McDonald's franchise group slams California fast-food law as 'draconian'

The National Owners Association called California’s recently-passed AB 1228 "draconian" and costly to franchisees in a memo distributed to its members.

"The new ‘AB 1228’ legislation has been voted into law and will result in a devastating financial blow to California McDonald’s franchisees at a projected annual cost of $250,000 per McDonald’s restaurant," the advocacy group representing some 1,000 McDonald’s franchisees said in the memo obtained by FOX Business. 

"These costs simply cannot be absorbed by the current business model."

CNBC earlier reported on the NOA memo. 

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Among the bill's key components: 

1. It would raise the minimum wage for fast-food workers to $20 per hour.
2. It would apply to restaurants with at least 60 locations nationwide, except for restaurants that make and sell their own bread.
3. It would also create a 10-person council to govern fast-food chains, set guidelines for wages and make recommendations pertaining to working conditions.

When signing the original version of the legislation, California Gov. Gavin Newsom said, "California is committed to ensuring that the men and women who have helped build our world-class economy are able to share in the state’s prosperity. Today’s action gives hardworking fast-food workers a stronger voice and seat at the table to set fair wages and critical health and safety standards across the industry."

The state Senate passed AB 1228 Thursday. 

The NOA said franchisees, suppliers and McDonald’s "must engage to support our California McFamily" and identified steps it said they each should take with ideas ranging from the franchisees establishing 501(c)4 entities and state political action committees (PACs) to create an official arm to lobby the government. 

Suppliers urged the reduction of costs in operations that could lead to cost savings for fast-food restaurants they work with. 

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The NOA called on McDonald’s to direct "rent and service fees collected from sales" from potential price increases in response to the bill to efforts like "overhauling" the operational platform and doing more labor-related research and development to help franchisees. 

In its memo, the NOA also made allegations about a "small coalition of franchisors" having "negotiated a deal with" the Service Employees International Union without franchisee involvement "causing the legislative outcome to now become certain." It mentioned McDonald’s, the National Restaurant Association and the International Franchise Association. 

IFA CEO Matthew Haller told FOX Business he participated in the negotiations with a goal of making sure franchises had involvement and representation. Some franchisees spoke directly to the governor’s office, he added. 

FOX Business also reached out to the National Restaurant Association for comment.

"Over the past year, I've worked closely with company leaders, a task force of fellow franchisees and our own independent advisers as part of a coalition of brands working to protect our business model against an all-out attack on restaurant owner/operators," California McDonald's franchisee Roger Delph said in a statement to FOX Business. 

"Anyone who is suggesting this was not a collaborative and successful effort to protect the franchised business model in California, or that franchisee involvement was absent, was either not involved or is contorting the facts."

The NOA suggested AB 1228’s passage could lead to similar efforts by legislative bodies elsewhere in the country, adding, "We need to remain unified so that this can not gain a foothold anywhere else."

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In a recent internal message obtained by FOX Business, McDonald's told its restaurant system AB 1228’s terms "are entirely different" compared to the prior version of the bill that it described as "harmful to our system."

It said AB 1228 created a "significantly limited Fast Food Council," did away with AB 257, prevented joint liability from getting applied to franchisors and franchisees, and made a "clearer, predictable wage schedule through 2029," among other things.

McDonald’s "worked tirelessly" with the "California Owner/Operator Task Force" and others in the state to "protect owner/operators’ ability to make decisions for their businesses locally and protect their restaurants and their crew," the company said in the message.

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Those included the creation of a "coalition of brands to refer AB 257 to California voters in November 2024" and "significantly" increasing its "political engagement in the state," according to the message. 

The company said it has established a "cross-function, fast-action team of McDonald’s staff as well as Owner/Operators from California, New York and Illinois, to co-invest and work collaboratively on an action plan." 

It will "pilot innovative short and long-term solutions" for California using best practices adapted from other places that have experienced similar legislation, according to the internal message. 

Jay Caruso contributed to this report.

Correction: An earlier version of this story misstated the council's authority regarding working conditions. It can only make recommendations for those.