Pending Governmental Intrusions on Franchisors & Franchisees

Barry Kurtz | Shareholder

July 12, 2022

Assembly Bill 257 and Senate Bill 1247 are now pending in the California legislature. Their passage could intrude on franchisors’ and franchisees’ abilities to conduct business in California.

AB 257

On June 28, 2022, the California Senate Judiciary Committee advanced the FAST Act (AB 257) to the Senate Appropriations Committee. Supporters of the Act claim the bill will remedy alleged rampant abuses of fast food employees by their franchisee-employers and their franchisors, which, in reality, are few and far between in the industry.

Opponents of the Act claim it will inject politics and governmental bureaucracy into the private franchisor/franchisee relationship and associate franchisors with their franchisees’ employees even when the franchisors, by contract, generally have no control, or rights or obligations related to the hiring, firing, training, establishing remuneration, compliance with wage and hour requirements, personnel policies, benefits, recordkeeping, supervision or discipline of their franchisees’ employees.

If AB 257 becomes law:

  • A Fast Food Sector Council (Council) of 11 unelected members appointed by the Governor, the Speaker of the Assembly and the Senate Rules Committee will be established to regulate the operation of fast food restaurants in California. Only four members would need fast food restaurant experience.
  • The Council will be required to standardize minimum wages, maximum hours and other working conditions for fast food restaurant workers at restaurant franchisees and franchisors with 30 or more restaurants in the U.S.
  • Fast food restaurant franchisors will be obligated to oversee their franchisees’ compliance with certain employment and worker public health and safety laws.
  • Joint and several liability will be imposed on fast food restaurant franchisors for penalties or fines that result from their franchisees’ violations of employment and worker public health and safety laws.
  • Fast food restaurant franchisees will be permitted to file legal actions against their franchisors attacking certain provisions of their franchise agreements.
  • Waiver and indemnification provisions in franchise agreements in favor of franchisors will be contrary to public policy, void and unenforceable.

If voted into law, AB 257 will hurt California fast food franchisors, franchisees and their employees. It is likely that following passage, fast food franchisors would cut back on their franchising activity in California, costing the state tax revenue and lost franchisee and employment opportunities, and hamper the California restaurant industry’s recovery from COVID-19. The California Senate Appropriations Committee announced it will examine AB 257 on August 1, 2022.

SB 1247

The California Franchise Investment Law (CFIL) currently requires franchisors to disclose the existence and amount of any rebates or other benefits that the franchisor receives as a result of its franchisees’ purchases of products or services from a supplier to prospective franchisees in their franchise disclosure documents.

SB 1247 would require franchisors and their affiliates to report to its existing California franchisees, upon a franchisee’s request, and within 120 days after their fiscal year end, any rebates or otherbenefits received by the franchisor from any entity with whom the franchisee does business in connection with the franchised business. 

In many cases, franchisors collect and retain rebates generated from their franchisees’ purchase of products or services from designated suppliers and deposit those funds into the franchise systems’ marketing fund for use for the benefit of all franchisees. Currently, franchisors need not inform their franchisees of the value of the rebates or other benefits they release to their franchisors when their franchisees assign or waive their right to the rebates or other benefits generated by their franchisees’ purchases of suppliers’ products or services.

SB 1247 would amend the CFIL to provide that franchisors will violate the CFIL if they require their franchisees to execute any agreement that calls for the franchisees’ assignment or waiver of the right to receive rebates or other benefits as a result of their franchisees’ purchase of products or services within the state unless the agreement states the potential or current gross value of that right. If the actual gross value of the right is unknown, franchisors must include a reasonable estimate of the value based on the average value for similarly situated franchises.

The bill has been passed by the California Senate and was referred to the Assembly Appropriations Committee on June 28, 2022.

Barry Kurtz is a Certified Specialist in Franchise & Distribution Law, by the State Bar of California Board of Legal Specialization.

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