California’s FAST Act Puts Franchising, Restaurants And Employees On Fast Track To Trouble

For the nearly 15,000 franchisees in California, franchising actualizes the American Dream. Franchises offer aspiring small-business owners the rare opportunity to establish ownership and build wealth with the pre-laid foundation of a brand, standardized services, and a network of resources. Historically underrepresented groups in business ownership, particularly women, minorities, and immigrants, gravitate towards the franchise industry. In comparison to their 20% ownership of California’s non-franchise businesses, minorities comprise 30% of franchise owners. It is said that franchisees are in business for themselves, but not by themselves.

California franchises provide jobs for close to 750,000 workers, many of whom may struggle to find employment elsewhere. These workers often form close relationships with their employers, the franchisees, who then provide opportunities for advancements within the franchise system. The employees and franchisees both play vital roles in facilitating the operation of the franchise structure, which in turn feeds millions of Californians. Franchise restaurants account for a large portion of Californians’ out-of-home dining.

The California Assembly’s AB 257, known as the “Fast Food Accountability and Standards Recovery Act” or “FAST Act,” poses an imminent threat to franchised and non-franchised restaurant businesses, restaurant workers, and consumers of the Golden State. The FAST Act aims to establish a Fast Food Sector Council and set industry-wide standards on minimum wage, working hours, and working conditions. The bill purports to promote the “health, safety, and welfare” of fast-food workers with the stated intention of suppling “the necessary cost of proper living to fast-food restaurant workers.” If enacted, it is doubtful that, after taking into account the likely resulting business closures and cessation of franchising by many franchisors, that the FAST Act will accomplish its purported purposes.

Initially proposed in January 2021 and shot-down later that year, the FAST Act was re-introduced to the Assembly by four Democratic Assemblymembers this January. The bill passed the California Labor, Public Employment and Retirement Committee with a 3-2 vote on June 13, 2022. At the June 14 hearing the following day, franchise owners of the IFA Franchise Action Network turned out in swarms to oppose the FAST Act, greatly outnumbering the bill’s proponents. The Senate Judiciary Committee approved the bill on June 28th and it has since made it out of Appropriations the Committee. The FAST Act is headed to the Senate for a vote.

By defining fast food restaurants as any establishments that consist of 30 or more establishments nationally that share a common brand, or that are characterized by standardized options for decor, marketing, packaging, products, and services, the FAST Act extends to “chain” restaurants in addition to traditional fast food spots. Restaurants that provide food in disposable containers, for immediate consumption either on or off the premises, with limited or no table service, and to customers who pay before eating fall under the FAST Act’s jurisdiction. This means that most “fast casual” restaurants–including smoothie bars, frozen yogurt shops, salad bars, bakeries, coffee shops, sushi counters, and more–would be forced into a drastic overhaul of their operations.

The Fast Food Sector Council specifies the inclusion of 13 unelected members: (1) The Secretary of Labor and Workforce Development; (2) One representative from the Division of Occupational Safety and Health; (3) One representative from the Division of Labor Standards and Enforcement; (4) Two representatives from the Department of Industrial Relations; (5) Two representative of fast food restaurant franchisors; (6) Two representative of fast food restaurant franchisees; (7) Two representatives of fast food restaurant employees; and (8) Two representatives of advocates for fast food restaurant employees. The Governor appoints the representatives of state agencies. The Speaker of the Assembly appoints one representative of fast food restaurant franchisors, one representative of fast food restaurant franchisees, one representative of fast food restaurant employees, and one representative of an advocate for fast food restaurant employees. The Senate Rules Committee appoints one representative of fast food restaurant franchisor, one representative of fast food restaurant franchisees, one representative of fast food restaurant employees, and one representative of an advocate for fast food restaurant employees. The Secretary of Labor would hold veto power over council actions. By creating the council, the legislature distances itself from voters and removes their responsibility and accountability to the voters for the edicts of the council. Democrat Ken Cooley, a moderate Assembleymember from Rancho Cordova, brands the FAST Act’s assignment of power to an unelected council as “undermining the rule of law.”

The Service Employees International Union (SEIU), the bill’s primary champion, argues that the FAST Act would take on big corporations while elevating workers’ rights. If the bill passes, however, restaurant employees will take on the greatest losses. California law already mandates a $15 minimum wage, and if the FAST Act requires fast food restaurants to pay their employees more, jobs will be cut. Most franchise restaurants experience slim profit margins as is. When labor becomes more expensive, fewer employees will work per shift and hours of operation will decrease. Less than 10% of fast food employees hold college degrees, meaning that if their minimum-wage jobs are eliminated, they likely face unemployment. Only 3% of American fast food employees belong to unions, so with a lack of support from workers, SEIU is staging an attempt to circumvent voters and create a political board with unfettered power.

Proponents of the FAST Act fail to understand that most franchisees operate their stores as mom-and-pop shops. Over two-thirds of California’s franchisees own only a single store, and franchisees with already-low profits would shut down. The FAST Act imperils franchisees all over California, but communities of color would be hardest hit. The FAST Act also makes franchisors liable for ensuring regulatory compliance on behalf of the franchisees. For example, if a franchisee fails to comply with applicable law and regulations, employees can sue the franchisor for monetary or injunctive relief. Put simply, this means that franchisors face a strong economic disincentive to expand franchises in California or bring new franchise concepts to California – the liability associated with joint and several liability for franchisees’ failure to comply with edicts of the Council may outweigh the profit motive generated when receiving a small royalty on top-line sales. One franchisee stated publicly that the joint and several liability clause would in essence force franchisees to become employees of out-of-state corporations.

The FAST Act would dash the dreams of so many entrepreneurial hopefuls. In a testimony against the bill, second-generation immigrant Sanna Shere, who owns a Burger King, said, “It’s a true American dream story and a powerful reminder of the opportunity the franchise business model provides.” The joint liability standard would force the closure of restaurants that rely on the franchise model or would result in new restaurants not opening in the first place. Opportunities would be lost for future entrepreneurs dreaming of owning their own business in California. It is important to note that the types of restaurants impacted by AB 257 are located in all communities up and down the state, including many underserved neighborhoods where food options are limited.

California Governor Gavin Newsom remains silent on the FAST Act. Newsom’s strict COVID-19 shutdowns, which kept restaurants closed throughout much of 2020 and part of 2021, disproportionately targeted small business owners and alienated lower- and middle-class workers from the Democratic Party. Entrepreneurs channeled their anger at the governor towards an ultimately unsuccessful, yet politically significant, recall election in the fall of 2021. Newsom may consider taking a more generous stance on small businesses in hopes of achieving re-election this November. If the bill reaches his desk, Newsom holds veto power.

Jessica Cause, a spokesperson for Stop AB 257, said, “There isn’t a worse time to raise prices on working Californians’ dining choices. Inflation remains over 8%; grocery and food costs continue rising; and gas remains near all-time highs. And for some reason, some think right now is a good time to raise expenses at thousands of restaurants throughout the state. Our leaders should be helping Californians struggling with higher prices, not making the problem worse.” A few years ago, California enacted AB 5, which itself threatens the franchising model and its ability to provide California’s underrepresented populations an opportunity to rise above mere employment and acquire equity. Now the FAST Act doubles down and threatens to ensure the destruction of franchising and jobs while purporting to “protect” workers. Franchisors are certain to abandon franchising in California if the FAST Act is enacted. For franchisors, franchisees, restaurant employees, consumers, and the integrity of the franchise model, the FAST Act must be defeated.

The author thanks Bryan Cave Leighton Paisner LLP clerk, Gracie McGovern, for her invaluable assistance with this article.