The Perils of Running a Restaurant (or Any Business) in California
It is no secret that the state and local governments make California a very difficult place to do business. The Golden State maintained its perennial position of the worst business climate in the country in Chief Executive magazine’s annual “Best and Worst States for Business” survey of hundreds of CEOs from across the nation. (Texas, Florida, and Tennessee once again topped the list.) But things are particularly bad for restaurant owners, and substantial increases in the minimum wage are only making them worse.
California’s minimum wage rose from $15.50 an hour to $16 an hour at the start of the year, but a couple of bills passed last fall will boost it significantly higher for a couple of industries. Assembly Bill 1228 will boost the minimum wage for fast-food workers to $20 an hour beginning in April—a 29 percent jump in just four months—and Senate Bill 525 will raise it to $23 an hour for healthcare employees (including support staff such as janitors and cleaning crews, security guards, and hospital gift shop workers) in June, rising to $25 an hour in 2026.
In a recent column for The Hill, I discussed the negative, but entirely predictable, effects of such increases in the minimum wage (which are often ignored by the proponents of such measures):
The economic implications are all too familiar, as we have seen this scenario play out over and over again. A portion of the increase in labor costs for minimum wage workers will be passed along to consumers through higher prices. Indeed, within weeks of the fast food minimum wage bill, Assembly Bill 1228, being signed into law in September, McDonald’s and Chipotle announced that they would be forced to raise food prices in California.
Some workers will benefit, but many others will see their hours cut and benefits slashed or end up losing their jobs to compensate for the higher costs. Pizza Hut restaurants across the state are already planning on eliminating more than 1,200 delivery driver positions (a number that is likely to grow) in response. And in New York City, which just raised its minimum wage to $17.96 an hour last month, companies such as Uber and DoorDash are compensating by imposing higher delivery fees, and food delivery workers are seeing fewer tips and reduced hours and scheduling flexibility.
Plus, there will also be fewer jobs in the future, so many others will never get hired in the first place—and it will now be much more difficult for low-skill workers and those new to the job market to get jobs since they now must compete against workers with skills worth $20 an hour.
Automation, such as ordering kiosks, will increase and human-provided service will decrease. Less money will be left over for other innovations or investments in the business. Businesses that are already struggling to get by will close, leading to even more job losses.
Now, we are hearing more evidence of the harm already being caused to restauranteurs and their employees. KRCR-TV, the local ABC affiliate covering Redding and Chico, California, recently interviewed Che Stedman, owner and executive chef of Moonstone Bistro, described as “a popular fine-dining restaurant in west Redding,” which is being forced to eliminate its lunch service due to the new minimum wage law. Steadman explained how, as a fine-dining establishment, his employees would not directly be affected by the minimum wage hike, but the ripple effects of the law certainly would push up their wages—and the restaurant’s expenses.
“We want to be able to hire people,” emphasized Stedman. “But anybody, if they have experience, now wants much more than $20 an hour. And if they have no experience, their opening ask is $20 an hour. Why wouldn’t it be?”
“If you can make $20 an hour at Taco Bell, with no experience, how much money do you think I’m going to have to pay a cook, who actually has experience?” Stedman continued. “I have to compete with that. Worse, I have to compete for somebody who has zero cooking experience. None, none at all!”
In a statement to the news station, Che and his wife and co-owner, Tanya Stedman, bristled at the idea that they might not be valuing their workers sufficiently by criticizing the wage hike and pointed out the plethora of costly government taxes and regulations—on top of normal business expenses—that they have to endure, noting that there is only so much that business owners can take.
We, as business owners, do not feel that we are the ones exploiting people. We pay huge taxes, fees, licenses, inspections, workman’s comp, insurance, you name it. We do this for the right to work really hard, and to create jobs. Yet, we are being told that WE are the reason why people can’t afford their rent. We are told we should pay everyone more, while we work harder, and for less. Employers are unprotected. We have no rights. We don’t get overtime or breaks. The only thing we get is what’s left over after everyone else takes their cut. At some point, the risk outweighs the reward.
For us, we cannot accept more liability and expense. We have to pay our rent, too. So we are reducing our costs. Reducing our liability. We are concentrating our efforts on the area that is most successful. Tanya and I, as most other business owners, are tired of hearing how it’s our fault people can’t afford their lives; tired of being told we need to work harder so other people can have more; tired of being told we should be happy with having less, working more, being liable and responsible for everyone and everything, so other people can have a better life.
In other words, California is becoming like the world of Ayn Rand’s Atlas Shrugged.
Marcus Walberg, owner, along with his family members, of four Fatburger franchises in Los Angeles, related a similar tale to Business Insider.
Doing business in California “has been more strained now than any time I can remember,” Walberg told Business Insider. Asked about the effects of the $20 an hour minimum wage, he added, “I feel there will be a lot of pain to workers as franchise owners are forced to take drastic measures.”
In what will certainly become a familiar theme in the industry, Walberg said he would be forced to raise prices, implement a hiring freeze, and cut employee hours and benefits. Despite his reservations about raising prices in a climate where “customers are already complaining that prices are too high,” he anticipates having to raise them in the range of 8-10 percent, on top of an 8 percent increase last year.
As for employees, “We’re not hiring new people to fill jobs,” Walberg said. “We’re being very tight on schedules.”
In addition, he has had to eliminate paid vacation time in anticipation of the minimum wage hike in April, asserting that “We just can’t afford to do that anymore,” even though it “is a real shame.”
Like Stedman at the Moonstone Bistro, Walberg is concerned about the “domino effect” of the minimum wage hike on more skilled and higher-earning employees, who will naturally look for additional compensation or seek other opportunities elsewhere.
“If you’re the shift leader and you’re responsible for making sure everyone got their breaks, you’re not going to do all that extra work for the $20 [an hour] minimum wage,” he said, noting that the same would be paid to “the guy who cooks the burger and goes home.”
“An entry-level manager is now going to want more than $20 an hour,” Walberg added. “All that translates back to the customer having to pay more money because the landlords aren’t going to drop the rent. The money has to come from somewhere.”
As I noted in my column for The Hill, this form of price control affects not only current workers but also potential future workers, particularly those who are new to the job market or who otherwise have lower job skills and fewer employment opportunities.
As Walberg explained, for example, fast-food restaurants will now be less likely to hire an inexperienced teenager. “What you will lose: the kids getting their first job at McDonald’s,” he said.
This all has a rather perverse effect on many lower-skilled workers. By forcing them to compete with higher-skilled workers and eliminating their sole leverage—the ability to voluntarily work for a lower wage—policymakers are not helping them up the ladder of economic opportunity. They are cutting off the bottom rungs and making success that much more difficult.