Franchisors argue US law preempts AB 5 for them

Arguing in a new lawsuit that Assembly Bill 5 does not apply to the franchising industry because the statute is preempted by federal law, some franchisors are hoping to obtain what California truckers did when they made a similar argument back in January: a court order stopping the state from enforcing the state labor law.

The International Franchise Association, Asian American Hotel Owners Association, Dunkin' Donuts Independent Franchise Owners Association, and Supercuts Franchisee Association planned to file the lawsuit in federal court Tuesday, arguing AB 5 is preempted by the Federal Trade Commission Franchise Rule and federal Lanham Act.

AB 5 has been interpreted so that California franchisors and franchisees are considered to be in employer-employee relationships, said Robert Cresanti, president and CEO of the International Franchise Association, at a virtual press conference Monday.

A worker must meet all three prongs of the "ABC" test to be classified as an independent contractor under AB 5, but the franchise industry can't meet the "A" prong - which holds that a worker is free from the control and direction of the hiring entity - because a franchisor's limited but substantial control over their franchisee is "the basis of our very business model," Cresanti said. Under the definition of "franchise" used by the Federal Trade Commission Franchise Rule, a "franchisor" must exert or have the authority to exert a significant degree of control over their franchisee's operations.

Norman M. Leon, a partner at DLA Piper who represents the plaintiffs, said at Monday's news conference that it doesn't make sense for franchisors and franchisees to "end up in an employment relationship simply because the franchisor took steps it was required to take under federal statutes" to lawfully qualify as franchises.

In response to news of the lawsuit, the office of Attorney General Xavier Becerra said in a statement, "The California Department of Justice has and will continue to defend laws that are designed to protect workers and ensure fair labor and business practices."

In her own statement on the lawsuit, AB 5 author Lorena Gonzalez, D-San Diego, said, "Codifying the Dynamex decision through AB 5 was never intended to prevent legitimate franchises or small businesses from operating, but rather prevent abuse of these business models to misclassify workers."

"We've continued to see the courts weigh in on the scope and application of the Dynamex decision through ongoing cases, such as Vazquez v. Jan-Pro Franchising International, where a group of janitors were found to have been misclassified under a three-tiered franchising model," she added. "I expect the courts will continue to provide important clarity on these issues through the judicial process."

Tuesday's lawsuit is the latest effort by the franchising industry to secure an exemption from AB 5. Earlier this year, the International Franchise Association lobbied for an industry exemption under AB 2257, which was introduced by Gonzalez. The final draft of the bill exempted an additional 18 industries from AB 5, but franchising was not included.

In an interview Monday, Steven Worley, senior director of communications for the International Franchise Association, said the recent passage of Proposition 22 was encouraging for those looking to challenge Assembly Bill 5. The ballot measure was funded by Uber, Lyft, and DoorDash.

"I think that more than anything else, the Proposition 22 result in California shows that there are real problems with AB 5. ... California voters have very clearly stated that the law is unworkable for the people it's intended to benefit," Worley said.

In September, a federal court in Massachusetts ruled that 7-Eleven franchisees are not employees of the 7-Eleven franchise under the state's independent contractor law. As with Tuesday's lawsuit, 7-Eleven had argued federal regulations for franchises made it impossible for them to satisfy the first prong of the "ABC" test.

"It cannot be the case, as plaintiffs suggest, that, in qualifying as a franchisee pursuant to the FTC's definition, an individual necessarily becomes an employee," the ruling said. "In effect, such a ruling by this court would eviscerate the franchise business model, rendering those who are regulated by the FTC Franchise Rule criminally liable for failing to classify their franchisees as employees."

Leon said he believed the same argument "would be especially well received by a California court, given the fact that California adopted basically to the letter the Massachusetts independent contractor law." Many states use an "ABC" independent contractor test, he said, but California and Massachusetts' tests both have a more narrow "B" prong than other states.