California franchisors and franchisees suffered setback when the legislature rejected a proposed franchise exemption to AB-5 in the recently passed clean up legislation.
When AB-5 was enacted in 2019, to the horror of the franchise industry, it appeared to create a presumption that the franchise business model created an employment relationship between franchisor and franchisee and franchisee’s employees.
The Bill’s sponsors in the Assembly disclaimed any intent to interfere with positive business relationships that allow small businesses, including franchised outlets, to continue and pledged to address the issue in future amendments to the law. The apologetic statement, promising amendments, temporarily calmed the waters.
An early draft of AB-5 amendments included a franchise exemption, but the provision died as amending legislation made its way to enactment. Amplifying the AB-5 adversity is the risk that the Dynamex case, which presaged AB-5, will be applied retroactively, exposing those considered employers under the test codified in AB-5 to years of prior year employment tax exposure.
Franchisors and franchisees will need to again reassess their approach to franchising in California’s AB-5 environment. The lure of access to the fifth largest economy in the world enhances the risks inherent in making the wrong decision.
In a 2019 alert, “New California Law Imperils Franchise Model,” written by a member of Fox Rothschild, a 950-lawyer national law firm, the authors noted a few possible actions by franchisors and franchisees in the wake of AB-5, none of them palatable.
The firm said that franchisors and franchisees need to reconsider discouraging choices: (a) bow to pressure and change to an employment model; (b) cling to the franchise model, but redefine obligations and change the financial model; (c) withdraw from California.
Now, with no apparent hope that a franchise business model and AB-5 can co-exist, will franchisors begin the agony of decision-making?
What is the future of the thousands of California franchisees and their tens of thousands of employees in the process? Millions are unemployed in the wake of COVID; is now the time to add thousands more to the ranks?