CA AB 5 Campaign Plan & Fundraising Effort


I wanted to give you an update on what’s going on in California related to AB-5. The background appears below.  As things stand now, AB-5 goes into effect Jan. 1, 2020, but IFA believes that a franchise exemption is possible. Based on the criticism of several industry sectors, when the California Legislature reconvenes in January 2020, the bill’s sponsor, Assemblywoman Gonzalez has stated that she will introduce a follow-up to AB-5 to address additional industry exemptions.  A copy of IFA’s campaign is attached here for your review. It is critical to obtain an exemption before similar legislation is introduced in New York and elsewhere.

The campaign seeks to raise funds from the franchise community for lobbying efforts in California. Franchisors with a large presence in California are asked to join the effort.

As we head into January, IFA needs an army of franchise owners and brands in California to be involved in IFA’s efforts and tell their stories including:

If you have or know franchise owners in California that would be willing to help, please let me, and IFA’s Erica Farage, know via email. 

Below are talking points that you might send to franchise owners in California as background on the legislation. Also, there is a repository of information and a link to send emails to state legislators here.

AB 5 BACKGROUND

California’s AB-5 law is one of the most significant policies to affect franchising in years.

Franchise employees are already covered under California labor law, and franchising was not the intended target of the legislation. IFA supports AB-5’s goal of properly classifying employees, and does not want to strike down the law, only to exempt franchise businesses.

Through its codification and wide-ranging application of the ABC Test, AB-5 could pose an existential threat to franchising.

Businesses are struggling to learn how this new law could affect them.

IFA is working to exempt franchise businesses from this harmful legislation.

ABOUT THE ABC TEST

AB-5 codifies the “ABC test” − the standard adopted by the California Supreme Court for determining whether workers should be classified as employees or independent contractors.

This test came from a California Supreme Court decision known as the Dynamex decision, and held that to be an independent contractor – and not an employee – all three of the following points must be met:

  1. The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
  2. The worker performs work that is outside of the usual course of the hiring entity’s business and;
  3. the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Since franchises rely on some level of control from franchisor to franchisee to maintain brand standards, and many franchisors have functions similar to their franchisees (i.e., corporate locations), meeting this test is a challenge.

BUSINESS EFFECTS

Unfortunately, this law leaves many franchise businesses with more questions than answers.

Franchise systems are structured differently, and legislation this wide-ranging has never before been tested. The most certain outcome is that it creates costly uncertainty.

Under AB-5, franchisors may consider changing their business operations and franchisee relationships, which creates its own legal risks under franchise agreements. Some brands may choose to forego franchising in California.

Franchisees could conceivably be classified as employees of the franchisor. This could result in equity loss for the franchisee and could saddle the franchisor with new corporate-owned locations and employees for which they likely aren’t prepared.

Additionally, AB-5 creates the potential for new lawsuits, whether from franchise employee to franchisee, franchisee to franchisor, or franchise employee to both. Additionally, AB-5 allows for city attorneys to file suit, which adds another level of legal uncertainty.

Best,

Lane Fisher

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