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.