By Daniela Sirtori-Cortina, Eliyahu Kamisher and Josh Eidelson | Bloomberg
Billionaire Greg Flynn, who made his fortune running one of the world’s largest restaurant franchise operations, is getting a new boost from sourdough loaves and brioche buns.
That’s because a California law that’s about to raise the state minimum wage at fast-food spots to $20 an hour from $16 offers an unusual exemption for chains that bake bread and sell it as a standalone item.
Governor Gavin Newsom pushed for that break, according to people familiar with the matter. Among the main beneficiaries is Flynn, a longtime Newsom donor whose California holdings include two dozen Panera Bread locations.
The specificity of the exemption has puzzled observers for months, especially after the governor told reporters last year that it came about as “part of the sausage-making” of politics. In response to detailed questions, Newsom’s office said the wage law was the “result of countless hours of negotiations with dozens of stakeholders over two years” — and will make a real difference for hundreds of thousands of Californians.
Flynn, who has been involved in business dealings with Newsom in addition to contributing to the governor’s political campaigns, said in a brief conversation that he didn’t play a role in crafting the bread exemption. He didn’t respond to requests for comment about his connections to Newsom.
Representatives of Panera Bread didn’t reply to multiple requests for comment.
Flynn emerged as a prominent critic of the fast-food bill, known as the FAST Act. In a 2022 opinion piece in Capitol Weekly, a publication covering California politics, he said it would all but kill the franchising business model in the state.
Behind closed doors, he urged the governor’s top aides to reconsider whether fast-casual chains such as Panera should be classified as fast food, according to people familiar with the discussions, who asked not to be named because the talks were private.While that plan wasn’t adopted, the Service Employees International Union, a labor group that was the driving force behind the bill, decided to accept a narrower carve-out as the talks progressed — one that would only apply to restaurants operating bakeries. That position was adopted as a means of winning the governor’s support for the legislation, said a person with knowledge of the discussions. The rationale was the governor’s longstanding relationship with a Panera franchisee, the person said.
While Panera locations and a handful of other eateries get a break on wages, competitors are bracing for higher costs when the law takes effect in April. McDonald’s Corp. franchisees have estimated the wage law will cost each California location $250,000 a year, characterizing it as a “devastating financial blow,” according to a memo seen by Bloomberg News. Chipotle Mexican Grill Inc. has said it’s considering a price increase to offset the extra expense.
Michelle Korsmo, the head of the National Restaurant Association, told an industry conference last year that “everyone’s scratching their head” about the bread exemption. She described the provision as an example of why her organization’s members should develop political connections to seek better legislative outcomes.
“You may be celebrating or you may be lamenting the bakery exemption,” she said. “But remember, all of that comes through relationships.”
‘Low Pay’
The push to transform fast-food employment gained steam during the pandemic, when workers showed up for low-paying jobs while many higher earners were able to work from home.
In early 2021, the California legislature considered a bill to address what a lawmaker called the “abuse, low pay, few benefits and minimal job security” workers faced. The legislation was designed to give employees a role in regulating the industry by including them in a council with business representatives that could set wage and workplace standards, among other changes.
That would raise costs for owners such as Flynn, who has made himself into the largest restaurant franchisee in the US, if not the world. He turned a handful of Applebee’s branches into an empire with $4.5 billion in sales, including 2,600 locations of brands such as Pizza Hut, Taco Bell and Wendy’s. Based on his company’s website, his California restaurant-chain holdings consist only of Applebee’s, which as a sit-down restaurant isn’t subject to the fast-food wage law, and Panera. Flynn is worth at least $1.1 billion, according to the Bloomberg Billionaires Index.
Flynn attended the same high school as Newsom in the suburbs outside San Francisco. The future franchising mogul served as student body president as a senior, the same year Newsom played basketball as a freshman, according to a yearbook.
Over the years, Flynn’s donations to Newsom’s political campaigns have included $100,000 to fight off a conservative-led recall effort and $64,800 to support the governor’s reelection in 2022. Flynn has been known to tout his relationship with Newsom, according to people familiar with the matter, with one saying the fast-food entrepreneur has said he can reach the governor via text.
A business connection goes back to 2014, when Flynn acquired a Napa Valley resort managed by Newsom’s hospitality company. Newsom, who was then serving as California’s lieutenant governor, reported an undisclosed amount of income from Flynn’s company that year. The management contract began under the previous owners, the Getty family trust, and Flynn decided not to renew it about a year into his ownership, said a person familiar with the decision.
Newsom’s office and Flynn declined to respond to detailed questions regarding the two men’s personal and business connections. Newsom’s assets were put in a blind trust after he was elected governor in 2018.
Newsom signed the fast-food wage bill into law in September 2022. That version of the measure set the stage for minimum pay to rise to $22 an hour at chains with more than 100 locations across the US. But it included the exemption for establishments that sold bread as a standalone item. It also defined what counts as bread according to a federal law that, the Food and Drug Administration said, excludes bagels and croissants.
Another win for Panera: The exemption meant bakeries were also off the hook on industry standards that could have been established by a fast-food council with authority to set rules about working conditions, including training.
Industry Pushback
The fast-food industry’s backlash to the law was swift, with large chains such as McDonald’s and trade associations staging a campaign to repeal the FAST Act almost as soon as it passed. About a year later, a compromise was worked out that set the minimum hourly wage at $20 and limited the worker council’s powers.
The new law applied the rules to chains with at least 60 national locations instead of 100, subjecting more companies to the higher pay requirement. Yet the bread exemption stayed in.
Newsom and the SEIU declined to discuss who wrote the provision. Open-records requests filed with the governor’s office were repeatedly denied.
The office of California Assemblymember Chris Holden, the bill’s lead author, said it didn’t have any insight into the exemption’s origins.
“We don’t know how that came about,” Willie Armstrong, Holden’s chief of staff, said by phone. Holden recently introduced a bill that would shield other establishments from the minimum wage law.
Lorena Gonzalez, who introduced the first iteration of the FAST Act in 2021 before leaving the legislature the next year to lead the California Labor Federation, said Panera will likely have to raise wages to keep up with other chains.
“It’s kind of a silly exemption,” Gonzalez said. “If you look at where Paneras are located, and their clientele, it’s not as if they’re going to be able to hire people for less.”
That may prove true, and some Flynn-owned Paneras already advertised $20 as the top end of the hourly pay range for certain non-management roles as of mid-February. Across California, about 24% of fast-food employees earned a base wage of at least that much as of the end of last year, according to a payroll index compiled by payments services company Square. Some cities and counties already require higher pay than the state minimum.
For now, though, Panera will have more wiggle room on wages than its competitors, which could face penalties if they don’t comply. Panera appears to be the largest chain by number of locations in California and countrywide to benefit from the exemption, according to company websites and a Bloomberg review of data compiled by research firm Technomic.
Other restaurants such as Paris Baguette and Great Harvest Bread Co. also appear to qualify for the carve-out, although the details remain uncertain ahead of the law’s debut. Many restaurants located inside grocery stores are also spared.
Higher Costs
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Among restaurants that do have to pay the higher wages, the financial fallout is becoming apparent.
Habit Burger Grill, a fast-casual chain owned by Taco Bell parent Yum! Brands Inc., wrote down the value of its assets last year to account for higher future wages in California. After the noncash charge, Habit reported a $10 million operating loss in the most recent quarter.
Fast-food chains can’t just start baking and selling bread now to get the exemption — they had to have been doing so by Sept. 15 of last year.
But some companies are looking to find ways to avoid being forced to raise wages. Honey Baked Ham Co. recently hired a lawyer to argue it shouldn’t be subject to the law, according to documents obtained through a public records request with the state’s Department of Industrial Relations, which will enforce the act. The agency and an attorney for the company declined to comment.
At a Flynn-owned Panera in Sacramento, not far from the stately California capitol building, workers rushed to stack sandwiches and fill a flood of online orders during a recent lunch hour. Employees said they knew the company had been left out of the wage increase but declined to give their names when discussing their views on the matter.
The branch had an opening for a cashier at a salary range of $16 to $18 an hour.
–With assistance from Leslie Patton, Devon Pendleton and Andrew Oxford.
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