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How the PRO Act could impact franchisee classification

On Behalf of | Jul 20, 2021 | Firm News

Earlier this year, members of Congress introduced new legislation that could dramatically impact franchises and their ability to manage and maintain their personnel. The “Protecting the Right to Organize” Act or PRO Act addresses the issue of unionizing, but also impacts franchising.

The proposed national legislation comes after other bills and rulings like California’s AB-5 and the recent joint employer ruling under the Fair Labor Standards Act (FLSA). While the other rulings dealt more generally with employment relationships, the PRO Act looks was designed to address union relations.

Here’s what you should know about the pending PRO Act and how it could impact franchisees.

The goal of the PRO Act

As the name suggests, the PRO Act aims to support increased unionization for more businesses, however it would have a serious impact on franchising. On the heels of California’s AB-5 legislation, the PRO Act seeks to institute the “ABC test” on a national basis for determining who are employees versus independent contractors. The result would, in my opinion, have a very detrimental impact on franchising as it would hold that franchisees are employees of the franchisor, not independent business owners.

The impact of the direct employee standard

Making franchisees direct employees of the franchisor complicates a relationship that already has protections for both parties. Currently, once the franchise agreements are in place, the franchisee has the opportunity to develop the business and experience the rewards and incentives of being an independent business owner operating under another’s brand/trademark.

The PRO Act, and the other legislation that has come before it, would make franchisees employees rather than business owners and independent contractors. The legislation could threaten the franchisor/franchisee relationship.

In my opinion, this is not something that either a franchisor or franchisee desires. A franchisor is selling franchises as a means to expand its business by offering franchisees the right to operate the business in a territory under their trademark and in accordance with their guidelines. A franchisee is interested in a franchise to gain the training and brand recognition that a franchisor can provide. A franchisee is not looking to be an employee of the franchisor, or they would not be interested in investing in a franchise opportunity that provides them with the independence to run their own business. A franchisor is not looking to have employees as franchisees or they would just open corporate locations around the country, and not franchise their business.

The PRO Act would severely damage the goals of both franchisors and franchisees in a way that neither side wants. To learn more about how this act could influence a franchisee’s future, contact an attorney familiar with franchise law.