MORE CHALLENGES TO ABC TEST « Law Offices of Timothy Bowles | Top Employment Law Firm in Los Angeles

MORE CHALLENGES TO ABC TEST

Franchisors Bring Federal Lawsuit to Prevent California from Classifying Franchisees as Employees

To prevent California from classifying franchisees as employees, the International Franchise Association, along with the Dunkin’ Donuts, Supercuts, and Asian-American Hotel Owners franchisee associations sued California in the San Diego federal court on November 17, 2020.  The lawsuit seeks a declaration that federal law prevents California from enforcing the ABC test against those who operate franchises and an injunction – a court order that some activity must not happen – preventing the state from doing so.

A franchise is a business model where the owner of a business (franchisor) grants the right to other businesses or individuals (franchisees) to sell the same products or services as the franchisor under the franchisor’s trademark and rules in exchange for license fees.

The concern raised in the lawsuit is that Prongs A and B of the ABC test are directly contrary to the longstanding franchise model.  Prong A prohibits control by a hiring entity of what an independent contractor does to perform the contract. Franchisors, however, exercise considerable control over what franchisees do, such as dictating color schemes, uniforms, what can be sold or what services can be provided, and so on.  And Prong B requires that an independent contractor’s work not be the same as the “usual course of the hiring entity’s business,” whereas franchisees are conducting the same business as their franchisors.

The issue raised by the lawsuit is significant because, as it states, in 2019, in California, there were 82,600 franchises, generating $82.9 billion in economic output, and employing 827,000 people who earned $35.3 billion in payroll.

Citing to the Federal Trade Commission’s “Franchise Rule,” the suit argues that franchisees are independent businesses and not employees of the franchisor.  It also notes that in September 2020, the Massachusetts federal court ruled that the ABC test used in that state could not turn a person who is a franchisee into an employee, as it would “eviscerate the franchise business model.”

Anyone who owns a franchise is well advised to keep an eye about what happens in that San Diego federal court.

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For further information, please contact Tim BowlesCindy Bamforth or Helena Kobrin.

Helena Kobrin

January 8, 2021

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