California's AB 257 Threatens the Franchise Business Model

This is a letter to the California Legislature in opposition to AB 257, the FAST Recovery Act, which would place onerous new rules and restrictions on fast food restaurants in the state.

(Also see IFA CEO Matt Haller’s Aug. 21 op-ed in the Wall Street Journal.)

Late-breaking news: California Governor Gavin Newsom, who had until Sept. 30 to sign or veto the bill, signed it into law on Labor Day, Sept. 5.

(Also see IFA CEO Matt Haller’s Aug. 21 op-ed in the Wall Street Journal.)

In 1988, my husband Gary Gardner and I founded Franchise Update Media, a publishing company that provides educational resources for franchisors and franchisees in the form of two print magazines and half a dozen online newsletters. We also publish business opportunity listings, and hold three annual conferences for the franchising community. We’re both lifelong residents of California, living and working in San Jose.

As a longtime participant and observer of franchising, I’m compelled to state my strong opposition to AB 257 (the FAST Recovery Act) as it is currently written and scheduled for an upcoming vote in the State Senate. I believe its intentions to help employees are good, but in my opinion, and that of all the franchisors and franchisees I hear from on a daily basis, AB 257 will do more harm than good. As the saying goes, it’s a solution in search of a problem – and one that likely will create a whole raft of new problems. To me, it seems loaded with unintended consequences, none of them good.

You’ve undoubtedly heard all the financial arguments by now, so I won’t repeat them here. Instead, I’m going to talk about what franchising is, the people I’ve come to know over nearly 35 years in the business, and of the harm this bill is likely to cause to successful small-business owners (franchisees).

In my years of being closely involved with franchising, I have come to know many people in the business. The overwhelming majority are fine people, providing jobs, contributing to their communities and national charities, and offering on-the-job training and a career path for the people they hire, many of whom are starting their first “real” job.

Before I give my reasons for opposing AB 257, I’ll state that I firmly support fast-food employees being treated fairly, honestly, legally, and earning a fair wage at their jobs. So are 99% of franchisors and franchisees. I won’t sugarcoat it: there are some bad actors in franchising – just as there are in any organization or industry. But increasingly in franchising, they are few and far between.

Penalizing an entire business sector for the bad behavior of a very small minority would be foolhardy. Prosecute and punish the violators and celebrate and support the large majority of good actors who are providing jobs that allow their employees to pay rent or buy a house, feed and clothe their families, and contribute to the needy in the cities and towns where they do business.

So what is franchising? I ask because in my encounters with people outside of franchising (politicians respectfully included) is that most don’t really understand how franchising works. I didn’t at first because, like most, I was familiar with how the corporate model works. In its essence, franchising is a system for distributing goods and services, from pizza and poke bowls to home care and automotive repair, massages and gyms to haircuts and home repair.

Under the franchise business model, franchisees are independent small-business owners – not employees of their franchisor. Again, they are independent business owners who pay a franchise fee in the tens of thousands of dollars for the right to use a brand’s trademarks, operating system, products, logos, etc. And while they receive initial training from their franchisor in how to operate their business, they hire, train, manage, and pay their employees out of their own pocket.

One of the biggest objections I have to AB 257 as it is currently written is that it would disempower people who have worked so hard for so long to own their own business, making them more like middle managers working for a corporation – which is the complete opposite reason of why they became franchisees in the first place!

There’s a saying in franchising: “Making it on your own doesn’t mean making it by yourself.” What that means to me is that while franchisees are independent business owners/entrepreneurs, they also know their franchisor has their back if they ever need advice or other guidance (but not direct control over their business). Yes, franchisees must follow the rules they agreed to when they signed their franchise agreement, but they signed willingly and were as fully informed as the law permits and their own due diligence could carry them.

I disagree strongly with Sec. 2, which the bill seems to use as the basis for all that follows, the statement (or rather, the assumption) that:

“For years, the fast food sector has been rife with abuse, low pay, few benefits, and minimal job security, with California workers subject to high rates of employment violations, including wage theft, sexual harassment and discrimination, as well as heightened health and safety risks.”

The FTC’s Franchise Rule, originally adopted in 1978, revised in 2007, and now under review, requires franchisors to provide potential franchisees with a disclosure document (the FDD) that contains 23 specific items about the offered franchise, its officers, and other franchisees in the system. The goal is full disclosure of the business to enable potential franchise buyers to enter into an agreement with their eyes wide open. This also happens to be the reason Gary and I started our company. Back in 1988, reliable, trustworthy information about franchising was hard to find. Since then, franchising has moved into the mainstream and many publications and businesses are now providing such information.

Franchisees are independent business owners. Following in the tradition of the Great American Dream, franchisees invest their money in a proven business model. Some call it a “business in a box”: Just add 70 hours a week of sweat and sleepless nights. Franchising provides an ideal opportunity for entrepreneurial-minded immigrants to start out as a fry cook, for instance, move into management, and eventually become franchisees, providing the same opportunities to others that they prospered from.

In fact, our company provides an American Dream Award each year to a franchisee who came to the USA and built a successful franchise business. We profile them regularly in our magazines. If you’d like to learn more about how these “good actors” nurture their employees, raise funds for flood victims, contribute to hospitals, charities, sports teams, and more, you can read about them on our website. Their stories may inspire you and show you there’s another side to the assumptions of Sec. 2 of the bill, a huge other side.

With the growing nationwide trend of fast food workers seeking to form unions to protect their rights and advocate for better pay and benefits, from Starbucks to Chipotle, Amazon to Apple, is this bill really necessary? Will the new layers of oversight be a help or a hindrance to business growth in the state – and the taxes that will be lost as franchisors avoid California in increasing numbers, a trend already well under way.

Another part of the bill that I strongly disagree with is the “joint and several liability” responsibility of franchisors for the actions of their franchisees. From the Legislative Counsel’s Digest on the state’s website where AB 257 is published:

“The bill would require that a fast food restaurant franchisor be jointly and severally liable for violations of its franchisee, as specified, and would provide that specified laws may be enforced against a fast food restaurant franchisor to the same extent that they may be enforced against a franchisee.”

If enacted, this would shoot a hole directly through the heart of the franchise business model. Businesses would shutter, many thousands would lose their jobs, commercial real estate would languish, and an invaluable training ground for America’s young people would be lost, among the many other downsides this provision might cause.

To reiterate, the “arm’s-length” relationship between franchisees and franchisors is especially important when it comes to hiring employees. Extreme example: A teen spits into a taco, gets caught on camera, and the franchisor is jointly liable? Huge payouts to settle lawsuits would deplete a franchisor’s ability to support its entire system of small-business owners, potentially shuttering hundreds of locations for the bad behavior of a disgruntled adolescent. This is wrong.

When you stop and think about it, the franchise business model is one of this country’s great training grounds for first-time employees. How many people do you know, or have heard about, whose first job was at a fast food restaurant and went on to succeed in business and in life, raise a family, and be a contributing member of their community?

Through fast food franchising, young people can work part-time, learn how to cook, work a register, and master other skills they can use later in life. And perhaps most important, they can be coached by the franchisee or their managers in the “soft” skills of customer service and working as a team.

These are transferable skills. Thanks to “flipping burgers,” many young people rise through the ranks and become managers, and some become franchisees themselves, perpetuating the virtuous cycle they benefited from. Some take the skills they learned on the job and become contributing employees of corporations, while others start their own business, equipped with a firm grounding in how to make it succeed – building on what they learned working in a fast food restaurant.

In conclusion, please reconsider this bill. Hear more from the people who will be most directly affected if AB 257 becomes law. Find other, less harmful ways to protect fast food employees. As the saying goes, there’s more than one way to skin a cat – or help fast food employees to a better life.