There has always existed a tension between the independent nature of franchising and the close relationship between the franchisor and franchisee.
Since there is no Federal Act governing franchising or franchise agreements specifically, this means that franchising is susceptible to individual states’ acts and regulations.
California codified the case of Dynamex Operations West, Inc. v. Superior Court of Los Angeles in September of 2019, which is called the California Assembly Bill No. 5 and is commonly referred to as AB 5. The purpose of the act was to update the definitions of what constitutes an independent contractor in the current digital age. Specifically,
AB 5 has been used against Uber and Lyft. However, there may be implications for the franchise industry as well.
AB 5 states that an individual is to be considered an independent contractor unless the hiring entity demonstrates all of the following conditions:
(A) The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work.
(B) The person performs work that is outside the usual course of the hiring entity’s business.
(C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
AB 5 did include specific occupations that were exempted from the act, but franchising was not included in the exemptions.
There are not any definitive cases that have used AB 5 against the franchise industries, but there have been cases such as Vasquez v. Jan Pro Franchising, which suggest the AB 5 could be used in the franchising context.
The uncertainty of the situation means that there may be a turbulent road ahead for the franchise industry in California. The International Franchise Association is lobbying for AB 5 not to apply to the franchise industry.
If you have any further questions, please contact the franchise agreement, a franchisor Mario L. Herman.
