Tag Archives: Franchise Investment Law

Changes to the California Franchise Relations Act

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.

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Filed under Franchise Basics, Franchise Insight, Franchise Law, In The News

Franchisors should focus on the brand to mitigate risk.

The standards used to determine joint employer status and the proper identification of an individual as an independent contractor within franchise systems are changing.  In order for a franchisor to minimize liability associated with joint employer status, vicarious liability and misclassification of employees as independent contractors, franchise systems must focus on controls that relate primarily to the protection of a franchisor’s brand and the integrity of the product or services provided to the marketplace by its’ franchisees.  By focusing on these essential elements of a franchise system, rather than the day-to-day operation of a franchisees’ business, the franchisor may mitigate the risk associated with the on-going attack against the franchise business model.  Specifically, franchisors should avoid the following;

  • Imposing employment policies/practices upon the franchised business
  • training employees of the franchised business
  • imposing scheduling requirements and pricing controls upon the franchised business
  • securing contracts/customers on behalf of the franchised business
  • sub-leasing office/retail space to the franchised business
  • acting as a guarantor/surety of the franchised business

In order to mitigate risk, franchise systems should examine their franchise agreements, operating manuals and internal policies to determine where a system may step over the line of policing essential policies to ensure brand integrity and into the day-to-day business operations of its’ franchisees.

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NJ Sick Leave Legislation Alert

Since San Francisco enacted mandatory sick leave legislation in 2006, efforts to pass similar laws have gained momentum in municipalities and states across the nation. Recently the New Jersey assembly became the latest state legislature to advance a bill, A2354, which would require most employers to provide their employees with annual paid sick leave. If it becomes law, and odds are strong that it will, it would make New Jersey the fourth state – after California, Connecticut, and Massachusetts – mandating paid sick time for all workers, and it would raise a number of challenging legal and compliance issues for both small and large franchised businesses.

At the core of the bill is the imposition of a legal obligation on employers to provide one hour of earned sick leave for every 30 hours an employee works. Employers with an average of fewer than 10 employees (which includes part-time and temporary workers) must allow each employee to accrue and use up to 40 hours per calendar year; employers with an average of more than 10 employees would have to allow up to 72 hours per calendar year.

As with any statute, however, the devil is in the details. The following is a brief summary of the bill’s provisions that pose the greatest risk to employers’ bottom lines:

Broad Application. Permissible use of earned sick leave is fairly broad under the bill. It permits an employee to use sick leave for themselves or a family member for: preventive medical care; the diagnoses, care, treatment or recovery from mental or physical illness; physical injury; and any adverse health condition. It also provides paid leave to employees who miss work due to closure of the workplace or a child’s school due to a public health crisis.

No Preemption Means Conflicting Employer Obligations. Many communities in New Jersey have already passed mandatory sick leave laws in the past year, including Newark, Jersey City, and Trenton, although the maximum leave provided is generally 40 hours. The state bill, however, does not include a provision which preempts those municipal laws, which would quickly lead to compliance conflicts for employers who have workers covered under different (or multiple) sick leave laws. This will quickly lead to confusion.

Disproportionate Impact on Small Businesses. While proponents argue the state bill is a pro-business and pro-public health policy that will ultimately reduce worker absenteeism and lower health costs for employers, businesses which heavily rely upon part-time workers, such as small local business, restaurants and seasonal businesses on the New Jersey coast, stand to disproportionately suffer adverse financial impact as a result of the legislation’s presumption that a large employer is one with 10 or more total employees. It’s common for these businesses to be staffed with part-time workers consisting of students and people with other full- or part-time jobs, and a small business can easily reach the 10-employee threshold simply because their workers have limited availability.

Practical Legal Ramifications. The bill would also impose certain record-keeping requirements and specifies when an employer may require documentation from an employee requesting or taking sick leave. In addition, the bill expands the legal rights of employees in two ways that raise fairly significant ramifications for even the most well-intentioned employer. First, if an employee makes any statement involving paid sick leave or invokes any right under the law, the employee receives a 90-day window in which any “adverse action” they suffer related to their job is presumed to be retaliatory. “Adverse action” is a broad term which, depending on the circumstances, could include merely changing the employee’s shift schedule. Second, unlike other states in which enforcement is entrusted to a state agency, the New Jersey bill permits an employee to sue the employer to enforce the law’s requirements. So instead of deferring resolution of disputed sick leave matters to a state regulator, aggressive plaintiffs’ lawyers will enjoy a wind fall.

It will be at least several months until the bill comes before the full New Jersey legislature for vote, and even if passed will require an openly reluctant Governor Chris Christie to sign it into law before it can take effect. However, the recent passage of similar leave laws in New Jersey’s three largest cities has led many observers to conclude it’s only a matter of time before New Jersey enacts state-wide legislation. Employers would therefore benefit from monitoring the bill and reviewing their existing sick leave policies to determine whether and to what extent its likely passage in New Jersey will affect workplace coverage and operating costs.

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Filed under Franchise Basics, Franchise Insight, Franchise Law, In The News, Restaurant & Hospitality Law, The Franchise Legislation Monitor

Save American Workers Act update

Sarah Ivy, Chair of G&K’s Executive Compensation and Employee Benefit practice, provided the following update.  Large franchisors and multi-unit franchise owners should take note.

We are watching the progress of H.R. 2575 very closely. Any upwards modification of the 30 hour per week standard in defining a full-time employee under PPACA would be a relief to those large employers subject to the pay-or-play penalties. We will keep you updated on the status of the Save American Workers Act bill. http://www.benefitspro.com/2014/02/04/committee-approves-full-time-worker-bill

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Maine Small Business Investment Protection Act advances to the House of Representatives.

I noted in 2013 that one franchisor association executive characterized the pending Maine legislation as “the worst legislation we have seen in years.”  The Maine Act requires that franchisors must “deal fairly” and “in good faith” with franchisees.  While these concepts appear to advance a common sense approach, in reality, the broadly defined terms will create litigation in the court houses of Maine for years to come.  In my opinion, inserting ambiguity into a contract between two parties creates nothing but headaches in the form of litigation.  In addition, the Act would require franchisors to: provide franchisees additional time to cure defaults; renew franchise agreements without increasing royalty rates or imposing new fees; and compensate damaged franchisees for placing outlets within their territories. The Act would also limit the ability of a franchisor to enforce post-term covenants against competition and imposes a fiduciary duty upon franchisors when performing certain services for the franchisee, including the administration of the franchisor’s advertising fund.  While lobbyists for franchisor and franchisee trade associations stake out their respective positions, the real winners in the event this bill is passed will be plaintiff lawyers who will create causes of action that fall far outside the four corners of the franchise agreement.  It is anticipated that the House will vote on the legislation before April.  I’ll update this blog with any developments as the vote nears.

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Filed under Franchise Basics, Franchise Insight, Franchise Law, In The News, Restaurant & Hospitality Law, The Franchise Legislation Monitor