Questions and Answers About AB 5
Q: What is AB 5?
A: The California Legislature passed a law in 2019, Assembly Bill 5, intended to ensure that workers who are treated like employees are classified as such. The state legislators who championed the law said they were concerned that gig economy companies (including ride-share companies like Uber and Lyft) were classifying their drivers as independent contractors, rather than employees, to avoid the burden of the range of benefits that state law requires that companies offer employees.
Q: Why is the current version of AB 5 a problem for franchising?
A: The franchise industry supports the goal of AB 5; in fact, many franchise businesses have led the way on worker employment. However, as currently written, AB 5 could turn franchise owners – local entrepreneurs who license a name and operating system from an established brand – into employees of the company from which they license their brand. Choosing to license a brand name and invest in starting a franchise business shouldn’t mean these entrepreneurs are treated like employees of a corporation. In fact, they are independent risk takers and job creators who employ more than 700,000 Californians.
Q: I understand many industries got exemptions from AB 5. Why not franchises?
A: Last year, nearly 40 industries – including doctors, realtors, insurance brokers, investment advisers and lawyers – successfully lobbied the Legislature to be exempted from AB 5. Although the franchise industry did not get an exemption in the bill as it was passed and signed into law, many legislators understand the potential for negative impact to franchising and have committed to revisiting the issue this year.
Q: How many franchise businesses and jobs in California are affected by AB 5?
A: There are 76,000 individual franchise businesses in California, employing 730,000 people and injecting nearly $70 billion into the state’s economy each year. Not only could AB 5 affect these existing businesses, but without a franchise fix, experts predict the measure could threaten 8,300 newCalifornia small businesses, 86,000 potential new jobs across California and $97.5 billion in local investment into new and existing California small businesses.
Q: Many franchise businesses are already represented by other organizations lobbying on AB 5 – why is there a specific “franchise fix” request on the table?
A: A number of industry groups are working on AB 5, including those representing restaurants, hotels and even individual brands. However, the International Franchise Association is the only voice advocating for the unique needs of the franchise businesses across all industries impacted by AB 5. We understand the unique state and federal laws that apply to franchising that make applying the ABC test such a challenge, and we are dedicating significant resources to helping California’s lawmakers get it right.
Q: Last session, IFA said that they opposed AB 5 – now you’re saying you support its goals. Which is it? Why have you changed your position?
A: We have always supported the goal of AB 5: ensuring that workers who are treated as employees are classified as such. We opposed AB 5 last year because we were concerned that its application of the ABC Test could lead to local franchise business owners being classified as employees of the company from which they license their brand. The bill as passed and signed into law still creates significant legal uncertainty for franchising; that’s the reason we’re seeking a franchise fix this year.
Q: The proposed “franchise fix” is written very broadly. Couldn’t this language allow companies that are already taking advantage of independent contractors to continue doing so?
A: The language IFA has put forward ensures that local franchise owners are not classified as employees of the corporate entity they license their brand, while still ensuring employees who work for the local businesses are appropriately classified.
Q: To ensure people don’t take advantage of a franchise loophole, why not include language requiring a brick-and-mortar location or a minimum number of employees?
A: One of franchising’s greatest strengths is the diversity of businesses it encompasses – including home-based and mobile businesses like pet groomers and business coaches who may not have any employees or a brick-and-mortar location. Our goal is to ensure that all of these franchise entrepreneurs can continue operating as business owners rather than as employees of the corporation they license their brand from.
Q: Don’t other states use ABC tests as well? How come AB 5 is any different, let alone damaging?
A: Yes, other states utilize ABC tests as well. However, it’s the application of those tests and their respective labor codes that differ. Most ABC tests are limited in application to worker’s compensation or unemployment compensation statutes. Under AB 5, the ABC test in California will apply to the state’s entire labor code, covering a much larger swath of business considerations, and thus exposing California franchise small business owners and brands to more liability and risk.
Q: What can I do to support California franchises?
A: Take action! Please contact and urge your State Assemblymember and Senator to clarify AB 5 by supporting a franchise fix that protects these entrepreneurs and the local franchise businesses they worked so hard to build. Visit clarifyAB5.org to learn more and get involved.