As noted in our first post on this topic, California’s AB-5 codified the employment test set forth in Dynamex Operations West v. Superior Court of Los Angeles, 4 Cal. 5th 903 (2018). Although the full implications of this new law are unclear, it will like have a major impact on the franchise industry.
If, as widely expected, AB-5 means that most franchisors will be considered joint employers of their franchisees employees, there will be both disadvantages and advantages . With the inevitability of joint employment, a franchisor might consider more closely monitoring a California franchisee’s employment practices, providing guidelines for hiring, firing, scheduling, and the myriad of other practices that affect franchise staffing. Against the possibility of greater control over employee practices, however, is the inevitability of increased cost and risk to the franchisor and franchisees. Will franchisors be willing to bear these costs, or will they be passed through to franchisees? Surely the latter. Royalty rates, franchise fees, and other in-term fees are likely to increase, if and when individual franchise agreements permit it.
In the short term, however, franchisors will reasonably turn to insurers. The risks exposure can affect franchisors across multiple lines of coverage. The biggest impact will most likely be felt in the EPLI and franchisor E&O insurance areas of coverage. At the outset, it is more important than ever that franchisees carry EPLI insurance. Bear in mind that “additional insured” status for the franchisor is typically not available on franchisee EPLI insurance policies. A few carriers today will provide a sublimit of coverage for the franchisor under the franchisee’s EPLI policy for joint employer issues.
Franchisors should carry their own EPLI coverage as well if the courts determine the franchisor to be a joint employer. However, potential expanded joint employer liability exposure under AB-5 could impact a franchisor’s ability to secure affordable and adequate EPLI coverage. Franchisors should contact their broker to discuss insurance options in light of AB-5.
AB-5 was intended to benefit workers, including franchise employees, who are viewed as underpaid and overworked. Regardless of one’s opinion of the veracity of the assumption, the ultimate effect of AB-5 may be quite the opposite. The law may result in fewer franchisee employers, fewer employment positions in franchises, fewer entry level employment positions, and increased costs and control for franchisees who continue to operate in California. Is that really what the California legislature intended?
This is the second post regarding AB-5. The first post, which can be found here, discusses the law itself as well as suggestions for franchisors with existing franchisees in California.