On April 1, 2024, California’s Assembly Bill No.1228 (“AB 1228”) took effect, making the state’s fast food workers the highest paid in the United States. However, uncertainty regarding precisely who is covered under the new law has left some employers reeling, as the stakes for complying with California’s Labor Code remain as high as ever.

How did we get here?

In 2022, California passed the Fast Food Accountability and Standards Recovery Act (“FAST Act”) in an attempt to “reform” the fast food industry. Among other things, the law contemplated the creation of a regulatory council within California’s Department of Industrial Relations with sweeping powers in the fast food sector, including the power to raise minimum wages up to $22 per hour for 2023. The FAST Act faced criticism from the restaurant industry and chambers of commerce as an untenable union-backed measure that tilted the playing field too sharply in employees’ favor. Through California’s referendum process, the FAST Act was put on hold until the November 2024 election.

Against that backdrop, AB 1228 is widely seen as an attempted legislative compromise arising in the wake of the FAST Act’s uncertain status. AB 1228, now codified as California Labor Code §§ 1474, et seq., increased the minimum wage for “fast food restaurant employees” from $16.00 to at least $20.00 per hour. It also established a Fast Food Council with more limited authority than contemplated by the FAST Act to make future increases to minimum wages, as well as adopt other minimum employment standards for fast food restaurants. AB 1228 also removed certain provisions imposing liability on a franchisor for the employment law violations of its franchisees.

Who is covered by the law?

National fast food restaurants (and their franchisees) subject to AB 1228 include those that: (1) consist of more than 60 establishments nationally and share a common brand; (2) are primarily engaged in providing food and beverages for immediate consumption; (3) offer limited or no table service; and (4) generally expect patrons to order and pay for items before consuming them. Cal. Lab. Code § 1474(a).

Conversely, exempt restaurants include: (1) restaurants that operate a bakery which produces and sells bread as a stand-alone menu item; (2) restaurants located within a “grocery establishment;” and (3) restaurants located in “airports, hotels, event centers, theme parks, museums, and certain other locations.” A.B. 610 (Cal. 2024).

Since the law passed, some businesses that do not fall squarely within the exemptions have sought clarification on whether they must now pay $20.00 per hour to their employees. For example, an employee who works for a fast food restaurant within a grocery establishment is exempt from coverage under AB 610. But according to guidance published by the Department of Industrial Relations, if the fast food restaurant is located within a retail store not designated a grocery establishment, the employee “[m]ost likely” should be paid the increased minimum wage for the hours worked in the fast food restaurant. Other restaurants may have concerns that fluctuations in sales of prepared food items may cause them to fall within and outside of the law’s ambit.

In an effort to forestall future profitability issues and potential litigation, many businesses are opting not to wait for additional guidance and have begun implementing price increases, layoffs of non-essential workers and shortened operational hours. The full impact of AB 1228, for good or ill, remains to be seen.

Significant consequences for non-compliance

As with other violations of the California Labor Code, the failure to comply with AB 1228 may give rise to claims for lost wages, statutory penalties (including waiting time and wage statement penalties) and civil penalties pursuant to the California Labor Code Private Attorneys General Act of 2004 (PAGA), among others. Given the significant consequences that may arise for non-compliance, employers in the fast food space are encouraged to consult their legal counsel to assess whether AB 1228 applies to their business.