IFA has strongly opposed efforts to enact independent contractor tests that rob franchise owners of their investments by effectively demoting them to employees of their brand.
In 2018, a three-part “ABC Test” for determining whether a worker can properly be classified as an independent contractor was upheld by the California Supreme Court in Dynamex Operations West v. Superior Court. Recognizing the potential harm to franchising, the IFA brought suit to challenge its application to the franchise business model after the California legislature codified the test into law through passage of Assembly Bill 5 (AB5) in September, 2019. Immediately thereafter, other states such as New York, New Jersey, and Illinois introduced similar measures.
Likewise, federal legislation named the Protecting the Right to Organize (PRO) Act was introduced to make sweeping changes to labor law, including codification of California’s ABC Test under the National Labor Relations Act (NLRA). Codifying the ABC test would result in many workers losing independent contractor status, as well as the scheduling flexibility that comes with it. Most importantly, codification of the ABC Test could upend the franchise business model - making every franchise owner an employee of the franchisor for purposes of the NLRA. Under prong “B” of the ABC test, an entity must perform work that is “outside the usual course of the hiring entity’s business” to be considered an independent business. Because brand owners license the trademark of the franchisor to operate their own business, they may be determined to be in the same line of business as the franchisor, and would thus fail the ABC test, depriving them of their investments and business operations.
While the PRO Act has gained momentum within Congress, the IFA has fought to protect franchise businesses from its harmful provisions. However, failure to pass the PRO Act would not directly affect the numerous states that have passed some version of the ABC test. Likewise, the PRO Act also has no direct impact on recent efforts by DOL to clarify the test for independent contractors under the FLSA. As a big win for franchising, the DOL finalized an independent contractor rule that adopted an "economic reality" test to determine a worker's status as an employee or an independent contractor, appropriately clarifying that the franchise relationship falls outside of its coverage. However, the new Administration’s DOL quickly worked to withdraw the Rule. Depending on the outcome of pending litigation on this matter, with or without the PRO Act, the DOL could choose to implement some version of the ABC test under the Fair Labor Standards Act (FLSA), though the Department would have to address conflicting court interpretations that do not support use of the ABC test under the FLSA.
To stay up to date on IFA’s advocacy pertaining to independent contractor legislation, please review the following resources:
- IFA article on how the PRO Act will specifically affect franchising
- The Hill published an op-ed written by IFA President & CEO Robert Cresanti
- Institute for the American Worker white paper on the PRO Act
- Coalition for a Democratic Workplace letter with 240+ business groups
- Labor Bill Comparison Chart - PRO Act 2021
- PRO Act Franchise Coalition letter
If you would like to get involved, please become a part of the Franchise Action Network and help protect small businesses across America.