The Covid-19 pandemic has changed a lot of things, including employment verification. Does your franchise system understand the special provisions the federal government instituted in the I-9 Employment Eligibility Verification process as a result of the pandemic? If not, you could quickly find yourself on the wrong side of the law.

Join Fox Immigration Partners Catherine V. Wadhwani and Mark D. Harley on Tuesday, October 5, 2021, at 12 noon ET/9 am PT for a one-hour webinar that will provide an overview of current Form I-9 requirements, appropriate steps for return-to-work and potential liability for non-compliance.

Register for the webinar HERE.

While the Protect the Right to Organize (PRO) Act was passed by the House of Representatives, it has not been made part of the Biden administration’s infrastructure efforts thus far and does not appear have sufficient support to overcome a certain filibuster in the Senate. Therefore, passage of the Act in its present form is unlikely, especially because the reconciliation process being used for the so-called Biden Budget Blueprint would not seem to apply to the PRO Act.

Thus, at the same time a strong anti-PRO Act lobby appears to be gaining momentum, the administration is reportedly contemplating adopting parts of the PRO Act by executive order, although the scope of such an order would be constitutionally limited.

Whether or not the PRO Act becomes law, David Weil may be inclined to either revert to the Obama era “economic realities” joint employment standard or could propose an even stricter ABC joint employment test. Dr. Weil’s book, Fissured Employment, provided a thoughtful foundation for the economic realities standard, but whether he would support a stricter ABC test is anyone’s guess.

The NLRB is constrained by existing legislation and cannot independently adopt all the changes featured in the PRO Act, nor could an executive order command legislative changes. For example, only the PRO Act would by law embed the indirect control standard into the NLRA. That said, the Board could revise its definition of employee, as it did during the Obama era, in the course of its quasi-judicial activities. The NLRB traditionally has three members from the President’s party and two from the opposition. With staggered terms, the Board’s composition can be slow to change. However, with Biden’s recent nominations to the Board, control of the NLRB could soon change to Democratic.

Whether and how much of the PRO Act can or will be implemented legislatively, by executive order, or by agency regulation is unpredictable. The answers will determine the landscape to which the franchise industry must adapt, and certainly there will be judicial challenges to the outcome. But in the interim, the industry must prepare to survive the maelstrom.

The California version of the ABC test is arguably the most hostile to franchising. Nonetheless, the risk is not confined to California.

This is because the ABC employee classification test, with variations, has been adopted in a majority of states including, in addition to California: Alaska, Arkansas, Colorado, Connecticut, Delaware, Georgia, Hawaii, Idaho, Illinois, Indiana, Kansas, Louisiana, Maine, Massachusetts, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Tennessee, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin and Wyoming.

Despite this wave of ABC test adoption, absent federal action, such as the PRO Act or DOL adoption of an ABC joint employment test, some states are likely to retain a direct control-based employment standard. But the direction is clear: away from a direct contract standard toward the troublesome ABC test.

As if its aggressive ABC test wasn’t enough, the California legislature very recently but narrowly defeated the so-called FAST Recovery Act, designated AB 257. That Act would have established unelected councils with power to establish industry-wide standards on wages, hours and working conditions in the fast food industry. In addition, it would have established joint liability for fast food franchisors and franchisees, substituting the newly-established councils’ employment policies for those of the owner-franchisee. In an ironically positive vein, the FAST act would make it very difficult to support a theory that the franchisor or the franchisee controlled or directed the employees of fast food franchises.

The FAST Act failed by a mere three votes. It is likely to appear again.

The second troublesome threat is the joint employment standard. The Obama Adminstration DOL caused angst in the franchise industry in January 2016, when it adopted a joint employment standard that focused on “whether the employee is dependent on the potential joint employer who, via an arrangement with the intermediary employer, is benefitting from the work.” Administrator’s Interpretation No. 2016-1, U.S. Department of Labor, January 16, 2016 (the “Interpretation”) Section II B.

The Interpretation explained that “the vertical joint employment analysis must be an economic realities test and cannot focus only on control.” The Department summarized a seven factor analysis:

  • Does the putative joint employer direct, control or supervise the work performed “beyond a reasonable degree of contract performance oversight?”
  • Does the putative joint employer control employment conditions, directly or indirectly, even if such control is not exclusive?
  • Is the putative joint employer’s relationship with the employer a long-term relationship?
  • Is the nature of the employee’s work repetitive, rote, relatively unskilled and/or does it require little or no training?
  • Is the employee’s work integral to the putative joint employer’s business?
  • Is the employee’s work performed on premises owned or controlled by the putative joint employer?
  • Does the putative joint employer perform administrative functions related to employment, e.g. “handling payroll, providing workers’ compensation insurance, providing necessary facilities and safety equipment, housing, or transportation, or providing tools and materials for the work.”

The DOL’s action followed a ruling by the NLRB in Browning Ferris Industries of California, Inc., in which the Board held that a third party with indirect control could be held jointly responsible, with the direct employer, for actions taken by employees.  This was the case regardless of whether the putative joint employer had ever actually exercised such control.

The franchise industry wrestled with the “economic realities” standard through the remainder of the Obama Administration, urging the DOL and the NLRB to acknowledge the existence of bona fide franchise/franchisor relationships. The agencies ultimately did so, by focusing not only on a franchisor’s contractual right to control aspects of franchised operations, but on the franchisor’s use of that power. In 2018 the NLRB concluded in Hy-Brand Industrial Contractors, Ltd & Brandt Construction Co., that the potential joint employer must have actually exercised joint control over the employee. 366 NLRB No. 94 (2018). The Board reiterated that position in Browning-Ferris Industries of California, Inc., declaring that a joint employer must possess and exercise direct and immediate control over at least one essential term or condition of employment. 369 NLRB No. 139 (2020).

The Trump Administration DOL withdrew the Obama Administration economic realities standard and engaged in a rule-making process that reverted to a control test of joint employment. However, in May 2021, mere days before the Trump rule was to become effective, it was withdrawn by the new Biden Administration. A new rulemaking is anticipated (and feared).

Next Up: Potential State Legislation

The PRO Act would do serious, and perhaps mortal, damage to the franchise industry. It would make sweeping changes to the National Labor Relations Act (NLRA), the Labor Management Relations Act (LMRA), and the Labor Management and Disclosure Act (LMDA). Most pertinent to franchising, the PRO Act would adopt the California ABC standard for determining employment status for purposes of the NLRA.

Initiated in Dynamex Operations West, Inc. v. Superior Court, (4 Cal. 5th 9013 (2018)), the ABC standard was later a feature of Assembly Bill 5 (AB-5), enacted and codified as Section 2750.3 of the California Labor Code. Under that test, a worker is presumed to be an employee unless the hiring entity can demonstrate all of the following:

  1. The worker is free from control and direction of the hiring entity in the performance of the work, both under the contract and fact; and
  2. The worker performs work that is outside the usual course of the hiring entity’s business; and
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

Few, if any, franchisors would be able to meet all three of requirements. Thus, a franchisor would likely be deemed the employer of its franchisees and the franchisee’s employees under the ABC test, negating the essential basis of the franchise relationship. Significantly, the value of franchisees’ independent businesses could evaporate.

Exacerbating the PRO Act’s risks, misclassification of an employee’s status would be an unfair labor practice under the NLRA, with a potential penalty of up to $50,000 for each misclassified employee. Penalties could be monumental. Other union-friendly provisions of the PRO Act include the elimination of Right to Work laws in twenty-eight states and the imposition of personal liability on corporate officers and directors for labor law violations in certain circumstances.

Coming Soon: the Joint Employment Standard

Omens of the Apocalypse for the franchise industry are everywhere:

  • The pending Protect the Right to Organize (PRO) Act;
  • The return of David Weill, author of Fissured Employment and chief architect of the Obama era joint employment standard, to the Department of Labor as Wage and Hour Administrator;
  • Withdrawal of the control-based joint employment standard by the DOL, and potential replacement with an ABC test;
  • The shift of control at the NLRB, from majority Republican to majority Democratic control as early as August of this year;
  • State ABC laws, some of which are hostile to franchising;
  • An 87 page condemnation of the franchise industry by Senator Catherine Cortez Masto, urging adoption of a federal franchise statute and more robust regulation by the FTC;
  • The California FAST Act, which failed by just three votes, but will surely reappear in the next legislative session.

The franchise industry is facing challenges that strike at the heart of a vibrant, progressive business model that has allowed trademark owner franchisors and trademark licensee franchisees entrepreneurial opportunities to build wealth. The success of franchising is well-documented: nearly 800,000 franchised businesses employ 7.5 million workers; people of color, women, and veterans comprise more than 30% of franchisees; and franchised businesses generate revenues of approximately $670 billion.

My colleagues have periodically accused me of overreacting to these threats to the franchise industry, and perhaps when I began wondering whether the sky could fall, this was true. But not now. This is a perfect storm for the franchise industry. My prior blogs chronicled the accumulating challenges. I was not alone, of course. But never has the industry been in such peril. How bad could it be? The collective impact of these potential new actions go the heart of the franchisor/franchisee relationship that is the foundation of the entire industry. The ability of individuals to establish independent businesses by exploiting the good will, business acumen and know-how of brand owners (franchisors) could be destroyed.

In a series of blogs over the next couple of days, I will cover these threats in turn. First Up? The PRO Act.

Starting on July 1, 2021. the NCAA permitted student-athletes throughout the country to profit from their name, image, and likeness (“NIL”). This decision marks a major shift from the NCAA’s longstanding amateurism model.  Twenty-eight states have also enacted their own NIL laws, and sixteen of those—including Alabama, Florida, Georgia, Mississippi, New Mexico, Texas, Kentucky, Ohio, Oregon, Pennsylvania and Illinois—have signed NIL legislation to take effect in 2021 alone.

Neither the NCAA nor the federal government have addressed NIL laws, which has made for a fragmented model that varies from state to state.  For example, Georgia’s NIL law allows for team pooling arrangements whereby student athletes who receive compensation for the use of their name, image, or likeness agree to contribute a portion of the compensation they receive to a fund for the benefit of other student-athletes.  Mississippi’s NIL law even authorizes student-athletes to hire agents to negotiate marketing opportunities.

Some student-athletes have already started taking advantage of this seismic shift in college sports.  University of Wisconsin quarterback Graham Mertz recently tweeted a video of his new trademark, and University of Iowa basketball player Jordan Bohannon has a deal with a local fireworks company Boomin Iowa Fireworks. And, when you get to college football royalty like Alabama? Well, Alabama QB Bryce Young has already obtained about $1 million in endorsement deals, according to his coach Nick Saban.

Meanwhile, boosters want a piece of the action as well. Dan Lambert, the owner of prominent MMA training facilities and a huge University of Miami football fan, has offered to pay every athlete on the ‘Canes roster $500 per month this year to promote his chain of gyms on social media. Lambert has also reportedly founded a company that will raise money from local Miami-area businesses to pay athletes who endorse them.

It will be interesting to see how NIL laws change the college landscape.  Recruiting is one of many areas where NIL laws may have an effect.  For example, a highly touted prospect with endorsements deals on the horizon might be swayed from School A to School B if School B is in a state with a less restrictive NIL law.  It will also be interesting to see how colleges and universities respond to their student-athletes’ outside endorsements.  What if a student-athlete signs a contract that conflicts with the school’s pre-existing sponsors or university codes of conduct? For example, BYU has already adopted a rule that bans athletes from endorsing a product that violates its honor code which, in the case of BYU, means not just alcohol but coffee is off limits.

Still interesting in having your franchise system or franchisees get a piece of the action, so-to-speak? Compliance with myriad NCAA and state rules respecting NIL should be carefully considered, as certain moves retain the risk of disqualifying athletes and teams–something no booster who bleeds blue (or red, or green or . . . well, you get the idea) wants to cause.  That said, navigating NIL rules laws may present some obstacles, but has the potential to be a high-reward endeavor.  And it might very well add a unique layer of intrigue and drama to college sports this season.

(Parts of this post previously appeared on the Fox Rothschild Above the Fold blog.)

With Ali Brodie

EB-5 Investments are a popular way of raising capital for franchise expansion. So it came as a bit of a shock last week the EB-5 Program was rocked by two major developments.

EB-5 Modernization Rule Struck Down (For Now)

On June 22, 2021, Magistrate Judge Jaqueline Scott Corley from the U.S. District Court for the Northern District of California ruled that the EB-5 Modernization Final Rule was not lawfully promulgated because the former-acting Department of Homeland Security Secretary Kevin McAleenan was not properly serving in his position.  As a result, the November 21, 2019 regulations have been vacated thereby reinstating the EB-5 minimum investment amount for TEA investments, temporarily, to $500,000.

It is unclear how long the lower investment amounts will last.  It is possible that Department of Homeland Security will appeal the decision and it is likely Secretary Mayorkas will seek to finalize the regulations.  Until then, the earlier investment amounts of $500,000 for TEA investments and $1 million for non-TEA investments remain in place.  Potential EB-5 investors should review the benefits and risks associated with filing an I-526 after this order.  There are a number of considerations worth discussing with immigration counsel.

EB-5 Regional Center Program Not Authorized (Yet?)

The EB-5 Regional Center Program will expired at midnight June 30, 2021, because Congress has not reached an agreement on reauthorization.

An attempt by Senators Chuck Grassley and Patrick Leahy to pass the EB-5 Reform and Integrity Act of 2021 was blocked by Senator Lindsay Graham.  Despite the lapse, it is expected negotiations will continue although there is much uncertainty surrounding the timing and outcome of the negotiations.  It is important to note the lapse in authorization does not affect EB-5 petitions filed by EB-5 investors seeking benefits outside the Regional Center Program.

Today, U.S. Citizenship and Immigration Services (USCIS) issued guidance on how the agency will handle EB-5 Regional Center filings during the lapse:

  • Form I-924, Application for Regional Center Designation Under the Immigrant Investor Program:  USCIS will reject Form I-924 applications received on or after July 1, 2021 except when the application type indicates that it is an amendment to the regional center’s name, organizational structure, ownership, or administration.  USCIS will place any pending applications as of July 1, 2021 on hold.
  • Form I-526, Immigration Petition by Alien Investor:  USCIS will reject Form I-526 petitions received on or after July 1, 2021 when it indicates the petitioner’s investment is associated with an approved regional center.  USCIS will place any pending applications as of July 1, 2021 on hold.
  • Form I-829, Petition by Investor to Remove Conditions on Permanent Resident Status: USCIS will continue to accept and review Form I-829 petitions, including those filed on or after July 1, 2021.  These petitions will not be affected by the expiration of the Regional Center Program.
  • Form I-485, Application to Register Permanent Residence or Adjust Status:  USCIS will begin rejecting Form I-485 applications and any associated Form I-765, Application for Employment Authorization, and Form I-131, Application for Travel Document, based on an approved Form I-526 associated with an approved Regional Center.  The agency will be unable to act on any Form I-485 based on an approved Form I-526 associated with an approved regional center unless the Regional Center Program is reauthorized.  Further clarification from USCIS is needed as to how USCIS will handle pending Form I-765 and Form I-131 applications associated with a pending Form I-485.

Additionally, after June 30, 2021, the U.S. Department of State (DOS) will not issue immigrant visas to applicants seeking immigrant visas pursuant to an approved Form I-526 at U.S. consulates abroad.

Fox Rothschild, which has one of the most comprehensive corporate immigration law and compliance practices in the United States, will continue to monitor negotiations and other EB-5 Regional Center Program developments.

Ali Brodie blogs about immigration issues at Immigration View, where this information first appeared. Ali is a Partner and the Co-Chair of the Immigration and EB-5 Immigrant Investor Practice Groups of Fox Rothschild LLP and has extensive experience in corporate immigration law and compliance.  Based in Fox Rothschild’s Los Angeles, California and Denver, Colorado offices, Ali’s practice spans the United States and reaches Consulates worldwide.  You can reach Ali at (303) 446-3854 or at abrodie@foxrothschild.com.

Please join Elizabeth Rose of Caiola & Rose LLC, Jason Binford of the Texas Office of the Attorney General, and me, John Gotaskie, on July 14th for a 90 minute CLE sponsored by the ABA Forum on Franchising discussing Franchise Agreements in Bankruptcy Cases and Business Restructurings.

Bankruptcy and other forms of business restructuring can throw agreements that existed prior to the bankruptcy or restructuring into chaos, and franchise and licensing agreements are no exception. A 2019 Supreme Court case, Mission Product Holdings, Inc. v. Tempnology, LLC, demonstrated that when a licensor goes bankrupt, the licensee’s rights to the license (in that case a trademark) may not necessarily end. This webinar will assess the impact of that case on franchise agreements, and will also look at issues that arise when franchise agreements are terminated before the bankruptcy filing, the franchise related issues involved in the restructuring of large multi-unit franchisees both inside and outside of bankruptcy, and the impact of large restructurings on the franchisor’s and franchisee’s ability to obtain credit. We will also address the different types of issues that bankruptcy can—and cannot— effectively address, along with the reasons why Subchapter V might be useful to consider as we exit from the COVID pandemic.

So yesterday I discussed some background related to anti-poaching and non-compete law. Today, I explain why the decision in Pittsburgh Logistics Systems provides a helpful analogue to franchising.

Facts

The case involves a no poach clause sought to be enforced by the current employer, Pittsburgh Logistic Systems (“Systems”), against four employees of Beemac Trucking, doing business with Systems.  The four employees all left Systems to work at Beemac, and Systems sought to enforce the non-compete clause in the employment agreements with the employees. A temporary injunction was initially entered against the employees, but ultimately the injunction was vacated as being unreasonable.

Systems then sought to enforce the no poach clause against Beemac, which would prevent Bee mac from employing the four employees who’s non-compete agreements could not be enforced. As the case wound it way through the courts, the judges and counsel astutely identified the dilemma of indirectly restricting the activities of the employees that they did not agree to make for themselves. In attempting to address the issues, the Supreme Court of Pennsylvania did review the law in several states and noted that while California and Wisconsin held no poach clauses per se unenforceable, Texas, Virginia and Illinois do enforce the clauses. In fact, the Attorney General of Pennsylvania filed an amicus brief in the case urging a blanket rule against the enforcement of no poach agreements.

Holding

The Pennsylvania Supreme Court weighed the legitimate business interest of Systems in preventing its business partners from raiding its trained employees against the public harm that the restriction caused. The Court determined that the no-hire provision at issue was overbroad because it was not limited to System employees who had worked with Beemac. The Court concluded that the no poach provision was likely to impair the employment opportunities and job mobility of all System employees. The Court also found that the restriction undermined free competition in the shipping and logistics industry labor market and thus harmed the public. The Court refused to apply a per se rule, and applied the existing reasonableness analysis applied to non-compete agreements in Pennsylvania to affirm the lower court’s decision not to enforce the no poach clause.

Lessons

The Pennsylvania analysis will likely guide courts in other states regarding the interplay of no poach, no hire, no solicitation and non-compete enforcement in other states. The lessons learned from the decision tell us that:

  1. Activity restrictions in existing franchise agreements need to be re-evaluated in light of changing jurisprudence.
  2. No poach agreements in many instances will be difficult to enforce, and even the inclusion of such a provision in a franchise agreement may lead a court to conclude that the franchisor is overreaching in other aspects of the franchise relationship.
  3. Franchisors with legitimate business interests requiring activity restrictions should be able to link the provisions to protection of confidential information and to tailor the provisions as narrowly to demonstrate reasonableness.
  4. Geographic reasonableness and non-solicitation should be reviewed and tailored in light of social networking and technological advancements.

Activity restrictions in franchise agreement protect the branding, the uniqueness, the competitive advantages through innovation, and the secrets of success of the franchisor. Now is the time to reappraise the tools being used to protect these most important assets.