The Golden State No More

 

 

When our company recently expanded the number of its restaurants in Texas, I was startled to receive a call from Governor Rick Perry thanking me for our decision.

In the 10 years I’ve been CEO of CKE Restaurants, owner of the Carl’s Jr. and Hardee’s brands, no governor had ever made such a gesture. Perry went further during our conversation and asked what it would take to move our headquarters from California to Texas.

This is a question weighing on many California CEOs right now. Do we grow our businesses here where the tax and regulatory hurdles remain high, or do we relocate to a more business-friendly state like Texas?

CKE’s history in California stretches back to 1941 when Orange County entrepreneur Carl Karcher and his wife Margaret bought a hotdog cart for $311. Today, we have over 72,000 employees, approximately 18,500 of them in California.

We at CKE love California, but the hard truth is this:  California is the most business-unfriendly state in which we operate. While we have kept our corporate headquarters in California so far, our company’s real job-creating engine has already moved.  Our current plans for domestic development are principally centered in Texas where it is easier to build and operate restaurants, unemployment is lower, and consumers can spend more of the money they earn because there is no state income tax.   While we will continue to operate our existing California restaurants, we will be building 300 new restaurants in Texas this decade.

When we open a new restaurant we invest over $1.2 million in the community and create about 25 permanent jobs within the restaurant itself, not to mention the numerous outside jobs supported by our constructing, maintaining, advertising and supplying food and paper products to the restaurant.  Texas’ business-friendly environment is one of the reasons its unemployment rate remains below the national average while California faces one of the nation’s highest unemployment rates, fleeing businesses and a severe erosion of its tax base.  Our 300 new restaurants will create about 8,000 new jobs in the restaurants in Texas and at least 16,000 additional jobs for our suppliers and service providers.  These are jobs we would love to create in California.

What it would take to bring our business development back to California? I would offer the following suggestions:

Reduce out of control permit costs and construction regulation. Excessive fees, oppressive environmental regulations, exorbitant street maintenance costs and unreasonable construction permitting requirements unique to California add up to $200,000 in additional costs for each restaurant and can take up to two years to process through state and local bureaucracies.  On average, the permitting process in California takes about 8 months.  In Texas, it takes six weeks.  That time difference alone materially increases our costs to open a new restaurant.

Allow managers to be paid as managers. California considers General Managers subject to overtime salary requirements if they work 50% of their time in non-managerial tasks.  This is not the case in most states or under federal law.  Our General Managers receive substantial salaries, bonuses and benefits to run their restaurants as entrepreneurs, like they own them.  In the great majority of states, our General Managers can do their jobs as they see fit whether the tasks they choose to perform are strictly managerial or as simple as speaking with guests and busing tables in the dining room.  If you are managing a restaurant and a cook fails to show up, you had better know how to cook and be prepared to do so.  While that is a non-managerial task, it is exactly what you would do if you owned the restaurant.  To avoid costly class action lawsuits on overtime claims in California, many retail businesses, including ours, have had to convert their salaried General Managers to hourly employees so they can do their jobs.   Our General Managers consider this a demotion but we have little choice.  It is simply common sense that General Managers should be classified as managers able run their restaurants as they choose.

Eliminate the overtime work day, pay overtime on a weekly basis. California requires overtime for employees working more than eight hours a day, not just those working over 40 hours a week as in most states. This deprives employees of the flexibility to work six hours one day and make up the time on another. Because managers are also hourly employees, this limits their ability to work more hours on busy days and fewer hours on others without again incurring overtime costs.  We have actually had to terminate General Managers for working overtime; in other words running their businesses as if they owned them, and failing to claim the overtime. A failure to do so would result in the very class action lawsuits we made them hourly employees to avoid.  The reality is that California law is requiring us to fire general Mangers for doing their jobs.  This law also impacts our crew employees who can ill afford to lose working hours in this economic environment.  Such employees may want to work 6 hours on one day, for family or personal reasons or to attend school events, and 10 hours on another day so we can compensate them for a full forty hours.  In California, that is not an option.

Simplify the confusing meal and rest break laws. These laws are so complex that it is difficult for employers or employees to understand the requirements, let alone comply with them.  Opportunistic lawyers often sue companies for minor and often unintentional violations. Employees, including our General Managers, are forced to take breaks during the busiest times of the day, to their frustration as well as that of their co-workers and customers.  You may have seen restaurant employees sitting in the dining room while you wait in a long line for “fast food.”  They are taking their mandatory rest breaks.

Tame the lawyers. With some 200,000 lawyers, California needs to put some limit on their ability to file class action lawsuits against some perceived threat as though each one were his or her own private attorney general. Like many California businesses, our company has wasted $20 million defending such cases in the last eight years, a majority of that money going to the attorneys’ pockets rather than to the creation of economic prosperity.  This is a major impediment to businesses deciding to grow in California as opposed to other states.

Reduce oppressive state taxes. California has some of the highest tax rates in the nation for businesses and personal incomes. The state must lower taxes to retain the businesses it has and to encourage others to locate or expand here.

California is one of the most beautiful locations in the country and California’s labor pool remains, for now, the most creative and knowledgeable in the world. We want to stay and we would like nothing better than re-energizing our job creating restaurant development here in California. But the laws and regulations I have discussed add substantial additional costs to doing business here and create the impression that our State government fails to understand or value the contributions private enterprise makes to the State’s prosperity.  In essence, it is very difficult and expensive to build a restaurant in California.  If you manage to build it, California law makes it onerously difficult to operate.  If you manage to build it and operate it at a profit, you are hit with a big tax.  The decision whether to grow in California or another more business friendly state is really quite simple.

Over the last two years, whenever I tried to discuss these issues with state political leaders, I was either brushed off or told there was a lack of political will for change.  That changed in February when Governor Brown, the Governor’s Office of Economic Development, the Lieutenant Governor and legislators from both sides of the aisle contacted me concerning these issues.  Whether these discussions will result in any progress is yet to be seen, but at least we are talking.

Republican or Democrat, liberal or conservative, any legitimate political agenda requires prosperity for the people of California.  Absent another unsustainable economic surge such as the dot-com boom or the housing bubble, to again experience economic prosperity California must strengthen the fundamentals of its business community by reducing both regulations and taxes.

Andrew Puzder is the CEO, CKE Restaurants and author of Job Creation, How it really Works and Why the Government Doesn’t Understand it