The PRO Act would do serious, and perhaps mortal, damage to the franchise industry. It would make sweeping changes to the National Labor Relations Act (NLRA), the Labor Management Relations Act (LMRA), and the Labor Management and Disclosure Act (LMDA). Most pertinent to franchising, the PRO Act would adopt the California ABC standard for determining employment status for purposes of the NLRA.
Initiated in Dynamex Operations West, Inc. v. Superior Court, (4 Cal. 5th 9013 (2018)), the ABC standard was later a feature of Assembly Bill 5 (AB-5), enacted and codified as Section 2750.3 of the California Labor Code. Under that test, a worker is presumed to be an employee unless the hiring entity can demonstrate all of the following:
- The worker is free from control and direction of the hiring entity in the performance of the work, both under the contract and fact; and
- The worker performs work that is outside the usual course of the hiring entity’s business; and
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.
Few, if any, franchisors would be able to meet all three of requirements. Thus, a franchisor would likely be deemed the employer of its franchisees and the franchisee’s employees under the ABC test, negating the essential basis of the franchise relationship. Significantly, the value of franchisees’ independent businesses could evaporate.
Exacerbating the PRO Act’s risks, misclassification of an employee’s status would be an unfair labor practice under the NLRA, with a potential penalty of up to $50,000 for each misclassified employee. Penalties could be monumental. Other union-friendly provisions of the PRO Act include the elimination of Right to Work laws in twenty-eight states and the imposition of personal liability on corporate officers and directors for labor law violations in certain circumstances.
Coming Soon: the Joint Employment Standard
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