The International Franchise Association, along with the Dunkin’ Donuts, Supercuts, and Asian-American Hotel Owners franchisee associations, have sued California in San Diego’s federal court to prevent the state from classifying franchisees as employees.

A franchise is a business model where one company (franchisor), e.g., McDonald’s or Burger King, grants the right to another (franchisee, the local outlet) to sell the franchisor’s products or services under an identifying trademark and operating standards in exchange for license fees.

While franchisees have operated as independent contractors to their franchisors for decades, the model comes into potential conflict with California’s strict ABC “Dynamextest,” instituted in 2014 and now incorporated in Labor Code section 2775. See, Independent Contractor Status in California Now Falls Under Radically Different Rules(June 1, 2018). A worker is automatically presumed to be an employee unless the hiring company can prove:

A. The person 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;

B. The person performs work that is outside the usual course of the hiring entity’s business; and

C. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Prong “A” – no control by the hiring entity – and prong “B” – work outside the hiring entity’s course of business – appear directly contrary to the longstanding franchise model. For example, franchisors exercise considerable control over what franchisees do in building design, color schemes, uniforms, what can be sold or what services can be provided, and so on. Franchises are also clearly in the same business as their franchisors.

The issue is significant. According to the suit, in 2019 there were some 82,600 franchises in California, generating $82.9 billion in revenue and employing 827,000 people earning $35.3 billion in payroll. Unlimited franchise opportunities exist in dozens of industries.

Citing to the Federal Trade Commission’s “Franchise Rule,” the suit contends franchisees are independent businesses and not employees of the franchisor. It also cites a September 2020 Massachusetts court ruling barring the ABC test conversion of a franchisee to an employee as an evisceration of the franchise business model.

Stay tuned.

See also,

• California’s Newest Independent Contractor Law Part 2 – Revised Referral Agency Exception (September 24, 2020)
• California’s Newest Independent Contractor Law Part 1 – Revamped Business-to-Business Exceptions (September 17,2020)
• Gagging the Gigs, Plan B – California Remodels Exceptions to Its Strict Independent Contractor Test (September 11, 2020)

For further information, please contact Tim Bowles, Cindy Bamforth or Helena Kobrin.

Helena Kobrin

January 8, 2021