September 22, 2023

Why fast food franchisees could be the next cohort to leave California

Alex Johnson is the kind of entrepreneur who built California. A second-generation small business owner in the San Francisco Bay Area, he and his family run 10 fast-food franchises employing 140 people, most of whom are first-time job seekers, such as underprivileged youth and new immigrants. Alex’s family has spent 30 years growing their small business. They’ve never had to close a store.

But the good times are probably coming to an end. He just signed a deal to run nine stores in neighboring Nevada. These may soon be the only stores he runs, as California leaders have launched an all-out assault on his business model.

Alex is one of 14,000 franchise owners threatened with extinction by California’s leaders. Last year, lawmakers passed the “FAST Act,” creating an unelected board of bureaucrats with unilateral power to raise the minimum wage by nearly $7 an hour and enact other labor rules. It only affects the fast food industry and affects both mom-and-pop small business owners like Alex and the national brands that license such entrepreneurs as franchisees. Yet the council’s mandates do not apply to unionized companies. Franchisees are essentially extorted into unions.

Small business owners and more than 1 million California voters like Alex fought back. They secured a referendum in November 2024 that could repeal the law, which has been suspended until then. In retaliation, unions have now pushed lawmakers to attack franchisees with even worse attacks.

In February, Councilman Chris Holden, who drafted the FAST bill, introduced a bill to make the so-called “joint employer standard” mandatory. Assembly Bill 1228 — which passed the Assembly on May 31 — would make larger companies accountable for their franchisee’s operations, ostensibly to end labor violations such as unpaid wages and poor working conditions. In the case of unpaid wages, this policy is a solution in search of a problem, as quick eateries account for less than 2% of California wage claims – and franchisees less than 0.7%. It also makes no sense since local franchisees are responsible for wages and benefits. Rather, it would actually force larger companies to exercise control, stripping away franchisees’ independence as small business owners.

Stopping labor law violations is not the point. By forcing thousands of small businesses under a handful of corporate umbrellas, unions and litigation lawyers will find it easier to organize and sue fast food brands. Mary Kay Henry, the head of the Service Employees International Union that has focused on the fast food industry for decades, took credit for the new bill. (The SEIU also spearheaded the FAST bill.) She clarified that it is in response to the referendum, saying that the SEIU “operat[ing] on several fronts.”

Co-liability is the death knell of the franchise model. Since small businesses will be liable alongside the larger companies they franchise with, they will face significant litigation and administrative costs, hurting already small profit margins. Even worse, the bigger companies will take control of franchisees altogether and pursue a California corporate ownership model, ending opportunities for new and long-term small business owners.

A new survey from the International Franchise Association finds that 98% of California franchisees say they will no longer be independent small business owners if AB1228 becomes law. Nearly two-thirds say they wouldn’t have started a small business in the first place. And nearly 100% of franchisees expect the resulting higher costs to be passed on to consumers – and nearly half believe they will have to downsize, if not jobs. While some argue that the joint employer standard will level the playing field for franchisees, it will in fact tip it decisively against small businesses.

When the FAST bill was passed, Alex felt the chances of his small business surviving were slim. He is sure that it will not happen under joint responsibility. Rising costs will put pressure on already small profit margins, and with a corporate entity gaining greater control, the independence that is franchising’s greatest appeal will be gone. So he pins his hopes on Nevada, where he can still run a small business instead of becoming a cog in the corporate machine.

Will the Silver State turn out better than the Golden State? In the short term, yes. But Mary Kay Henry has already announced that SEIU is bringing California’s new laws to other states while also pushing for federal mandates. The SEIU is also the biggest cheerleader for the stalled nomination of former California Labor Commissioner Julie Su to head the U.S. Department of Labor, which could implement these damaging policies across the country. Su’s loyalty is evident since she appeared via video conference during a meeting in support of the FAST Act last year.

If the union succeeds with this crusade, more than 800,000 small business owners could fall victim, many of whom belong to minorities and female entrepreneurs. Job creators like Alex can run now, but maybe not for much longer.

Matt Haller is president and CEO of the International Franchise Association.

The opinions expressed in commentary are the opinions of their authors only and do not necessarily reflect the opinions and beliefs of Fortune.

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