Carl's Jr. Chewed Up By State

MARCH 21, 2011

California has changed dramatically since 1941, when Carl and Margaret Karcher scraped together about 325 bucks to start a hot dog cart in Los Angeles – a precursor to a drive-through restaurant they opened in Anaheim and which grew into the Carl’s Jr. fast-food empire. The Karchers were household names in Southern California, not just for their restaurants but for their activism in conservative politics and Catholic charities.

Whatever you think of the Karchers’ politics, you’ve got to love the entrepreneurial story that surrounds their success and what it said about California in its heyday. The Karchers – he died in 2008 and she in 2006 – came to the Land of Opportunity from the staid backwater of Upper Sandusky, Ohio.

California has beckoned many Midwesterners – and people from every part of America and the globe – not just because of its pleasant weather, but because of a culture of openness that allowed creative people to go as far as their ideas would take them. Unfortunately, people with energy and creativity are now likely to go elsewhere, to places where the state government has different attitudes toward the private sector.

Indeed, CKE Restaurants, parent of Carl’s Jr., is likely to move its headquarters from Carpinteria, near Ventura, to Texas and is undergoing a rapid expansion of restaurants in the Lone Star State. Right before the budget circus got going Wednesday, CKE CEO Andrew Puzder spoke at the California Chamber of Commerce, blocks from the Capitol dome. Like most of us, Puzder loves California and has no interest in leaving it, but he told harrowing tales about doing business in a state that has gone from an entrepreneurial heaven to a bureaucratic nightmare.

“It costs us $250,000 more to build one California restaurant than in Texas,” he said. “And once it is opened, we’re not allowed to run it.” This explains why Carl’s is opening 300 restaurants in Texas and only maintaining its presence in California. Texas has lower taxes than California, but the reason for the shift has more to do with regulation and with the attitude of the respective governments.

Puzder complained about the permitting process here, where it takes eight months to two years to open a new restaurant compared to an average of 1 1/2 months in Texas. In California, restaurants have to provide new curb cuts, new traffic lights, you name it. The company must endure so many requirements and must submit to so many inspections that it becomes excessively costly – and the bureaucrats are in charge of the project.

Once the restaurant is open, Puzder said, the store’s general managers are not allowed to run the business as if they own it. That’s the key to the company’s customer service approach – allowing general managers to do whatever it takes to make customers happy. But California’s inflexible, union-designed work rules, for instance, classify general managers as regular employees. They must be paid overtime for any work beyond an eight-hour day. They must take mandated breaks at specified times.

If a busload of customers comes to a store, these general managers must sit back and do nothing if they are on a break period. Most states have 40-hour workweek rules, meaning employees are paid overtime after exceeding 40 hours of work in a single week. In California it is based on the day, which limits the ability of managers to work, say, six hours one day and 10 hours the next day. Puzder complains about these industrial-era requirements that impede flexibility and harm customer service.

And California law encourages “private attorney general” lawsuits against private businesses over overtime and other regulatory rules, which has created a huge financial incentive for attorneys to file questionable legal actions against restaurants.

“It’s not like we have kids working in coal mines or women working in sweatshops,” Puzder said. It’s not as if his workers in other states, where these regulatory rules don’t exist, are oppressed, he added. “How does this help us instill entrepreneurial values?” He wonders how all these nonsensical rules teach people about being independent from the government rather than dependent on it.

I’d argue that the rules are designed specifically to impede private enterprise and to hobble entrepreneurship. After all, the unions, trial attorneys and liberal legislators writing these rules believe that government is the answer to most problems and that private industry is a cancer.

“People are just dying to get out there and make money,” Puzder said. “But California is setting a bar here. You can’t work smarter, harder, longer or better.” His company has had to fire hardworking store managers who insist on working longer hours than the state allows. He wants to tell these people, “Come to Texas, and we will hire you.”

The big debate at the Capitol has been whether to pass a budget with tax extensions. Gov. Jerry Brown and Democratic legislators believe the only thing wrong with California is that people here don’t give the state enough of their paychecks. They believe this state has too-few government workers and too little oversight of business.

As Brown said earlier in the week in reference to the Japanese earthquake: “A lot of people say, ‘Just get the government out of the way.’ Well, if you get ’em out of the way, people die.” That’s a perfect summation of the authoritarian and paternalistic attitudes in Sacramento, and a reminder that these problems are unlikely to change soon.

“We can bring economic prosperity back to this state,” Puzder added. “We don’t need to be stimulated. We don’t need to be subsidized. We need to be left alone.”

California officials mock such sentiments, just as they routinely mock Texas. But which state do you think will recover more quickly and better accommodates the dreams of today’s version of the Karchers?

–Steven Greenhut

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