The FAST Act is in limbo pending the outcome of a California ballot repeal initiative. Undaunted, the Legislature has excised key provisions of that Act and positioned them for separate enactment as AB 1228, introduced by California Assembly Member Holder on February 16th.
Gone from AB 1228 are the controversial unelected local councils, empowered to dictate working conditions, hours and other matters, that were a feature of the FAST Act. Yet AB 1228 includes some aggressive provisions. The Bill would:
- Create joint liability between franchisors and franchisees all “civil legal responsibility and civil liability” for the fast food restaurant franchisee’s violations of a long list of California statutes, orders and regulations, particularly employment and labor laws.
- Allow direct action against the franchisor for franchisee violations, after 30 days’ prior notice, during which time the franchisor has an opportunity to cure any alleged violation. The “cure” would require the franchisor to “abate each violation alleged and ensure that its fast food franchisee is in compliance with the underlying laws, orders, rules, or regulations specified in the notice, and that any fast food restaurant workers against whom a violation was committed is made whole.”
- Declare invalid and unenforceable any contractual provision requiring the franchisee to indemnify the franchisor or waiving the provisions of the Act.
- Create a statutory cause of action against a franchisor if a requirement or mandate of the franchisor “prevent[s] or create[s] a substantial barrier to a franchisee’s compliance” with the identified laws. The Bill identifies as one actionable barrier a franchisee’s financial inability to comply, and a franchisee may seek injunctive or monetary relief from the franchisor “as necessary to ensure compliance.”
- Establish a rebuttable presumption that any changes in the terms of the franchise that result in increased costs to the franchisee “create a substantial barrier to compliance. . . .”
These provisions would essentially redefine the franchisor-franchisee relationship for fast food franchisees. Bypassing the “employee” or “franchisee” definitional argument, AB 1228 thrusts the franchisor in the de facto role of employer, insisting that the franchisor bear responsibility for violations of state law (particularly labor and employment laws and regulations). It is the franchisor, not the franchisee, who must step into the franchisee’s operations and effect a statutory cure of all “alleged” violations within 30 days. This leaves precious little time to both challenge the claimed violation and prompt the offending franchisee to take action.
Nor would the franchisor be permitted to seek indemnification by the franchisee; those contractual provisions are declared inoperative.
Finally, and perhaps most intrusively, AB 1228 would allow a franchisee to sue the franchisor in the event any contract provision or change in the system is a barrier to franchisee’s compliance. In such an action, a franchisee may claim that the profit margin he realizes from operations are insufficient to fund compliance and seek a judicial remedy, specifically including monetary or injunctive relief. And the franchisor in that action would face a rebuttable presumption that any change in the franchise creates a barrier to compliance.
Where to start? The franchisor must assume liability for violations of the identified California laws; the franchisor must perform the franchisee’s compliance duties; the franchisor must financially bear the liabilities for violations; the franchisor must ensure that the franchisee can afford any system changes; and the franchisor cannot seek indemnification from the franchisee. All of this is regardless of the provisions of the franchise agreement, which will be judicially or administratively rewritten to shift these responsibilities to the franchisor.
As a practical matter, AB 1228 transforms the franchise agreement into an employment agreement, and an employment agreement that is subject to change by governmental decree. It mandates close control and affirmative action by the franchisor over employment, labor and other operational matters.
Franchisors and franchise industry organizations will undoubtedly launch vigorous campaigns challenging the logic and effects of AB 1228. But recall that those efforts did not divert the Legislature from enacting the FAST Act; it was only the success of a repeal petition that stalled its implementation. Without the hot button local council feature that fueled the repeal efforts, will the more subtle but deeply affecting provisions of AB 1228 enflame public outrage?
Sadly, California is not the only state legislature considering separate enactment of some FAST Act provisions; New York and Virginia are reportedly considering partial FAST Act legislation. While not all will go as far as AB 1228, most feature at least the joint civil liability feature. There will be many upcoming battle sites.