Franchise Law Updates

Avoiding Unwanted Employees – Which Way Will The Winds Of AB 5 Shift Next?

Assembly Bill 5 formalizes the “ABC test” as the legal standard to determine whether a worker is an independent contractor or an employee. Franchise law experts are watching the development of the law closely, as it may make it more difficult for a company to maintain workers as independent contractors.

The law says that a company can call a worker an independent contractor only where the individual remains “free from the control and direction of the hiring entity in connection with the performance of the work.” This standard could be used against franchisors, who by design maintain a degree of “control and direction” over the “performance of the work,” simply to maintain the standards of consistency and quality that characterize the franchise business model.

If the “ABC test” is applied to categorize workers in the franchise as employees of the franchisor, it will shift the business model substantially. Franchisees sign on to the franchise business to benefit from the operational systems and marketing support of the franchisor company, not to have their hiring overseen by the franchisor. All those in the franchise business should consult with legal counsel about the law, review and revise franchise agreements and other related documents, and clarify training and instructional materials to emphasize the important areas that keep the franchisee and its workers from being direct employees of the franchisor.

Accidental Franchises

California laws defining franchise businesses are generally clear and precise. The law explains that a “franchisee is granted the right to engage in the business of offering, selling, or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchisor.” A franchise fee, whether paid directly or indirectly, is also an essential part of the relationship.

Some well-intentioned but misguided businesses have accidentally entered into a franchise relationship when they intended only to create a licensing, distributing, or dealership relationship. While the three elements of a “franchise” must be met for a court to find that there was a franchise relationship, it is possible to meet the elements in error. When a company becomes associated with the other company’s trademark, when the first company pays for the right to use those trademarks, and when the operating or marketing system comes largely from the second company, a franchise may exist.

If the business relationship involves those three elements, a court may find that there is a franchise, however unintentional. Unfortunately, the company that becomes a franchisor rather than simply a licensor may face substantial costs and complications in rescinding the accidental franchise. An experienced business lawyer who is well-versed in the details of franchise law will be your best guide to avoid such a situation, or to get out of it if you’ve stumbled into it already.

California Franchise Attorney

Find out more about how AB 5 might affect your franchise by talking to a franchise attorney. Mohajerian Law Corporation helps California franchisors and franchisees with a wide range of cost-effective and efficient legal services to help businesses with contracts, regulatory compliance and dispute resolution. Reach out to Mohajerian Law Corporation by calling (310) 556-3800 or by contacting us online today.