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California’s FAST Act: What does it mean for franchising?

The bill was defeated in July 2021, but has reared its head again in 2022, and threatens to fundamentally redefine the franchisor-franchisee relationship.

There is clearly an issue across the U.S. with foodservice workers and their employers. Social media platforms have been abuzz with workers quitting their jobs and citing low pay amongst other factors as the reason for their resignations.

While attempts are being made federally to strengthen workers with the PRO Act, the state of California is going ahead with its own radical proposals to shake up the fast food sector. The FAST Act would seek to place a lot more power in the hands of workers and labor advocates with the appointment of an 11-person panel to the Fast Food Sector Council. This council would have the power to set wages, work hours, working conditions and much more.

Much like the PRO Act, the FAST Act would in the most fundamental way, redefine the long-established relationship between the franchisor and franchisee. Currently, the franchisee is a business owner which employs its own staff, and is liable for its own actions.

“The bill by its very design would re-categorize independent franchisee business owners as simple representatives of corporate franchisors, and would necessarily restrict franchisees’ ability to engage in meaningful and mutually beneficial relationships with their employees,” said Lane Fisher, partner at FisherZucker LLC.

The new Act would seek to create joint-liability between the franchisor and franchisee, creating a completely new, unwanted relationship that makes franchising pointless.

The FAST Act, or California Assembly Bill 257 as it’s also known, was defeated in July last year by just three votes. But it passed through the California State Assembly on January 31 after it was reconsidered, but is yet to pass the State Senate and be signed into law by the Governor, Gavin Newsom.

What is contained in the Bill?

  1. The FAST Act would create the Fast Food Sector Council, a panel of 11. It would comprise of two representatives of fast food employees, two labor advocates, one representative of a fast food franchise and one representative of a fast food franchisee. The remaining five members would come from state agencies.

    The 11-member panel would be appointed by the Governor and legislator leaders. While franchise brands and franchisees are given representation on the panel, they will be hugely outnumbered in every meeting.

    California legislators need to find common sense solutions without unfairly targeting independent small business owners”

  2. Franchisors and franchisees will both be held liable for any breaches, and it will be significantly easier for franchisees to initiate legal action against their franchisor.

“If you establish joint liability between a franchise brand and the franchisee, what you essentially do is turn what was an independently owned and operated business into a corporate store,” said Jeff Hanscom, vice president of state and local government relations and counsel at the International Franchise Association (IFA).

“Over time, that will substantially impact and reduce franchise opportunities in California.”

This will take away the autonomy of franchisees, who have significant leeway in deciding the policies in their own stores, as long as they don’t conflict with directives from the franchisor. It is unlikely that franchisors will be able to get around the joint-ruling status by leaving franchisees to themselves and offering minimal support.

Why the franchising industry is afraid of the Bill

The Fast Food Sector Council

The panel would have the power to set new standards in terms of wages, working conditions, hours and health and safety standards, exclusively in the fast food industry. This is a power that currently lies with the California legislature, and the Bill aims to give that power to an unelected council of 11 members, the majority of whom are labor-friendly.

The central, fundamental aspect of franchising is business ownership. Franchisees approach franchising because it allows them to own and run a business without putting years of legwork into marketing, operations and scaling.

“It’s a two-part bill. The first part sets up the wage council, and then the second part establishes joint liability between franchisors and franchisees,” said Hanscom.

“The second part of the bill is the biggest issue for franchising, because it dismantles the franchise business model.”

Joint-liability

Franchisors use the franchise model to scale up rapidly, by going into business with many partners who take on the responsibility of running an established brand and set of operations for a regular fee, or share of the revenue. The bargain struck means both parties are happy, and get what they want.

“The franchise model generally provides entrepreneurs with a license to use a known brand with which they can own and operate their own business, but that does not mean that franchisors play an active role in managing that business,” said Fisher.

“To legislate that every franchisor is by default a joint employer with its franchisees, as the FAST Act attempts to do, is to impose tremendous cost and liability pressures on independently owned and operated businesses.”

This would upend that model, and leave franchisees as nothing more than general managers of fast food locations in California. Franchisees won’t even have the option to indemnify franchisors against legal action.

“If a franchisor is liable for whatever happens in each franchise unit, as it is in a company-owned location, it might as well own the unit,” said Fisher.

“This also makes the cost of doing business in California dramatically higher, because it needs to factor in the possibility that it may have to defend and potentially be liable for all franchisee’s labor violations.”

It’s also key to note that the bill is being advanced by Lorena Gonzalez, a longtime labor advocate herself. Gonzalez has successfully led many efforts in the state to provide extra protections, including a higher minimum wage but is most well known in franchising for advancing AB 5, the joint-employer test, which gave employee status to independent contractors. Service Employees International Union (SEIU) are widely considered to be the authors of the bill.

While this Bill targets the fast food restaurant industry now, it’s not unreasonable to believe that those behind this Bill will make attempts to apply it to more industries.

How the Bill was defeated in 2021

The Bill has been defeated once – in July 2021. To pass, the Bill required 41 votes, but it only managed to gain 38. The thin margin meant that it was still viable, and with careful campaigning and support, those three votes could be made up before the California legislature meets up again.

“If you establish joint liability between a franchise brand and the franchisee, what you essentially do is turn what was an independently owned and operated business into a corporate store”

The International Franchise Association (IFA) teamed up with the California Restaurant Association to create the ‘No Takeout Takeover’ campaign. Over 50 business organizations signed up to the campaign tried to educate voters on the issues raised by the proponents of the bill, and present their side of the argument.

It was a successful argument, as the Bill was defeated at the time, but not thoroughly enough to kill off all hopes of it returning.

Legislators must do better

The way in which foodservice workers are recounting their days at work, their experiences with management has rightly urged lawmakers to look at their remuneration and working conditions. Franchisors want to learn too, and are offering employees more and more benefits, a pathway to a brighter career and in many places and a higher rate of pay.

The approach taken to this problem by the California legislature does not lend itself to a collaborative atmosphere, it’s created a standoff, in which nobody stands to gain. Imposing conditions and unelected layers of powerful bureaucracy will only serve to harden franchisors’ views, and validate the idea that certain lawmakers are ‘anti-business’.

“Like employees in all industries, California’s food service workers deserve to be treated with respect and to be compensated fairly for their work, and any common-sense measures aimed at those goals should be vigorously advocated for and applauded,” said Fisher.

“This proposed legislation, while purporting to be a “recovery” bill, would actually reverse the California restaurant industry’s already delicate comeback. California legislators need to find common-sense solutions without unfairly targeting independent small business owners.”

If the Bill passes as is and becomes law, there is no doubt that there will be a slowdown of F&B brands expanding into California, and some may even find the rulings of the new Fast Food Sector Council will leave their business at a loss. There is also the further risk that the fast food sector is just the beginning. Lawmakers, encouraged by their victory against a mammoth industry, will soon attempt to do something similar in other industries.

Many franchisees will lose the will to continue their business. Whilst previously enjoying a degree of freedom, the FAST Act will render them corporate middle managers of a location and not the business owner they signed up to be.

“We are all for appropriate worker protections. If there is an issue with the enforcement of existing laws, then let’s focus on enforcing what’s on the books in a more impactful way. California has one of the most robust worker protection apparatuses in the country, from a statutory and regulatory perspective,” said Hanscom.

“If the issue is that workers are not being afforded the appropriate protections under existing laws and regulations, then let’s focus our efforts on enforcing those laws and regulations.”

Workers, legislators and franchisors alike must work together in good faith. Attempting to create a system that allows one party to penalize another will only breed resentment, and in the long-run, serves to suffocate an entire industry.

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