“Some day, California’s going to fall into the ocean” usually refers to the San Andreas fault. Now it may refer to AB-5, and the future of the franchise industry in California.
The California legislature has now passed AB-5, and Governor Newsom has signed it into law. AB-5 codifies the Court’s decision in Dynamex Operations West v. Superior Court of Los Angeles, 4 Cal. 5th 903 (2018), which horrified the franchise industry last year. Application of Dynamex’s A-B-C employment test to the franchise model will likely result in most franchisors being deemed the employer of its California franchisees’ employees.
Opposition to AB-5, including organized opposition from the franchise industry, despite monumental efforts, has resulted in vague promises to “fix” the law in the next legislative term. But what aspects are amenable to revision, and whether California legislators will rally behind amending legislation, are anyone’s guess. Many commentators have discussed the implications of AB-5’s codification of the Dynamex ruling, but how to plan for the sweeping impacts of the law are less frequent topics. Business as usual is one choice, but wise franchisors aren’t holding their breath and waiting for a legislative fix. They are beginning to act now.
What can/should franchisors do now? How AB-5 will be enforced is anyone’s guess. In the immediate face of uncertainty, franchisors with only a small number of franchisee units may withdraw or refuse to locate in California; large, sophisticated franchisors may curb expansion in the state.
Withdrawal is an extreme choice, and undoubtedly faces legal hurdles, at the very least those imposed by franchise agreements. Stalling any future expansion is a relatively easy choice. But if a system already has a healthy population of franchisees, what else might a franchisor do?
Does it make sense to quarantine a franchisor’s California system into a separate corporate entity? That may not change the situation in California, but the specter of joint employment might not taint the system in other states. The existence of a separate California franchisor entity might also create more agility in the system, as the full implications of AB-5 develop or the “legislative fix” becomes a reality. Agility will be at a premium as the franchise industry responds to a changing legal environment. Planning needs to begin now, and aimed for expeditious implementation.
This is the first in a two-part post regarding AB-5. The second post will discuss important considerations in planning for joint employment implications as well as insurance concerns.