Friday, July 15, 2011

International Franchise Association Comments on Two Massachusetts Bills

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

The International Franchise Association (IFA) has recently made its views known on two Massachusetts bills by submitting “testimony” concerning the proposals in letters to the state legislature’s Joint Committee on Community Development and Small Business.

In the letters, IFA’s Senior Vice President of Government Affairs and Public Policy, Judith Thorman, expresses the organization’s support for Massachusetts House Bill No. 3513, which would amend the state labor laws to clarify that franchisees are not employees, and voices the IFA’s arguments against advancement of Massachusetts Senate Bill No. 1843, a proposed franchise relationship/termination law.

Franchise as Employment Relationship

House Bill No. 3513, An Act Relative to Clarifying Franchises, “only makes clear that the relationship between the franchisor and franchisee is not one of employer and employee,” according to Thorman. Specifically, the bill, which was filed on behalf of the IFA, would amend the Massachusetts labor, unemployment insurance, and workers’ compensation statutes by including the following (or a very similar) provision:

"Notwithstanding the provisions of this section, an individual who owns a franchise, or is a party to a franchise agreement under which he or she is authorized to sell products and/or services (a) in accordance with prescribed methods and procedures; and (b) under service marks, trademarks, trade names and other intellectual property licensed under such agreement, shall not be considered an employee of the franchisor."
Massachusetts uses a three-pronged “ABC Test” to assess whether an employment relationship exists between individuals and/or business entities. Under the test, an individual will not be considered an employee if:

(A) Such individual has been and will continue to be free from control and direction in connection with the performance of such service, both under his contract for the performance of service and in fact; and

(B) Such service is performed either outside the usual course of the business for which the service is performed or is performed outside of all the places of business of the enterprise for which the service is performed; and

(C) Such individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.
“The problem from a franchising perspective—and the reason for this legislation—is that, while a rational person would think otherwise, an argument can be made that a franchise system fails all three prongs of Massachusetts’ ABC Test,” in Thorman’s view.

For example, “while prong (a) of the test requires the individual to be free from control, both under the parties’ agreement and in fact, under federal law, a franchisor must maintain certain controls over the use of its brand, marks and system, or risk losing trademark rights.”

The proposed legislation would not absolve employers from adhering to Massachusetts law, Thorman continued. Franchisees would remain fully liable to their employees for all appropriate obligations, just as franchisors would continue to be responsible for their employees.

Furthermore, if franchisees were treated as employees under Massachusetts law, “some franchisors will seek to impose the resulting costs on the franchisee, since they are properly the costs of operating the franchisee’s business, Thorman commented.

“Other franchisors will simply stop selling franchises in a jurisdiction that finds them to be ‘employers,’ go elsewhere, and thereby reduce the opportunities for those entrepreneurs left behind.” Both results would fail to promote the legitimate state objectives and punish those who wanted to be entrepreneurs.

Franchise Relationship Bill

“The underlying implication of Senate Bill No. 1843 is that franchisors and franchisees are on opposite sides competing against one another,” according to Thorman. “This could not be farther from the truth. At the heart of franchising is a mutually dependent relationship requiring the franchisor and the franchisee work together to achieve shared success, since neither will be successful without the other.”

Moreover, the proposed language of S.B. 1843 was nothing new and had been previously proposed and rejected in Massachusetts multiple times, according to the letter.

To understand the IFA’s concerns over the proposal, Thorman referenced Iowa's enactment of similar legislation in 1992. As a result of the enactment of a relationship law, “growth of the franchising business model ground to a halt” in Iowa, especially in comparison to the strong growth rates experienced by the surrounding states of Illinois, Minnesota, Nebraska, South Dakota, and Wisconsin during the years following 1992.

The Massachusetts bill would prohibit a franchisor from terminating or failing to renew a franchise, except for “good cause showing which shall include, but not be limited to, the franchisee’s refusal or failure to comply substantially with any material and reasonable obligation of the franchise agreement.” It also would also require written notice of termination or nonrenewal be provided to a franchisee at least 90 days in advance, along with the cause for the action.

The bill would hold any franchisor that developed a new outlet or location that had an adverse impact on the gross sales of an existing franchise liable to the affected existing franchisee for monetary damages, unless certain exceptions applied.

The proposal also imposes an inventory repurchase obligation on franchisors and prohibits franchisors from several types of actions, including: (1) prohibiting the right of free association among franchisees; (2) imposing unreasonable standards of performance on a franchisee; and (3) failing to deal in good faith with a franchisee.

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