California’s AB-5: What Happened and What’s Next?

What Happened?

This week, the California legislature approved Assembly Bill 5, or AB-5. Governor Newsom is expected to sign the legislation. Through its codification and wide-ranging application of the so-called ABC Test, AB-5 would effectively turn franchising – where an independent owner licenses a brand name and an operating system from an established brand – into a corporate model, where the independent owners and their employees are effectively absorbed into a single company.

What Does This Mean?

With this bill’s passage, California has upended an entire business model and thrown thousands of small business owners’ livelihoods into flux. AB-5’s overly broad language makes franchising’s future uncertain in California. The legislation takes effect on January 1, 2020.

How Does This Affect My Business?

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

For franchise brands, AB-5’s enactment will create an inherent risk for operating the same way as they do today. Any franchisee or franchise unit employee could presumably sue as an employee. This may lead brands to change their business operations and relationship with their franchisees, which in turn creates its own, separate legal risks for the franchise relationship under that contract.

For franchisees, remaining in control of your own business is of paramount concern. The best course of action is to engage directly with policymakers in California, who need to hear about how AB-5 effectively demotes owners to becoming managers of their businesses and puts their equity at risk. Additionally, franchisees should remain in regular contact with their franchisor regarding the brand’s plans for adapting to the new law.

What’s Next?

Over the coming months, IFA will exercise all possible options, including continuing to lobby the California legislature for a common-sense exemption from this misguided policy, while partnering in coalitions with other affected industries to pursue other challenges to the law.

In addition, IFA is already engaged in advocacy and coalition-building efforts to oppose other states, such as New York, that have indicated their desire to follow on the heels of California and pursue a version of AB-5. Meanwhile, IFA is aggressively opposing legislation in Congress that would make the AB-5 language into a national standard. Lastly, IFA will consider legal challenges, as the plaintiffs’ bar will likely file suits in many industries to test the bounds of AB-5.