Hot on the heels of disappointing AB-5 news from California, a federal district court in Manhattan delivered a stinging rebuke to the Department of Labor (“DOL”), invalidating the control-based joint employment rule issued by the Department only 6 months ago.

The DOL Rule adopted a control-based test of joint employment for purposes of federal employment law, in particular the Federal Labor Standards Act (“FLSA”). The Rule was strongly cross-current to states legislative actions adopting versions of the ABC joint employment test, e.g., California’s AB-5 legislation, and encouraged franchisors and franchisees to believe that the franchise business model might escape the worst impacts of these state actions. In Biblical terms, joy has turned to weeping.

Almost immediately after the DOL Rule issued, a coalition of Attorneys General from 18 states challenged the Rule’s validity. On September 8th, a federal Judge largely agreed with the AGs in a 62 page opinion in New York v. Scalia, on the issue of vertical employment. Of course, it is the vertical test that’s critical in the franchise industry. The DOL got that test wrong on all fronts, the Court opined. Not only was the process of adoption deficient, but the substance ignored the language of the FLSA by impermissibly narrowing the Act’s joint employment standard.

The DOL has not raised the white flag in response to the Court’s ruling; instead it has signaled defiance: “We stand by the Rule and are weighing all options.” An appeal is apparently not an option, another attempt at rulemaking by the DOL will take time that this Administration may not have, and traversing the Court’s objections would be a tall order given the Judge’s detailed and closely reasoned exegesis of the FLSA, its purposes, history and implementation over its 50+ year history. It particularly rankled the Judge, it seems, that the Rule effectively exempted the franchise model from the joint employment definition.

Where does this leave the franchise industry and the many thousands of people whose employment depends on the success of the model? On the hot seat. While the current DOL is highly unlikely to press for enforcement of the FLSA using the prior joint employment test, a future Administration may do so. States that have adopted an ABC joint employment test, on the other hand, may become emboldened to push state enforcement efforts.

A glimmer of optimism might be found in 7-Eleven’s very recent (September 10th) escape from a misclassification suit in Massachusetts, Patel v. 7-Eleven. Relying on Massachusetts’ Independent Contractor Law (“ICL”), codifying the ABC joint employment test, a group of 7-Eleven franchisees alleged they had been misclassified as independent contractors rather than employees. The crux of the case was the impossibility of harmonizing the legal requirements imposed on franchisors under federal law with the presumption of employment in the Massachusetts ICL law. As the Court reasoned, it was impossible for any franchise to satisfy the first prong of the ABC test, requiring a demonstration that the independent contractor is free from the principal’s control, given that the FTC franchise rule only applies to relationships in which the franchisor exerts a significant degree of control over, or provides significant assistance to the franchisee in its method of operation. Those same characteristics would prevent 7-Eleven and other franchisors from meeting the first prong of the ICL. Every franchise relationship would by definition constitute an employment relationship under the ICL. The ICL thus irretrievably conflicted with federal law. Happily for 7-Eleven, the Court held that federal law must pre-empt application of the Massachusetts ICL.

The 7-Eleven case offers a glimmer of hope to franchisors facing state law enactments of the ABC joint employment test. But the Court’s decision in 7-Eleven would lead to exactly the result feared by the Scalia Court – franchises would be could never be joint employers under an ABC test.

Joint employment standards truly are in chaos, and the future is even less predictable than before. As the saying goes, “watch this space,” but with trepidation.

As if COVID, wildfires, and heat weren’t enough, California franchisors and franchisees suffered another gut punch when the legislature rejected a proposed franchise exemption to AB-5.

When AB-5 was enacted in 2019, to the horror of the franchise industry, it appeared to create a presumption that the franchise business model created an employment relationship between franchisor and franchisee and franchisee’s employees. The Bill’s sponsors in the Assembly disclaimed any intent to interfere with positive business relationships that allow small businesses, including franchised outlets, to continue and pledged to address the issue in future amendments to the law. The apologetic statement, promising amendments, temporarily calmed the waters.

Then COVID attacked, and the industry focused on survival in the wake of quarantine orders and massive unemployment. Now, just as the world adjusts to a new reality, word emerges from the California legislature that there will be no franchise exemption to AB-5. An early draft of AB-5 amendments included a franchise exemption, but the provision died as amending legislation wended its way to enactment. Amplifying the AB-5 adversity is the risk that the Dynamex case, which presaged AB-5, will be applied retroactively, exposing those considered employers under the test codified in AB-5 to years of prior year employment tax exposure.

Commentators blame/credit unions for the exemption’s demise, but the source hardly matters. What does matter is that franchisors and franchisees will need to again reassess their approach to franchising in California’s AB-5 environment. The lure of access to the fifth largest economy in the world enhances the risks inherent in making the wrong decision.

In a 2019 alert, “New California Law Imperils Franchise Model,” my colleague Elle Gerhards and I noted a few possible actions by franchisors and franchisees in the wake of AB-5, none of them palatable. Franchisors and franchisees need to reconsider frankly discouraging choices: (a) bow to pressure and change to an employment model; (b) cling to the franchise model, but redefine obligations and change the financial model; (c) withdraw from California. There is a raft of nearly-impossible steps that would be required to implement significant changes to the franchise business model, not the least of which are the contractual underpinnings of the franchise relationship.

Now, with no apparent hope that a franchise business model and AB-5 can co-exist, will franchisors begin the agony of decision-making? What is the future of the thousands of California franchisees and their tens of thousands of employees in the process? Millions are unemployed in the wake of COVID; is now the time to add thousands more to the ranks?

As if the global pandemic was not enough to cause franchisors and their attorneys heartburn, the North American Securities Administrators Association released a commentary titled “Disclosing Financial Performance Representations in the Time of COVID-19” to add another spice to the stomach turning situation. While it provides franchisors with recommendations on evaluating existing FPRs, it does not exactly provide guidance on what to do after you conduct that evaluation. Should a franchisor leave their FPR as is if there is not a material difference between the 2019 and 2020 results? What constitutes a material difference in results? How do you explain to state examiners that a reasonable basis still exists for your historical FPR presenting 2019 data? If you choose to amend your FPR, what information should you include? How can you explain the circumstances of the situation without using illegal “disclaimers”?

If you have these kinds of questions, we encourage you to attend Megan Center’s presentation at the IFA Virtual Legal Summit being held from August 12-13. This summit covers a whole host of issues plaguing the franchise industry both COVID related and non-COVID related, including this all important FPR consideration. The panel features three experienced private practice franchise practitioners and one in-house practitioner that are dealing with these issues on a day-to-day basis. We will provide practical guidance and options on how best to revise and structure your FPR during this incredibly uncertain and tumultuous time and tactics on how to address state examiner comments. We hope you will take the time to attend and hope you take a few nuggets of advice with you!

My vote is YES! In fact, I think they are essential! I thus respectfully disagree with my partner and colleague John Gotaskie.

John appropriately focuses on three stakeholders in discussing immunity legislation: business operators, employees and consumers. In my opinion, COVID immunity laws are critical to franchisors, franchisees, franchise employees, and consumers.

COVID has pitched a small nuclear device into the franchise industry. Overnight everything changed. Franchisors and franchisees were faced with shut-down orders, obtaining needed inventory and supplies became problematic, some businesses retooled to offer contactless and/or delivery services, employees needed protective equipment, facilities needed to be adapted, and new distribution methods too often required additional investment. In short, doing business became more expensive and more complex, at the same time that revenues decreased. Now those same businesses face the challenge of reopening even as the COVID threat persists.

There is a regrettable absence of cohesive guidance on reopening safely. A franchisor trying to advise its franchisees, and a franchisee trying to protect its employees and guests, bear the risk of critical decisions that must be made in the regrettable absence of clear guidance. And what guidance there is changes frequently, sometimes for apparent political reasons and sometimes because medical professionals are learning more about the virus every day. While some businesses may take unfair advantage of the absence of clear rules, I believe the vast majority of businesses will strive in good faith to protect itself, its employees and its guests, even though at the cost of added expense. Opening safely benefits every business.

I agree that a “reasonable effort” standard of compliance with any standard, and excusing all but “gross negligence” go too far, but I strongly disagree that the answer is narrow immunity. Nixing broad immunity legislation, save the ephemeral (and impossible) ideal statute, helps no one. In addition to exposing franchisors and franchisees from the additional costs of reopening, the absence of expansive immunity legislation exposes the industry to the unknown and unknowable expense of litigation based on varying legal standards. Insurance costs can be expected to skyrocket, again at the expense of the business operator. When will the additional expense so overburden a business that it will not reopen . . . or will close? Losing businesses that employ millions of people, especially as the millions who lost their jobs because of the pandemic need to return to work, will not help the economy or consumers – who are themselves employees.

John argues that broad immunity legislation will discourage consumers who fear the virus from staying away from businesses. In truth, what will keep consumers at home is the degree the virus is controlled in the entire community. It’s just as Fed Chairman Powell explained: “The path of the economy is going to depend . . . on the measures we take to keep [the virus] in check.” That path demands attention to both medical and economic issues. It’s a difficult calculus, but if businesses are expected to reopen despite the ongoing pandemic (and that is another philosophical discussion), businesses must be protected from the lack of consistent federal guidance. Good faith efforts to comply with reasonable guidance should be rewarded with generous immunity.

The Senate HEALS Act includes a level of immunity that may be too broad. But the House’s HEROES Act and the Senate’s HEALS Act (assuming it emerges substantially in its present evolving form) will be the subject of Congressional negotiations. With the ameliorating effect of the House, a better immunity bill, one that sets a clearer standard for compliance, should emerge.

That’s the kind of business immunity that the franchise community needs!

(This post solely reflects the views of the author, and not that of Fox Rothschild or any of its other attorneys.)

While I am not opposed to immunity laws generally, I am not fan of immunity that is too broad. Given that stance, I have grave concerns about the liability protections and COVID immunities being offered to business in the context of the HEALS Act and other legislation at the Federal and state level. Why? Because I am not sure they will help, and they sure could hurt. We as a franchise industry should want our customers to feel comfortable and confident when coming to shop, dine or otherwise visit our establishments. And we should want our employees to feel completely safe, and to be safe, when they come to work.

The issues with the current COVID immunity proposals are, I believe, three-fold. First, the HEALS Act establishes the standard of “gross negligence” to even get into the courtroom. (There are actually several more hurdles to legal access, but this is the biggest.) This is an extremely high standard for anyone wishing to challenge the grant of immunity. As one law professor I heard interviewed on the radio pointed out, gross negligence is the equivalent of a drunk driver driving the wrong way on very busy freeway. In other words, it is a standard nearly impossible to meet. Such a standard may sound great from a liability protection point of view. But I expect it will be counter-productive and discourage the public from coming back to restaurants and retail establishments.

Second, the HEALS Act doesn’t set any standard for the level of protection of consumers and employees that needs to be provided in exchange for the immunity protection. The House bill passed last month directs the creation of national standards and compliance with them in exchange for qualified immunity. The HEALS Act, in contrast, merely requires “reasonable efforts” toward compliance with voluntary standards. Moreover, it allows for the use of the lowest standard available in your jurisdiction—such as a lower state or local standard. Again, while such a standard sounds attractive on the surface and may be easier with which to comply, it is unlikely to do much to encourage the public to return to dining out or shopping robustly again.

Third, based on data from Open Table and the credit card industry, reservations and spending at retail establishments, and particularly at restaurants, go up and down depending on the severity of the coronavirus in a region. Immunity exemptions, when the coronavirus is not under control, are highly unlikely to alter that behavior—and might actually cause fearful people to stay home.

Chairman of the Federal Reserve Jay Powell said recently that, “The path of the economy is going to depend, to a very high extent, upon the course of the coronavirus and on the measures we take to keep it in check.” Qualified immunity waivers coupled with strict COVID regulation make sense, are likely to assist in control of the virus, and as such, are likely to support an economic rebound. Unfettered immunity waivers have the risk of prolonging the crisis and preventing a robust economic recovery. I know which path I choose. How about you?

This is like watching sausage being made – it isn’t pretty. The House passed its $3 Trillion COVID rescue package (the HEROES Act) about a month ago. But the Senate’s HEALS Act is still a work in progress with an unpredictable future. And of course the internally split Senate must negotiate final legislation with the House. In the meantime, workers and businesses are forced to battle the virus, navigate challenging re-openings, and handle employment complications without much comfort as to future relief. Franchisors and franchisees are clearly not immune from this conundrum.

My crystal ball is no clearer than anyone else’s, but sifting through the various reports, opinions and rumors surrounding the fate of COVID Relief 3.0 suggests some features that are likely to appear in a compromise bill, including:

*          Permitting second PPP loans to certain businesses dependent on the level of revenue loss experienced by a business over a set period of time – although both the revenue loss level and the applicable period of time remain matters of debate (some Senators supporting a second round only if a business demonstrates a revenue loss of at least 50% while other supporting a lower threshold).

*          Forgiving PPP loans under $150,000 on the borrower’s attestation of use.

*          Expanding permissible uses of PPP funds to restart necessities, e.g., PPE, cleaning, etc.

*          Expanding the deadline for borrowers to apply for PPP loans (already extended over the short term).

*          Making direct payments to low income Americans, although the amount of the payment is undecided.

Note that I did not refer to putting more money into the PPP pot. The House provided for additional funds, but thus far, the Senate has not. That’s just one of many items that’s undetermined, and it’s a big one – will there be more PPP money or not?! Admittedly, there’s money left from PPP 2.0, but will there be more funds to help businesses bear the costs of preparing for a return to business, or will it be a first-come, first-served rush (similar to the experience with the initial PPP loans) to use what’s left?

While the Senate resists adding money for small business (and many franchisee) PPP loans, the HEALS bill in its present form reflects some traditional Republican policies, e.g., tax credits for certain COVID-related expenses (e.g., PPE) and PPP expenses being deductible. These ex post facto changes don’t really help a business financially bear the expenses in the first place.

Two key battlegrounds affecting businesses broadly, franchise and non-franchise, big and small, are the continuation of expanded unemployment benefits and COVID liability protection for businesses (and medical providers). Even within the Senate, these items are still being debated.

The House HEROES act generally extends current enhanced unemployment benefits, including the $600 sweetener, through December 31st. The Senate extends unemployment benefits generally, but is not sanguine with the $600 enhancement, arguing that it discourages a return to the workplace. It looks like the Senate is debating a few approaches to the $600 enhancement issue – no enhancement, a $200 enhancement, or a scaled enhancement based on average salaries in each state. As some commentators have observed, anything other than a continuation of the $600 enhancement would result in a delay in payments to workers, as state payment systems would need to readjust to the new amount. The scaled enhancement approach would result in the longest delay; it would require Congress to explain the scaling method to states, and then states to perform and implement the change. Still, this debate is along lines familiar to legislators – money.

Business liability protection is a far more complex argument. The Senate and the administration are insistent on broad immunity for businesses and medical providers for COVID claims, establishes gross negligence as the only basis for recovery, preempts state law standards of liability, and proposes a cap on damage awards. The House HEROES act does not include business immunity provisions. The philosophical divide is a sharp one – will immunity dissuade businesses from compliance with what may be expensive COVID protections for employees and guests, or will the absence of immunity dissuade businesses from reopening at all? Is there room somewhere in the middle for narrow business immunity, perhaps measured against known, authoritative and accepted standards? It’s worth noting that many states have already enacted some form of business immunity from COVID suits, but getting the Senate and House to bridge this divide will be a good trick.

This sausage is not even mixed; it won’t go on the grill until the House and Senate can negotiate its ingredients. And there’s little to no indication of imminent meaningful negotiations. Congress appears to agree that COVID Relief 3.0 is needed, but given the divisions in the Senate and the chasm between House and Senate, the answer to our heading may be:

HEROES + HEALS = a messy stew.

Five years ago, “Bitcoin”, “blockchain”, and “cryptocurrency” were not in the common lexicon.  Five years ago, Bitcoin, the seminal cryptocurrency, was valued at approximately $275.00 (a staggering 2,749,900% return on investment for those who obtained it for less than a penny in 2010), but very few accepted it as a method of payment.  In fact, the first person to buy a pizza with Bitcoin, a Florida programmer, had to route his transaction through England.

Bitcoin (BTC) captured the public’s attention when its value neared $20,000.00 in December 2017, taking other crypto-currencies along for the ride up  . . . and then down as Bitcoin sunk below $3,500.00 one year later.  The high valuations encouraged the creation of speculative “altcoins” (alternatives to Bitcoin) sold to investors in “ICOs” (initial coin offerings) until the Securities Exchange Commission and Commodity Futures Trading Commission took an increased interest, thus tamping down the euphoria.  Today, there are thousands of cryptocurrencies; but the top 10 represent approximately 85% of the crypto market, and Bitcoin aka “crypto gold” dominates the field.  Bitcoin’s market cap of $175+ billion is more than double that of all other cryptocurrencies combined.

Franchise Unit and System owners can therefore appreciate the value of cryptocurrencies like Bitcoin as an investment, even if the Chairman of the SEC famously refused to call it a “security” in 2018.  But what about the value of Bitcoin (or other cryptocurrencies as a means of payment, a medium of exchange?

For many, Bitcoin’s volatility precludes its use as a means of payment.  (Interestingly, the price of Bitcoin, has stayed relatively stable since May, hovering between $9,000 and $10,000.)  “Stablecoins”, cryptocurrencies backed by a reserve asset or basket of assets, have risen as an answer to the stability issue.  The most used stablecoin is currently Tether (USDT), a stablecoin tied to the U.S. Dollar, which now exceeds Bitcoin in daily volume.

Tether is a centralized cryptocurrency (not an oxymoron) run by a private company, Tether Limited.  While there are different Tether coins, the chief one is USDT, tied to the U.S. Dollar.  Tether maintains that every USDT is backed by the equivalent of $1 in reserves of traditional currency or other cash equivalents.   Perhaps Tether cannot be trusted to maintain the ratio any more than a bank, but it is the chief way to exchange digital “dollars” until the U.S. adopts a digital dollar . . .

Which may be coming very soon.  Committees in Congress (e.g. Senate Banking, Housing and Urban Affairs Subcommittee on Economic Policy and the House Financial Services Committee) have begun talking seriously in hearings about the benefits of digitizing the U.S. Dollar.  Perhaps buzz has been spurred by the nascent Digital Dollar Project, a think tank, which released a white paper earlier this year.

Meanwhile, in a major development this week the Office of the Comptroller of the Currency wrote in a public letter that nationally chartered banks in the U.S. could provide “cryptocurrency custody services, including holding unique cryptographic keys associated with cryptocurrency,” which may extend beyond passively holding cryptocurrency keys.  This provides an alternative from existing ways to “hold” cryptocurrency; you can now entrust a nationally chartered bank to “hold” your cryptocurrency as opposed to holding it on a cold (offline) or hot (online) wallet.

The future will likely see increased adoption of currencies secured by cryptography, with one or a select few of them going mainstream.  Savvy business owners should begin learning about this topic now, if they haven’t already.

I blogged a while ago about the Green Phase of reopening in Pennsylvania, and how it did not mean “go” but something more nuanced. Something like “proceed with caution”. Today, Governor Wolf called for even more vigilance, out of concerns based on modeling done by Children’s Hospital of Philadelphia showing that the coronavirus is sweeping back into the Northeast from the South and West.

Consequently, effective July 16, 2020, at 12:01 am,  Governor Wolf has issued a new order directing targeting mitigation efforts. The stated goal is to avoid the dramatic “spike” in cases seen in other states.  Here are the highlights of the order:

  • Bars and Restaurants. Take out and dine-in service, both indoor and outdoor, as well as delivery are permitted to continue, with the following restrictions:
    • No service of alcohol without a food order, unless alcohol is purchased for take-out.
    • Service must be at a table or booth. No bar service is permitted.
    • Alcohol and food sales must occur in the same transaction.
    • Occupancy is limited to 25 percent of fire-code maximum for indoor dining OR 25 persons total for a discrete indoor event.
    • Maximum occupancy limit includes staff.
  • Nightclubs.
    • All nightclubs, as defined in the Clean Indoor Air Act, must cease operations.
  • Teleworking.
    • Unless not possible, all businesses are required to conduct their operations in whole or in part remotely through individual teleworking of their employees in the jurisdiction or jurisdictions in which they do business.
    • Where telework is not possible, employees may conduct in-person business operations, subject to requirements of the business safety order, worker safety order, and the masking order.
  • Gyms.
    • Gyms and fitness facilities, while permitted to continue indoor operations, are directed to prioritize outdoor activities. All activities must following masking order requirements and social distancing of at least 6 feet apart.
  • Events and Gatherings.
    • Indoor events and gatherings are limited to 25 persons.
    • Outdoor events and gatherings are limited to 250 persons.
    • Like restaurants, total limits include any staff.

Finally, more restrictive local rules–such as those currently in place in Allegheny and Philadelphia Counties–may remain in place.

Key takeaways from my partner, Odia Kagan’s recent presentation titled “Service Providers v. Data Processors: What Should Your Agreement Address?”  with Lexology and Exterra:

  • As the “business,” the “buck stops with you” as it relates to liability to the individual customer respecting processing their data.
  • Between you and your service provider/data processor, you can and should impose liability for tasks that you are engaging them to do for you.
  • To comply with your legal obligations under the General Data Protection Regulation, California Consumer Privacy Act and other data protection laws, be sure to perform due diligence on the vendor and ensure that they can deliver to the standard you need.
  • When performing the due diligence, cover both information security (How will you protect my data from unauthorized access?) AND privacy (What are you allowed to do with my data?)
  • Enter into a data processing agreement with your vendor. GDPR and CCPA have different requirements. You need to make sure that your concerns are addressed.

You can watch a recording of the really outstanding presentation at your convenience via this webinar link.

In Part 1 of this series, we discussed the recent actions taken by Congress regarding the PPP program as well as the efforts by the Fed. In today’s post, we dig deeper into the challenge by state Attorneys General to the Department of Labor’s final joint employment rule moved forward in the Southern District of New York, and the North American Securities Administrators Association issued guidance on financial performance representations in light of the Coronavirus.

States Litigate: DOL joint employer rule challenge continues

At the beginning of January, the Department of Labor issued its final joint employer rule, rejecting the ABC approach applied in California and other states, in favor of a four factor control test. That triggered an action in the Southern District of New York, State of New York et al v. Scalia, No. 1:20-cv-01689, by Attorneys General in the ABC states of New York, Pennsylvania, California, Massachusetts, New Jersey, Illinois and the District of Columbia, challenging the rule. The DOL moved to dismiss, alleging the AG’s lack of standing to initiate the action. In another early June action, however, the Court rejected the DOL’s motion. The suit will continue.

NASAA Speaks: Offers Item 19 guidance

            Spring is franchise registration renewal season. Of course, this renewal season brought a raft of questions about the effect of the coronavirus. Especially problematic was Item 19 Financial Performance Representation. How should an FPR reflect the actual and potential effects of the pandemic?

In another June billet doux, the NASAA offered its guidance. Most reasonably, NASAA acknowledged that its crystal ball was no clearer than anyone else’s and that the ultimate course of business post-virus was anyone’s guess. Some franchise systems are suffering a steep revenue slide, while others are enjoying increased revenues; there is no common experience across the industry. Thus, it is “impossible at this time to provide . . . specific guidance to franchisors about making a Historical FPR in 2020 and beyond.” NASAA did offer some specific guidance to franchisors, however, including:

*          If franchise outlets have experienced material changes in financial performance, the FPR must be updated to reflect the changes.

*          If permanent changes will be made to the business model (e.g., delivery and take-out) that will materially impact an historical FPR, the FPR must be updated to reflect those changes and their impact on financial performance.

*          If an historical FPR is made on pre-pandemic data, a franchisor must disclose that fact by stating that the historical FPR is not representative of what a franchisee can expect post-pandemic; that the franchisor cannot predict post-pandemic performance; or that the franchisee should not rely on the historical FPR disclosure.

Finally, confirming the experience of many, NASAA advised that franchisors should expect comments from regulators on the issue.