the California Restaurant Association. He said he fears the wage-setting council’s authority could later be expanded beyond the fast-food industry.

The bill, known as the Fast Act, passed California’s Legislature on Monday. It was backed by labor unions, which say a government council setting minimum wages for fast-food workers could create a model to ensure fair wages and other protections for hourly workers in an industry where unions have struggled to organize workers.

“We want California to be the first in the nation as it is in so many fronts, and to be able to spread this to other states,” said

Mary Kay Henry,

international president of the Service Employees International Union.

On Monday, more than 100 union members rallied outside the state capitol ahead of the bill’s final passage. “Sign the bill!” they chanted, in a message aimed at the governor.

A spokesman for Mr. Newsom, declined to comment on whether he would sign the bill. However, top officials in his administration have been engaged in negotiations over the bill’s final language over the past month, and changes such as removing a provision that made chains jointly responsible with franchisees for the treatment of workers were made partly in response to the governor’s concerns, according to people with knowledge of the conversations.

Mr. Newsom expressed numerous concerns about the bill before significant amendments were made during the past week, including one that calls for the wage-setting council to shut down in 2028 unless it is renewed, the people said. His finance department publicly opposed earlier versions.

He has until Sept. 30 to decide whether to sign or veto the measure.

Restaurant owners and other business groups called the bill the latest example of overly burdensome government regulation in California. The state recently completed regulations to ban the sale of gasoline-powered cars beginning in 2035, and is considering bills to more tightly regulate social-media platforms and accelerate climate goals that are already among the most aggressive in the U.S.

Democratic political leaders in Sacramento consider the state to be a leader in progressive policy-making, and say California is attractive to companies whose workers want to live in a state that supports abortion rights and equality for transgender people.

Some companies have said California’s burdensome regulations are motivating them to move corporate headquarters, manufacturing plants and other operations elsewhere.

If signed into law, the bill could more heavily affect chains such as Starbucks, Chipotle and In-N-Out that operate their own locations, versus other chains that rely more heavily on franchisees. Starbucks has about 1,880 locations in California and Chipotle has roughly 440, according to an analysis by

Citigroup

Global Markets Inc. Starbucks declined to comment. Representatives for Chipotle and In-N-Out didn’t immediately respond to requests for comment.

A representative for San Diego-based

Jack in the Box Inc.,

which according to Citigroup has 972 franchisee-owned stores and 338 company-owned locations in California, said any increased labor costs handed down by the council to restaurants will lead to operators hiking prices. The chain said it is engaging the governor’s office on the bill.

“The small owner who wants to go into business will be negatively impacted,” said

Sid Feltenstein,

a former Dunkin’ executive who is now a partner with private-equity firm DIA Equity Partners. Mr. Feltenstein said he wouldn’t consider a deal for a fast-food company that has a large percentage of outlets in California today.

In Pasadena, Calif., Blair Salisbury signed up this spring to be a regional operator for the Daddy’s Chicken Shack brand, meaning he would run one location himself and recruit people to run others. After learning about the Fast Act, Mr. Salisbury said, he began reconsidering, because of uncertainty over what next year’s minimum wage would be.

“Am I going to be able to find other franchisees? Because they are probably going to avoid California like the plague,” he said.

If the Fast Act becomes law, Mr. Salisbury said he would likely employ fewer workers in his Daddy’s Chicken restaurants. He said he is considering focusing his expansion on locations outside California, such as Salt Lake City.

The bill calls for creating a 10-person panel made up of workers, union representatives, employers and business advocates, chosen by the governor and legislative leaders. The panel would set hourly wages of as much as $22 starting next year for workers at fast-food restaurants that are part of a chain, with limited or no table service, and where customers order and pay before receiving their food. After next year, wages can increase annually by the same rate as the consumer-price index, up to a maximum of 3.5%.

California’s current minimum wage is $15, set to increase to $15.50 on Jan. 1.

Labor shortages have already driven up wages nationally for many fast-food workers over the past year. Workers at U.S. restaurants and bars were earning an average wage of $18.50 in June, up about 8.3% from a year earlier, according to the Labor Department.

Before the Fast Act passed the Legislature Monday, McDonald’s owners and supporters last week sent more than 11,000 opposition emails to members of the Senate, according to an email from the National Franchisee Leadership Alliance, the elected body representing U.S. chain owners.

“All of us have a stake in this,” wrote leaders of the group in an email viewed by The Wall Street Journal. “It would utterly devastate the businesses of our owner/operators in California and could set a precedent for other states to introduce similar legislation.”

The bill would also create an unequal playing ground, because it would apply to larger restaurant chains and not smaller ones, they wrote in the email.

Ms. Henry, of the SEIU, said her organization is confident Mr. Newsom will sign the bill, particularly because her members supported the governor during his recall fight last year.

“He’s met and heard stories of these workers,” Ms. Henry said during a news conference after the bill’s Senate passage Monday night.

She said California activists have met with fast-food workers in New York, and Illinois about passing legislation similar to the Fast Act.

California has a history of implementing progressive ideas through business regulations. In the current legislative session, which ends Wednesday, state legislators are weighing bills that would force large employers to provide salary ranges in job postings, another requiring large buffer zones between oil wells and sensitive areas such as homes and schools, and a measure that would bar employers from retaliating against employees who don’t report to work because of a “reasonable belief” that their workplace is unsafe.

Mr. Salisbury, the California restaurateur whose family owns the full-service El Cholo Restaurant chain, said that if big fast-food chains are required to pay higher wages, that could make it harder for smaller restaurant operations to compete.

“Now that poor guy won’t be able to find employees because they will be working for the ones that pay more,” he said.

—Sarah Chaney Cambon contributed to this article.

Write to Heather Haddon at heather.haddon@wsj.com and Christine Mai-Duc at christine.maiduc@wsj.com

The effort is being pushed by franchise owners, including many who would have to take on the cost of paying workers a minimum wage as high as $22 an hour starting next year, set by a government-run council created by the bill. Chains that operate their own restaurants, such as

Starbucks Corp.

,

Chipotle Mexican Grill Inc.

and In-N-Out Burger, would also be affected.

Groups representing restaurant companies and owners said they plan to launch an advertising campaign and deploy franchisees and business leaders to attempt to persuade Mr. Newsom, a Democrat, to veto the bill, which they say is the latest evidence of California making it difficult for businesses to thrive.

“Every resource at our disposal will be used to ensure our entire membership is asking the governor to veto this bill,” said

Jot Condie,

president of the California Restaurant Association. He said he fears the wage-setting council’s authority could later be expanded beyond the fast-food industry.

The bill, known as the Fast Act, passed California’s Legislature on Monday. It was backed by labor unions, which say a government council setting minimum wages for fast-food workers could create a model to ensure fair wages and other protections for hourly workers in an industry where unions have struggled to organize workers.

“We want California to be the first in the nation as it is in so many fronts, and to be able to spread this to other states,” said

Mary Kay Henry,

international president of the Service Employees International Union.

On Monday, more than 100 union members rallied outside the state capitol ahead of the bill’s final passage. “Sign the bill!” they chanted, in a message aimed at the governor.

A spokesman for Mr. Newsom, declined to comment on whether he would sign the bill. However, top officials in his administration have been engaged in negotiations over the bill’s final language over the past month, and changes such as removing a provision that made chains jointly responsible with franchisees for the treatment of workers were made partly in response to the governor’s concerns, according to people with knowledge of the conversations.

Mr. Newsom expressed numerous concerns about the bill before significant amendments were made during the past week, including one that calls for the wage-setting council to shut down in 2028 unless it is renewed, the people said. His finance department publicly opposed earlier versions.

He has until Sept. 30 to decide whether to sign or veto the measure.

Restaurant owners and other business groups called the bill the latest example of overly burdensome government regulation in California. The state recently completed regulations to ban the sale of gasoline-powered cars beginning in 2035, and is considering bills to more tightly regulate social-media platforms and accelerate climate goals that are already among the most aggressive in the U.S.

Democratic political leaders in Sacramento consider the state to be a leader in progressive policy-making, and say California is attractive to companies whose workers want to live in a state that supports abortion rights and equality for transgender people.

Some companies have said California’s burdensome regulations are motivating them to move corporate headquarters, manufacturing plants and other operations elsewhere.

If signed into law, the bill could more heavily affect chains such as Starbucks, Chipotle and In-N-Out that operate their own locations, versus other chains that rely more heavily on franchisees. Starbucks has about 1,880 locations in California and Chipotle has roughly 440, according to an analysis by

Citigroup

Global Markets Inc. Starbucks declined to comment. Representatives for Chipotle and In-N-Out didn’t immediately respond to requests for comment.

A representative for San Diego-based

Jack in the Box Inc.,

which according to Citigroup has 972 franchisee-owned stores and 338 company-owned locations in California, said any increased labor costs handed down by the council to restaurants will lead to operators hiking prices. The chain said it is engaging the governor’s office on the bill.

“The small owner who wants to go into business will be negatively impacted,” said

Sid Feltenstein,

a former Dunkin’ executive who is now a partner with private-equity firm DIA Equity Partners. Mr. Feltenstein said he wouldn’t consider a deal for a fast-food company that has a large percentage of outlets in California today.

In Pasadena, Calif., Blair Salisbury signed up this spring to be a regional operator for the Daddy’s Chicken Shack brand, meaning he would run one location himself and recruit people to run others. After learning about the Fast Act, Mr. Salisbury said, he began reconsidering, because of uncertainty over what next year’s minimum wage would be.

“Am I going to be able to find other franchisees? Because they are probably going to avoid California like the plague,” he said.

If the Fast Act becomes law, Mr. Salisbury said he would likely employ fewer workers in his Daddy’s Chicken restaurants. He said he is considering focusing his expansion on locations outside California, such as Salt Lake City.

The bill calls for creating a 10-person panel made up of workers, union representatives, employers and business advocates, chosen by the governor and legislative leaders. The panel would set hourly wages of as much as $22 starting next year for workers at fast-food restaurants that are part of a chain, with limited or no table service, and where customers order and pay before receiving their food. After next year, wages can increase annually by the same rate as the consumer-price index, up to a maximum of 3.5%.

California’s current minimum wage is $15, set to increase to $15.50 on Jan. 1.

Labor shortages have already driven up wages nationally for many fast-food workers over the past year. Workers at U.S. restaurants and bars were earning an average wage of $18.50 in June, up about 8.3% from a year earlier, according to the Labor Department.

Before the Fast Act passed the Legislature Monday, McDonald’s owners and supporters last week sent more than 11,000 opposition emails to members of the Senate, according to an email from the National Franchisee Leadership Alliance, the elected body representing U.S. chain owners.

“All of us have a stake in this,” wrote leaders of the group in an email viewed by The Wall Street Journal. “It would utterly devastate the businesses of our owner/operators in California and could set a precedent for other states to introduce similar legislation.”

The bill would also create an unequal playing ground, because it would apply to larger restaurant chains and not smaller ones, they wrote in the email.

Ms. Henry, of the SEIU, said her organization is confident Mr. Newsom will sign the bill, particularly because her members supported the governor during his recall fight last year.

“He’s met and heard stories of these workers,” Ms. Henry said during a news conference after the bill’s Senate passage Monday night.

She said California activists have met with fast-food workers in New York, and Illinois about passing legislation similar to the Fast Act.

California has a history of implementing progressive ideas through business regulations. In the current legislative session, which ends Wednesday, state legislators are weighing bills that would force large employers to provide salary ranges in job postings, another requiring large buffer zones between oil wells and sensitive areas such as homes and schools, and a measure that would bar employers from retaliating against employees who don’t report to work because of a “reasonable belief” that their workplace is unsafe.

Mr. Salisbury, the California restaurateur whose family owns the full-service El Cholo Restaurant chain, said that if big fast-food chains are required to pay higher wages, that could make it harder for smaller restaurant operations to compete.

“Now that poor guy won’t be able to find employees because they will be working for the ones that pay more,” he said.

—Sarah Chaney Cambon contributed to this article.

Write to Heather Haddon at heather.haddon@wsj.com and Christine Mai-Duc at christine.maiduc@wsj.com