Restaurant Business – Hype Aside, is Panera Exempt From California’s Wage Bill?

News analysis: The controversy involving Panera Bread franchisee Greg Flynn may be moot, but the exemption baked into the impending fast-food wage remains unexplained.

By Lisa Jennings and Peter Romeo on Mar. 08, 2024

Legal experts say more clarification is needed on the exemption for bakeries in AB1228.

California Gov. Gavin Newsom is facing allegations that he showed favoritism to Greg Flynn, a political donor who’s also the nation’s largest operator of franchised restaurants. At issue is whether a portion of Flynn’s portfolio was shielded from a 25% increase in California’s minimum wage for fast-food workers that takes effect April 1, a (perhaps overblown) controversy that centers on a key question:

Why is there an exemption for bakeries written into the law setting the new minimum wage of $20 an hour, and who does it apply to?

Flynn has stated that he won’t claim any exemption and will ensure that employees of his 24 Panera Bread bakery-cafes in California are paid at least the new minimum fast-food wage, rendering the matter virtually moot. Yet the firestorm rages on, with a social media tag known as “Paneragate.”

It’s a byproduct of the already contentious legislation creating a fast-food wage in California, known as AB1228. In addition to setting minimum pay for most fast-food workers in the state,  the bill creates a Fast Food Council that will determine future wage increases and have a say on workplace standards. It was enacted last year after a three-year pitched struggle between organized labor and the restaurant industry. The warring parties eventually struck a compromise at the instigation of Newsom.

The bill targets limited-service chains with more than 60 units nationally. But tucked into the law’s definitions is also an exemption for businesses that, as of Sept. 15, 2023, operated a bakery that produces and sells bread as a stand-alone menu item.

On its face, the exemption appears to apply almost exclusively to Panera Bread. Early on, it was termed the “Panera exemption.”

Behind the scenes, sources closely following the legislation speculated that the carve out was designed to specifically benefit Flynn, a sometimes resident of San Francisco, where Newsom was previously a two-term mayor. Flynn has also been a donor to the governor’s campaigns in the past, and he and Newsom also attended high school together, but the governor has said the two didn’t meet until after graduation.

Flynn’s company operates more than 2,600 restaurants across the country, including units of Pizza Hut, Taco Bell and Wendy’s. His holdings include a significant portion of the Applebee’s casual-dining chain. The only limited-service brand his company operates in California, however, is Panera. Flynn Group owns 24 of Panera’s 188 locations in the state.

Individuals involved in the negotiations that resulted in AB1228 have refused to reveal what happened in the closed-door sessions. But some acknowledged they were surprised by the Panera exemption, saying it was presented to the negotiating group as a fait accompli as they started the bargaining. Indeed, the carve out was included in an earlier version of the bill, when the legislation was known as the Fast Act.

At least one participant in the negotiations expressed anger at what was viewed as special treatment for bakery-cafes and indicated that the provision was never on the table during the negotiation sessions.

Flynn has stated emphatically that he never asked for a carve out, saying his input was limited to suggestions to the governor’s staff that fast-casual restaurants be differentiated from fast-food places. He has declined requests for further comment.

Alex Stack, a spokesman for Newsom quoted in The New York Times, called the controversy “absurd,” saying the governor never met with Flynn about the bill.

Immediately after signing AB1228 into law, Newsom was asked why an exemption for bakeries was included in the legislation. The Democrat dismissed the provision as an example of “sausage-making” and moved on to the next media question.

State Republicans, however, see it differently. Last week, a group of lawmakers sent a letter to California Attorney General Rob Bonta asking for an investigation of what they described as a “pay-to-play” deal. Bonta’s office reportedly acknowledged receipt of the letter but did not immediately respond.

“If the governor helped exempt one of his largest political donors from a bill that harms small businesses, the people of California deserve to know,” Republican Assemblyman Josh Hoover said in a statement. “Our leaders cannot be allowed to hide behind the veil of legislative ‘sausage making.’ They must be held to a higher standard.”

Newsom’s spokesperson said the governor’s legal team had reviewed the bill and that Panera Bread would actually not likely be exempt from the law because the fast-casual chain makes its dough off site and ships it to units for baking. Yet the bill says California will rely on the definition of a bakery that’s included in a voluminous description of most U.S. business types by the federal government.

That characterization essentially says a bakery is a place that produces bread, without defining “produces.” Elsewhere in the code, a retail bakery is defined as a place that produces or processes bread.

Panera officials did not respond to questions about the bill or its bread-baking procedures.

Observers in the legal world agree the legislation is ambiguous.

Los Angeles employment law attorney Anthony Zaller said the governor’s office is likely taking the stance that Panera is not exempt in part to move on from the issue.

“There could be an argument that ‘producing’ does not mean that the establishment needs to take all of the steps in making bread,” Zaller said. “But given that AB1228 does not define the term ‘producing,’ it would ultimately be left up to the courts to define the scope of this term, unless the legislature amends AB1228 to provide further clarification.”

Others say the issue is a potential pain point for Panera Bread, a part of the larger Panera Brands group that’s expected to be sold to the public possibly later this year. Panera has been a leader in shifting to less processed and fresher menu options.

“One issue is, as there is more discussion about this, the ‘secret’ about Panera’s bread will get out,” said consultant John Gordon, principal of Pacific Management Consulting Group in San Diego. “Panera has fresh dough manufactured somewhere else and then shipped in to each store. It begins to knock down the ‘fresh bread quality’ moniker a bit.”