The one-two punch of state and federal employment standards activity poses an existential threat to franchising; many commentators, including this one, have acknowledged that fact. But why? Did the California legislature or the Obama Department of Labor intend to deliver a knock-out punch to a very popular business structure that creates tens of thousands of independent franchisee business owners, who in turn employ hundreds of thousands of workers?
I recently had an interesting conversation on this topic with Erik Sherman, who contributed “Trump Labor Department Pushes Quick-Boiling Independent Contractor Rule that the White House has Left of Simmer” to a recent issue of Forbes. The current “mess” that I referred to in the Forbes article seems to be the product of union anger with the gig economy and ineptitude on the part of the Trump Department of Labor.
Briefly, the Obama DOL issued new standards for determining joint employment, often referred to as the “economic reality” test. In the franchise context, the standard was applied to determine the relationship between the franchisor and the franchisees’ employees: specifically, whether the franchisor is the joint employer of the franchisees’ employees. Startling to the franchise industry, the test focused not on issues of control but a bevy of other factors of which control was only one. It was likely that many, if not most, franchisors would be deemed joint employers of their franchisees’ employees. After initially moving to enforce the new standard, the DOL paused, apparently to consider the effects of those actions on the franchise industry.
As I’ve explained in a prior post [reference], the Trump administration issued new joint employment standards, reverting to the former control-based tests. That effort was judicially rejected as procedurally and substantively defective. The DOL intends to publish a new control-based joint employment standard on January 6th, theoretically effective 60 days later. But a Biden DOL can delay effectiveness to allow time for a reversal, thus dooming the Trump DOL’s eleventh hour action. Bottom line: The currently effective DOL joint employment standard remains the Obama economic reality test.
At cross-purposes with the Trump DOL action, the California legislature enacted the infamous AB-5 legislation which adopted three factor test for employment that virtually assures that most franchisors would be deemed the employers of both their franchisees and their franchisees’ employees. Many states have enacted similar legislation.
As the Forbes article argues, Uber and Lyft were the primary target of California’s AB-5 legislation, which was actively and aggressively promoted by unions, and the DOL’s economic reality standards eyed the same targets. Uber and Lyft heavily financed a successful California ballot initiative, Proposition 22, to nullify the effects of AB-5 on app-based businesses. The initiative was worded narrowly, to benefit only its investors; Uber and Lyft thus dodged the AB-5 bullet. Meanwhile, time will run out on the Trump’s attempts to short circuit the usual regulatory process and reissue the control-based joint employer standards.
The franchise industry, collateral damage in the fight against Uber and Lyft, has suffered a severe injury. We start 2021 with federal regulations and, in many states, laws that could render the franchise business model untenable.