For almost a hundred years, the franchise model has worked exceedingly well. A business owner perfects a system of delivering products or services and it’s so popular with the public that others want to capitalize on that success. The business owner, knowing he or she can’t expand the brand without help, then franchises their way of doing business to partner with other ambitious entrepreneurs.
But a new law in California is threatening to disrupt the extremely successful business model: Assembly Bill 5, which goes into effect on January 1, 2020.
AB5 was created to force certain new “gig economy” companies to reclassify contract workers as employees. Dozens of industries successfully convinced the bill’s author to exempt their workforce, including realtors, travel agents and architects. However, franchises were swept into the new law, and now it’s time to fix that oversight.
To be clear, the law’s goal is admirable. People who are treated as employees should be classified as such. But the problems AB5 were designed to solve simply don’t apply to franchise owners and their employees.
That’s because franchise ownership offers the best of both worlds — the opportunity to capitalize on the name recognition of a tested brand with the freedoms, flexibility and benefits that come with being your own boss, including setting your own hours, dictating how many customers you serve, and building real assets and wealth instead of simply earning hourly wages.
As CEO of Stratus Building Solutions, a Los Angeles-based international green commercial cleaning franchise, my company has created business ownership opportunities for more than 300 Californians, with locations all across our state. That kind of local ownership is the core of franchising and helps both entrepreneurs and their employees grow and prosper in their careers.
That’s true for employees of franchise locations, too. Franchises are often an incubator for part-time or full-time workers with larger ambitions. People rise up the ranks and become assistant managers, managers, and sometimes even buy out the franchise owner. Working at a franchise isn’t always a lifelong career, but it isn’t just a gig job either, where you’re using your own car or renting out your own home, for example.
And franchising has been successful because it helps aspiring business owners reduce risk when opening their first, or next, business because they are investing in a proven model. If you own a franchise, you are an independent business owner who has invested the startup capital to get your business started and you are involved in all activities tied to the day-to-day operation of the business.
The problem with AB5 is the lack of clarity in the language. The wording of the bill allows for a broad interpretation, and many people worry that local franchise employees and franchise owners will be considered employees by not just the local franchise owner but also by the franchisor, meaning the national corporate brand. They could be rolled into the same company, ultimately robbing the local franchise business owner of the entrepreneurial freedoms that make franchising attractive and rewarding in the first place.
Because AB5 could potentially combine the franchisee and franchisor into a single entity, it threatens the very nature of the business model. For franchisees, it puts their equity and hard work at risk. For franchisors, it adds new employees and legal complications for which they cannot plan and do not want. For both parties, it opens them up to a flood of new lawsuits, compliance costs, and uncertainty.
In California, more than 75,000 businesses are franchises, so their 730,000 employees and billions of dollars of economic output are at risk because of AB5. It’s imperative that the California Legislature address this issue in their next session. California’s economic success depends on it.