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Franchising realizes the American Dream for the nearly 15,000 franchisees in California. Franchises offer aspiring small business owners the rare opportunity to take ownership and build wealth with the pre-built foundation of a brand, standardized services, and a network of resources. Historically underrepresented corporate-owned groups, particularly women, minorities, and immigrants, are leaning toward the franchise industry. Compared to their 20% ownership of California’s non-franchise companies, 30% of franchisees are minorities. It is said that franchisees do business for themselves, but not alone.
California franchises provide jobs to nearly 750,000 employees, many of whom struggle to find work elsewhere. These employees often form close relationships with their employers, the franchisees, who then provide opportunities for advancement within the franchise system. The employees and franchisees both play a vital role in facilitating the operation of the franchise structure, which in turn nourishes millions of Californians. Franchise restaurants account for much of Californians’ outdoor dining.
California Assembly AB 257, known as the “Fast Food Accountability and Standards Recovery Act” or “FAST Act,” poses an immediate threat to franchised and non-franchise restaurants, restaurant workers and consumers of the Golden State. The FAST Act aims to establish a Fast Food Sector Council and establish industry-wide standards for minimum wages, hours of work and working conditions. The bill aims to promote the “health, safety and well-being” of fast food workers with the stated intent to provide “the necessary costs of decent living to fast food restaurant workers.” If passed, it is doubtful that, after taking into account the likely resulting business closures and abandonment of franchising by many franchisors, the FAST Act will achieve its purported goals.
Originally proposed in January 2021 and shot down later that year, the FAST Act was reintroduced in the Assembly in January by four members of the Democratic Assembly. The bill passed by 3-2 votes on June 13, 2022 by the California Labor, Public Employment and Retirement Committee. At the June 14 hearing the following day, franchise owners from the IFA Franchise Action Network swarmed to oppose the FAST Act, far more than proponents of the bill. The Senate Judiciary Committee approved the bill on June 28, and it has since been removed from the committee’s appropriations. The FAST Act goes to the Senate for a vote.
By defining fast food restaurants as any establishment consisting of 30 or more national-level establishments that share a common brand, or are characterized by standardized options for decor, marketing, packaging, products and services, the FAST Act extends to “chain “restaurants alongside traditional fast food outlets. Restaurants that provide food in disposable containers, for immediate consumption, both on and off the premises, with limited or no table service, and to customers paying for the food are subject to the jurisdiction of the FAST Act. This means that most “fast casual” restaurants — including smoothie bars, frozen yogurt shops, salad bars, bakeries, coffee shops, sushi bars and more — would be forced to drastically overhaul their operations.
The Fast Food Sector Council specifies the inclusion of 13 non-elected members: (1) the Secretary for Labor and Workforce Development; (2) A representative of the Occupational Safety and Health Department; (3) A representative of the Labor Standards and Enforcement Department; (4) Two representatives of the Industrial Relations Department; (5) Two representatives of fast food restaurant franchisors; (6) Two representatives of fast food restaurant franchisees; (7) Two representatives of employees of fast food restaurants; and (8) Two representatives of advocates for employees of fast food restaurants. The governor appoints the representatives of government agencies. The chairman of the meeting shall appoint one representative of fast food restaurant franchisors, one representative of fast food restaurant franchisees, one representative of fast food restaurant employees, and one representative of a fast food restaurant employee advocate. The Senate Committee appoints a representative of the fast food restaurant franchisor, a representative of fast food restaurant franchisees, a representative of fast food restaurant employees, and a representative of a fast food restaurant employee advocate. The Minister of Labor would have veto power over actions by the council. By creating the council, the legislature distances itself from voters and takes away their responsibility and accountability to voters for the council’s edicts. Democrat Ken Cooley, a moderate MP from Rancho Cordova, has labeled the allocation of power by the FAST Act to an unelected council as “undermining the rule of law.”
The Service Employees International Union (SEIU), the main proponent of the bill, argues that the FAST Act would target large companies while increasing workers’ rights. However, if the bill goes through, restaurant workers will incur the biggest losses. California law already mandates a $15 minimum wage, and if the FAST Act requires fast food restaurants to pay their employees more, jobs will be cut. Most franchise restaurants have narrow profit margins in their current form. If labor becomes more expensive, fewer employees will work per shift and working hours will decrease. Less than 10% of fast food workers have college degrees, meaning if their minimum wage jobs are cut, they are likely to face unemployment. Only 3% of US fast food workers are union members, so with a lack of worker support, SEIU is attempting to evade voters and create political governance with unfettered power.
Proponents of the FAST Act fail to understand that most franchisees operate their stores as mom-and-pop stores. More than two-thirds of franchisees in California have just one store, and franchisees with already low profits would close their doors. The FAST Act puts franchisees across California at risk, but communities of color would be hardest hit. The FAST Act also holds franchisors liable for ensuring regulatory compliance on behalf of the franchisees. For example, if a franchisee fails to comply with applicable laws and regulations, employees can sue the franchisor for monetary or injunctive relief. Simply put, this means that franchisors have a strong economic impediment to expanding franchises in California or bringing new franchise concepts to California – the liability associated with joint and several liability for franchisees’ failure to comply with Council edicts can outweigh the profit motive generated when receiving a small royalty on sales. A franchisee publicly stated that the joint and several liability clause would essentially force franchisees to become employees of out-of-state companies.
The FAST Act would destroy the dreams of so many hopeful entrepreneurs. In testimony against the bill, second-generation immigrant Sanna Shere, who owns a Burger King, said, “It’s a true American dream story and a powerful reminder of the opportunities the franchise business model offers.” The joint liability standard would force the closure of restaurants that rely on the franchise model or prevent new restaurants from opening at all. Opportunities would be lost for future entrepreneurs who dream of owning their own California business. It’s important to note that the types of restaurants affected by AB 257 are located in all communities in the state, including many underserved neighborhoods where food options are limited.
California Governor Gavin Newsom is silent on the FAST Act. Newsom’s strict COVID-19 closures, which left restaurants closed for much of 2020 and part of 2021, disproportionately targeted small business owners and alienated lower and middle class workers from the Democratic Party. Entrepreneurs have channeled their anger at the governor toward an ultimately failed, but politically significant, fall 2021 recall election. Newsom might consider taking a more generous stance on small businesses hoping in November to be re-elected. When the bill reaches his desk, Newsom has his veto power.
Jessica Cause, a spokesperson for Stop AB 257, said: “There is no worse time to raise prices for the dining options of working Californians. Inflation remains above 8%; groceries and food costs continue to rise; and gas remains near all-time highs. And for some reason, some think now is a good time to raise costs at thousands of restaurants across the state. Our leaders should be helping Californians struggling with higher prices, not making the problem worse.” A few years ago, California ran AB 5, which itself threatens the franchising model and its ability to give California’s underrepresented population the opportunity. rise above mere employment and acquire shares. Now the FAST Act doubles down and threatens to destroy franchising and ensure the destruction of jobs while claiming to “protect” employees Franchisors will surely waive franchising in California if the FAST Act The FAST Act must be defeated for franchisors, franchisees, restaurant employees, consumers and the integrity of the franchise model.
The author thanks Bryan Cave Leighton Paisner LLP clerk, Gracie McGovern, for her invaluable help with this article.
