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by Simon Lord

last updated 23/09/2019

Editor of Franchise New Zealand

International - California legislation could turn franchisees into employees

by Simon Lord

last updated 23/09/2019

Editor of Franchise New Zealand

14 August 2019 - Legislation currently pending in the Californian state legislature could significantly affect the future of franchising in that state - and set a precedent for other US jurisdictions

A bill which would fundamentally alter the employer-employee relationship across multiple industries in California is currently pending in the state legislature. In its present form, Assembly Bill 5 (AB5) wrongly considers franchisees as employees of big, out-of-state franchise brands rather than local small business owners. The US-based International Franchise Association says, ‘AB5 would lead independent franchise owners to cede control of their businesses to their parent brands, effectively turning locally-owned and operated franchise businesses into part of a larger corporate entity.

‘It’s not an exaggeration to say that AB5 would forever change the California economy if it isn’t amended to exempt the franchise business model,’ said IFA Senior Vice President of Government Relations and Public Affairs Matt Haller. ‘California’s 75,000 franchise businesses and their nearly 730,000 employees would be subject to new laws that would undermine their very ability to operate. As the California Assembly considers this bill, it should also consider the uniquely harmful effects it would have on California’s locally-owned franchise businesses. IFA looks forward to working with legislators to ensure that California franchises can continue to grow and contribute to their communities.’

One commentator estimates that franchises contribute over US$40 billion to California's GDP. 

Writing in Littler Insight, James A Pareti Jr and Michale J Lotto comment, 'In 2018, the Supreme Court of California turned much of the established law regarding worker classification on its head with its decision in Dynamex Operations West Inc. v. Superior Court. Dynamex addressed a single, narrow question: whether certain workers were appropriately classified as independent contractors or were instead properly classified as employees for purposes of the state’s wage and hour laws.' 

'In the wake of Dynamex, however, some have urged courts to expand the scope of the case beyond the narrow confines of independent contractor/employee classification to instead broadly redefine the law of joint employment and vicarious liability generally.  If courts take up this invitation, it may sound the death knell for the franchise model of business operation in California, imposing joint liability on franchisors with little to no control over the day-to-day activities of their franchisees or of those franchisees’ employees.'

Read the Littler Insight article.

Read about New Zealand franchises exporting to the USA.

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