California’s Assembly Bill 5, or AB-5, is a demotion for California franchise owners.
On September 18, 2019, California Governor Gavin Newsom signed into law Assembly Bill 5, or AB-5, which the state's legislature had passed on September 11. Through its codification and wide-ranging application of the so-called ABC Test, AB-5 could potentially turn franchising – where an independent owner licenses a brand name and an operating system from an established brand – into a corporate model, where independent owners and their employees are effectively absorbed into a single company.
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 many franchise businesses with more questions than answers. Compounded by the variances in how franchise systems are structured, and the untested nature of legislation this wide-ranging, the only certainty of this law is that California franchise businesses may be in grave uncertainty.
While the bill’s sponsor stated in a September 13 “legislative intent” memo that AB-5 “is not intended to replace, alter or change joint employer liability between two businesses,” it is still likely plaintiffs’ attorneys will still seek to apply AB-5 and the Dynamex test to franchise relationships. However, the author’s argument in conjunction with the legislative text could mean that California joint employer law – not the ABC test – could be used to determine joint employer status. This would be welcome news for franchise businesses.
For franchisors, AB-5’s enactment may lead brands to change their business operations and relationships with their franchisees, which in turn creates its own, separate legal risks under the contracts that govern those relationships. For franchisees, remaining in control of your own business is of paramount concern and could be jeopardized by AB-5.
The best course of action for franchisors and franchisees is to engage directly with policymakers in California, who need to hear about how AB-5 potentially upends the franchise system and could risk franchisee investment, ownership, and independence. Additionally, franchisors and franchisees should remain in regular contact with legal counsel and their franchise system regarding the effects of the new law.
IFA is also fortunate to count among its membership hundreds of experts in franchise law. Franchise businesses looking for additional resources should take advantage of the IFA supplier network as they seek legal guidance in California.
How Can I Get Involved?
The franchise community needs as many voices as possible advocating for our interests in California. To get involved, California franchisors and franchisees can contact their legislators through this IFA form. IFA will send advocates emails to send to legislators on AB-5 and contact you with opportunities to meet with your legislators or talk to the media to discuss AB-5’s effects on your business. To help, please fill out this survey and text FixAB5 to 52886.
Over 160 American franchise companies - from household names to emerging businesses - as well as the California Hotel & Lodging Association, the California Restaurant Association, the Hotel Association of Los Angeles, the Long Beach Hospitality Alliance, and the National Restaurant Association joined IFA in a coalition letter to the California Legislature, urging an amendment to AB-5 which would protect franchise businesses in the Golden State.
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.
Across the country, 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.