Franchising’s Biggest Threat: AB-5
Everything you need to know to protect your business from AB-5, the law that plans to dissolve the franchise business model.
By Stephen Worley and Chris Pratt, IFA
California’s AB-5 law is one of the most significant policies to affect franchising in years.
Through its codification and wide-ranging application of the so-called ABC Test, AB-5 could potentially pose an existential threat to the franchise business model. Ever since September 18, 2019, when Governor Gavin Newsom signed the bill into law, businesses have been working to learn how this law could affect them. IFA, for its part, has been working to exempt franchise businesses from this harmful legislation.
What Happened?
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 California Supreme Court decision is known as the Dynamex decision, and held that to be an independent contractor — and not an employee — the following three points must be met:
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;
The worker performs work that is outside of the usual course of the hiring entity's business and;
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, meeting this test appears to be a challenge for franchises.
How Does This Affect My Business?
Unfortunately, this law leaves many franchise businesses with more questions than answers. Franchise systems are structured differently, and legislation this wide-ranging has never been tested before. It’s safe to say the only certainty of this law is that California franchise businesses are facing serious and dangerous uncertainty.
Under AB-5, brands may wish to change their business operations and franchisee relationships, which creates its own legal risks under the contracts that govern those relationships. Some brands may choose to forego franchising in California. For franchisees, maintaining the control of your own business could be threatened.
Franchisors and franchisees should engage through IFA with policymakers in California, who need to hear about how AB-5 potentially upends the franchise system and risks franchisee independence, ownership and investment. It is also important for franchisors and franchisees to remain in regular contact with legal counsel and their franchise system regarding AB-5.
IFA’s membership also includes hundreds of experts in franchise law and operations. Franchise businesses looking for additional resources should take advantage of the IFA supplier network as they seek guidance.
How Can I Get Involved?
California has a challenging legislative and regulatory climate for businesses, and franchises need as many supportive voices as possible. To get involved, California franchisors and franchisees should join the Franchise Action Network (FAN), IFA’s grassroots arm, at franchiseactionnetwork.com or by texting FAN to 52886.
By joining FAN, IFA will provide emails to send to legislators and contact you with opportunities to meet with elected officials or talk to the media to discuss AB-5’s effects on your business.
What’s Next?
With California legislature back in session, IFA will redouble its lobbying efforts to secure a common-sense exemption for franchise businesses from AB-5. Our association will exercise all possible options, including litigation, while partnering in coalitions with other affected industries to pursue other challenges to the law.
Unfortunately, California may be the first domino to fall in a series of similar anti-franchise laws. New Jersey is moving to implement an “ABC” test and state leaders in Illinois and New York have indicated they want to do the same. In Washington, the PRO Act contains the worst of AB-5 and is close for House passage. With the support of more than 40 senators and numerous presidential candidates, it could become law in a few short years.
As always, IFA members’ advocacy is critical to the franchise community’s efforts. Your brand and your business have a role to play and a voice that needs to be heard — we hope you get involved.
Stephen Worley is Senior Director of Communications at the International Franchise Association.
Chris Pratt is a Business Operations Consultant at the International Franchise Association.