On March 2, 2016, Governor Scott Walker(R), of Wisconsin, signed Wisconsin Senate Bill 422 into law. This law is important to franchisors because, under this new law, franchisors are not considered employers of their franchisees or their franchisees’ employees for purposes of state employment laws relating to worker’s compensation, unemployment insurance, employment discrimination, minimum wage, and wage payments, unless the following applies:
- The franchisor has agreed in writing to assume that role.
- The franchisor has been found to have exercised a type or degree of control over the franchisee or the franchisee’s employees that is not customarily exercised by a franchisor for the purpose of protecting the franchisor’s trademarks and brand.
As of now this law is only applicable in Wisconsin. However, it is good news for franchisors. It is in direct contrast to recent publications by several federal agencies ( e.g., NLRB) which have tried to make it easier for franchisors to be considered joint employers with their franchisees. Hopefully, other states will follow suit and pass similar state laws.
As always, we will keep up to date on any developments in this area and keep you informed.
On October 11, 2015, California Governor Jerry Brown signed California bill AB 525 into law, amending the California Franchise Relations Act, and imposing additional constraints upon the franchisor-franchisee relationship. The new restrictions are not retroactive, but will apply to any franchise agreement that is entered into or renewed on or after January 1, 2016 or to franchises of an indefinite duration which may be terminated without cause.
First and foremost, the new law makes it more difficult for franchisors to terminate a franchise agreement for good cause. The law changes the definition of “good cause” for termination from “failure of the franchisee to comply with any lawful requirements imposed upon the franchisee by the franchise agreement” to “failure of the franchisee to substantially comply with any lawful requirements imposed upon the franchisee by the franchise agreement.” Additionally, once the franchisee is given notice of the failure, the franchisee is allowed sixty (60) days to cure the failure, which doubles the thirty (30) day requirement in the prior law.
Next, the new law prohibits franchise agreements from preventing the sale or transfer of the franchise as long as the buyer is qualified under the standards the franchisor uses to approve new or renewing franchisees. Under the new law, the franchisor must provide the franchisee the standards it uses for approving new or renewing franchisees. Once notified by the franchisee of the pending transfer, the franchisor has sixty (60) days to approve or disapprove the sale or transfer.
Finally, subject to certain exclusions, the new law requires franchisors who terminate or fail to renew a franchise to purchase all of the inventory, supplies, equipment, fixtures, and furnishings acquired under the terms of the franchise agreement. Additionally, if it is found that the franchisor improperly terminated the agreement or failed to renew, the franchisor will be liable for damages, including “the fair market value of the franchised business and the franchise assets, and any other damages caused” by the violation.
Please do not hesitate to contact me if you wish to discuss how this new law may impact your franchise.
Two bills were introduced in the US Congress last week that would significantly impact the franchise relationship as well as the ability to obtain financing from the SBA in order to acquire a franchise. The first bill, The Fair Franchise Act (H.R. 3196), addresses some of the same issues covered by many state relationship laws such as non-renewal, transfer of franchise units and termination. The bill would prohibit mandatory arbitration and requires the franchisor to act in “good faith.”
The second bill, the SBA Franchise Loan Transparency Act (H.R. 3195) would require the Franchisor to provide specific financial information to prospective franchisees in order to obtain SBA financing. The thinking behind H.R. 3195 is that by providing prospective franchisees with additional financial information regarding a franchise system, the prospective franchisee will be able to make a better, well-informed decision regarding the purchase of a franchise.
While the first bill is a re-tread of many state relationship laws, the second bill, H.R.3195, would appear to add significant procedural requirements to an already heavily regulated process in order to obtain SBA financing. The International Franchise Association has already voiced its opposition to both bills while the Coalition of Franchisee Associations praised the Fair Franchise Act. I will monitor these bills as they move through the legislative process.
On May 14, 2015 the Texas House passed Senate Bill 652 which states that a franchisor is not the employer of its franchisees or its franchisee’s employees. The bill is in response to recent actions by the National Labor Relations Board and the Board’s expansion of the standards of joint employment in the franchise setting.
The bill would amend Texas law to establish that unless a franchisor exercised direct control over a franchisee or franchisee’s employees beyond what is necessary to protect the franchisor’s brand, the franchisor will not be deemed an employer of a franchisee or a joint employer of the franchisee’s employees. The legislation is similar to the joint employment standard previously utilized by the National Labor Relations Board. The Texas bill addresses employment issues in the context of employment discrimination, wage payment, minimum wage and workers compensation.
The issue of joint employment has been front and center in franchising since the NLRB issued complaints against McDonald’s USA, LLC and franchisees of McDonald’s, as joint employers of the franchisee’s employees, alleging various labor law violations. The complaints are based upon the NLRB’s new standard that by possessing the ability to exercise control over a franchisee’s employment policies (whether exercised or not), the franchisor becomes a joint employer. This standard is a departure from the 30-year-old standard that treat two companies as joint employers only if both exercise a significant degree of control over the same employees.
Earlier this week, a Washington federal judge rejected the argument of the International Franchise Association that Seattle’s new minimum wage law unfairly targets franchise owners in Seattle. The new law will raise the minimum wage in Seattle to $15 per hour over the next several years. The focus of the IFA’s court action was not whether the city had the power to raise the minimum wage, but the way the increase is to be implemented. Small businesses will be allowed to implement the increase over a seven year period while large businesses (500 employees or more) must implement the increase in only three years. However, the law places franchise owners in the large business category regardless of the number of employees the franchisee actually employs. On its face, the law seems to unfairly burden franchise owners simply because they operate using the business format and trademarks of the franchisor. As franchisees know, ownership of an independently owned franchised business does not equate to being a “large business” employing 500 people. In fact, most franchised businesses are small, locally owned and lack the resources of companies who employ 500 or more people. The IFA stated that it will continue its’ fight against a law that it perceives to unfairly discriminate against franchise owners.