Protesters march outside McDonald's in Los Angeles, California, December 5, 2013.
Photo by Lucy Nicholson/Reuters

Labor and small businesses team up on California franchising law

Updated

On Thursday, the California State Assembly is expected to consider a law that could dramatically alter the shape of fast food and other franchised industries in the state.

Senate Bill 610 (SB 610), which has already been approved by the State Senate, would make it harder for franchisor companies such as the McDonald’s Corporation to end licensing agreements with franchisees. The proposed law has polarized the business community, and become a flashpoint in organized labor’s efforts to transform the franchising business model.

The question before the Assembly is whether current state law is sufficient to protect franchisees from the arbitrary whims of major franchisers. If made law, SB 610 would prevent a franchisor from severing licensing agreements with their franchisees unless they can demonstrate that a “substantial and material breach … of a lawful requirement” of the agreement has taken place. The bill also says licensing agreements cannot obstruct the right of franchisees to participate in franchisee associations, or prevent them from selling their franchises, although the franchisor must still give consent for a sale to take place.

The labor union SEIU – a major financial backer of the nationwide fast food strikes – has thrown its support behind the proposed law, launching the website FranchiseFairness.org and funding pro-SB 610 radio ads. Although union representatives have been reluctant to hold on-the-record discussions regarding the strategy behind their support for the bill, the theory appears to be that protecting franchisors against the threat of closure will make it easier for them to do things like raise workers’ wages.

Franchisors currently pose a large potential obstacle to attempts at improving workplace conditions on a store-by-store basis. Recent wage theft lawsuits against McDonald’s, for example, allege that the corporation assiduously tracks labor costs at each of its franchised locations; the company has also reportedly “told a franchise owner that it was paying its employees too much” on at least one occasion, according to The New York Times. If it were harder for franchisors to end franchise licensing agreements, the presumably franchisees would be more at liberty to ignore such warnings.

That helps to explain why powerful business groups like the California Chamber of Commerce and the International Franchise Association (IFA) are on the other side of the bill. IFA senior vice president Matt Haller said the association of franchisor and franchisees is concerned that laws such as SB 610 could make it more difficult for a franchisor to sever its relationship with a unionized franchisee. If a union like SEIU were to unionize a single franchise it could “use it as a bargaining chip to negotiate with the franchisor,” he said. (SEIU has repeatedly said it has no intention of launching a fast food unionization drive for the foreseeable future.)

But the IFA’s main concern is “brand loyalty,” according to Haller. If franchisors don’t have a free hand to terminate their contracts with franchisees, it becomes harder to enforce the same quality of service across a nationwide system of franchises. Saunda Kitchen, a franchisee who has lobbied California state officials on behalf of the anti-SB 610 campaign, told msnbc the bill could potentially hurt her business. She owns a Mr. Rooter Plumbing franchise location in Santa Rosa, Calif., and says that she benefits from the Mr. Rooter corporation’s ability to enforce a high standard of quality across all its franchised locations.

“My biggest argument is about brand equity, that franchisors can’t maintain a consistent level of authority for enforcing what I work so hard to protect myself,” she said. “If they can’t protect those brand standards, that makes me lose my brand equity that I’ve worked for over 20 years to maintain.”

Stuart Hershman, IFA’s assistant general counsel and a partner at the Chicago law firm DLA Piper, said SB 610 also includes “absolutely no guidance” on what counts as a “substantial and material breach” of the franchise agreement. As a result, “neither the franchisor nor the franchisee will have any notion of its rights under the law,” meaning a potential monsoon of litigation over the issue. Current law provides what he sees as a less ambiguous standard: The franchisee simply has to avoid any breach of the agreement, “substantial and material” or not.

“The franchisee completely controls its own fate because it can take the action necessary to take care of any problem,” he said.

McDonald’s franchise owner Kathryn Slater-Carter begs to differ. It was Slater-Carter who in 2011 reached out to Democratic State Assemblyman Jared Huffman (now a member of the U.S. House of Representatives) regarding the state of franchise law in California. Huffman duly introduced AB 2305, a failed precursor to SB 610, in 2012. Slater-Carter has been arguing for greater restrictions on franchisors’ ability to shut down franchised locations ever since.

Slater-Carter told msnbc she decided to get involved because of her own acrimonious dealings with the McDonald’s Corporation. Although she and her husband now own just one McDonald’s franchise, they had been operating two up until the company declined to renew the agreement for one of them in 2011. Allegedly, the company assured Slater-Carter and her husband that it intended to renew the lease for the location, so the couple would be able to sell the restaurant to another owner, who would then ink a new agreement with the company. Then they went back on that claim.

“You have no rights. In California law, you have absolutely no rights.”
McDonald’s franchise owner Kathryn Slater-Carter
“In 2011 they told us they were not renewing the franchise, and in 2014, two months before the end of the lease, they told us they weren’t renewing it,” Slater-Carter told msnbc. “They had led us along for almost three years.”

In the meantime, Slater-Carter visited a lawyer to see what legal options she could pursue in order to prevent the restaurant’s closure. The attorney, she says, told her, “You have no rights. In California law, you have absolutely no rights.”

That particular McDonald’s location is now closed. It had been open since December 12, 1983, three days before the birth of Slater-Carter’s daughter. She says the opening of that restaurant was “like a double birth.”

“A business that employed 30 people and served hundreds of thousands of visits is gone,” she said. “Poof. And since then I have discovered that this has happened in other locations to other operators, but they won’t come forward because McDonald’s will take it out on them if they do.”

McDonald’s did not respond to a request for comment regarding Slater-Carter’s allegations.

California, Labor and Small Businesses

Labor and small businesses team up on California franchising law

Updated