California enacts FAST Act into law

September 12, 2022

Blog Post

On Sept. 5, 2022, California Gov. Gavin Newsom signed into law AB 257, the controversial Fast Food Accountability and Standards Recovery Act, also known as the FAST Act (the Act). The Act creates a government-appointed 10-person council to set wages as high as $22 an hour (starting next year) at fast food chains with more than 100 units nationwide. The council, which will include fast food workers, will also set working conditions and address alleged worker abuses that advocates say soared during the pandemic. A voter referendum was filed on Sept. 7, 2022, to attempt to block the new Act. If the proponents of the referendum collect a sufficient number of signatures to qualify for the 2024 ballot, the Act cannot be implemented until voters decide the issue.

In total, 176 fast food brands have more than 100 units nationwide and the new law applies to 148 chains with units in California, according to research by franchise advisory firm FRANdata. Those 148 fast food brands have 16,753 franchised locations in California operated by 5,820 different franchisees. According to FRANdata, the top five are Subway (2,098 units in California as of year-end 2021), McDonald's (1,158 units in California), Taco Bell (839 units in California), Jack in the Box (836 units in California), and Carl's Jr. (628 units in California).

The restaurant industry has spoken out against the Act. Last week, McDonald's USA President Joe Erlinger called the legislation "lopsided, hypocritical, and ill-conceived." He believes the creation of the council will "hurt everyone" because the new standards will apply to large restaurant chains, and not to those with fewer than 100 locations. The International Franchise Association also took issue with the bill, calling it a "discriminatory measure designed to target the franchise business model." IFA president and CEO Matthew Haller said in a statement that the bill would hurt smaller franchise operators and pointed to a study that suggested higher wages could lead to 20% increases in menu prices. The National Restaurant Association is also against the bill.

This decision only adds to to the growing circuit split on the application of the “hypothetical test” or the “actual test” in bankruptcy, and may lead a higher court to consider the issue. For franchisees in the Sixth Circuit who desire to reorganize in bankruptcy, however, this decision provides clarity about which test parties may use to determine if a contract could be assumed.

This ruling reveals the limits to the rejection power of the Bankruptcy Code. While a bankrupt franchisee can use bankruptcy to unburden itself of future monetary liabilities due to a franchisor, such franchisee cannot completely rid itself of those bargained-for equitable remedies that are there to protect the integrity of the brand and the confidential, proprietary information that the franchise arrangement is designed to protect.

California enacts FAST Act into law

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