Regulation review for 2022 | Global Franchise
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Wednesday 10th August, 2022

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Regulation review for 2022
Regulation review for 2022

Insight

Regulation review for 2022

As we enter a new year, it’s worth taking the time to outline the legal and regulatory changes or challenges that franchisors need to be aware of. We spoke with three of the leading franchise legal practitioners to get the lowdown on 2022’s biggest hurdles

The PRO Act

Lane Fisher, FisherZucker LLP

KM: Why is the PRO Act such a contentious issue in franchising at the moment?

LF: The PRO Act is significant because it resurrects the Obamaera joint employer standard. The PRO Act could be used to impose liability on a franchisor under the National Labor Relations Act for a franchisee’s alleged unfair labor practices and to force franchisors to recognize and legally bargain with unions across a brand, rather than franchisee by franchisee.

Essentially, the PRO Act seeks to make it easier for employees to unionize by adopting California’s joint employer standard and its “ABC” test into federal law. That ABC test says that an employee of a franchisee is considered an employee of the franchisor if the franchisor has “indirect” control and is involved in hiring, firing or other direct supervision. Amid all the objections and opposition, the California legislature crafted over 100 exemptions to allow certain industries to continue to operate freely as independent contractors; however, despite Herculean efforts, IFA and the franchise lobby were unsuccessful at getting a franchise exemption written into the California law.

The PRO Act has yet to be passed; however, if Senate Democrats lower the legislative filibuster threshold from 60 to 50 votes, they could enact the PRO Act into law this year. Even if the PRO Act fails, remember that the National Labor Relations Board and Department of Labor can adopt the joint employer standard on their own through new appointees, with or without a requirement that the joint employer must possess and actually exercise direct control over a term of employment. On the bright side, David Weil’s confirmation is stalled, and 25 states have legislated the definition of joint employer to require direct supervision.

Kevin Hein, Akerman LLP

KM: Will the PRO Act pass, and if so, will it instrumentally affect franchising in the U.S.?

KH: At this point in the legislative cycle, I am doubtful the PRO Act will get passed by Congress. The president is working to get his Build Back Better legislation through both houses and he may be using all of his political capital to do so. The question remains whether he will have the capital left to push the PRO Act as well, especially in an election year. Plus, the unions seem to be doing fairly well in their organizing efforts as is.

If the PRO Act were to pass, I am sceptical that it will significantly change the way that franchising operates here in the U.S. The unions would need to rely on strong “joint employer” rulings to assert that the franchisor is the joint employer of all of the employees of all of its franchisees. That can be a high burden.

Even if it were to become easier, the unions will focus on organizing employees in the big brands because that will give them the best return for their efforts. Since the vast majority of U.S. franchise systems have fewer than 100 locations, most franchise systems will fly well below the radar of many unions.

Areas of expertise

Pauline Cowie, TLT LLP

KM: What is the number-one area of expertise that franchising legal teams will need to master in 2022?

PC: 2022 will be another year where legal teams will need to provide flexible resource to franchisors, to help them navigate and weather the pressures they and their franchisees face. These pressures include higher energy costs, increases in inflation, the ongoing impact of COVID-19, supply chain issues, availability of labour, and Brexit. Another year of disruption will mean that some sectors will continue to struggle, so helping clients to find practical and creative solutions will be key.

With challenges there are, however, opportunities, and we see international expansion as being a key driver for resilience and diversification. Franchising-focused legal teams with knowledge and expertise in guiding clients through negotiations with international partners and handling regulatory compliance will be in high demand.

KM: What should franchisors look for when identifying the perfect legal team for them?

PC: A team with the right legal expertise is a given, but it is about more than that. Clients want their legal team to listen to them, anticipate their legal needs and deliver solutions with real commercial benefit. They want their legal team to align with their values, to be inclusive and celebrate differences with a flexible and considerate environment to help people thrive as well as meeting sustainability goals.

They also want their legal team to be innovative and agile, and to push boundaries to increase speed of delivery while reducing the cost of legal services without compromising on quality.

Lane Fisher, FisherZucker LLP

KM: Are there particular industries within franchising that require a more nuanced approach, from a regulatory perspective?

LF: Franchisors with labor intensive businesses, often in the service space, are at a higher risk in states like California and New York. Business models where the franchisor must exert a higher degree of control based on the nature of the service – where they play some critical and indispensable role in recruitment, or which employ many workers – are more likely to run into more issues.

Post-pandemic landscape

Kevin Hein, Akerman LLP

KM: Have the aftershocks of COVID-19 changed the regulatory landscape of franchising?

KH: In my opinion, the answer is no. During the initial months of the pandemic the franchise regulators were very focused on disclosing to franchise prospects how the pandemic was impacting unit level operations. In some cases, these regulators were requiring franchisors to amend their disclosures in the middle of the year.

By the time we rolled into 2021 many of the pandemic-related disclosures imposed by the regulatory states had been softened or eliminated. I suspect we will see a continuation of this trend in 2022.

So even though the effort required by lawyers to get franchise disclosure documents through the regulatory process continues to grow for other reasons, I do not anticipate that the pandemic will impact the regulatory regime in any meaningful way going forward.

Pauline Cowie, TLT LLP

KM: Has the work that you do been impacted as a result of the pandemic, or do your services remain consistent?

PC: Certain sectors have really struggled during the pandemic. Our real estate, dispute resolution, licensing and restructuring teams have certainly never been busier. We have also been guiding clients on supply chain and logistics issues and challenges.

Having said that, we have also never been busier on the international front, with clients having a particular focus on the Middle East and looking to Eastern Europe. This isn’t a surprise, as often negotiations and completing legal formalities can take some time.

Regional nuances

Lane Fisher, FisherZucker LLP

KM: Are there any U.S. markets that are notably more complex from a regulatory perspective, or can the country be considered legally homogenous?

LF: California is far and away the most regulated state in the country with more than 395,698 regulations (compared to Idaho with 38,961 regulations). The most regulated states are California, New York, Ohio, Illinois, Texas, Oregon, Washington, Florida, Massachusetts and Louisiana. We also have 15 states that require pre-sale registration and approval by a state administrator before you’re permitted to sell there, and 25 states with comprehensive and disparate business opportunity laws.

You definitely cannot treat all states the same without ending up in regulatory hot water. You must carefully examine your business model, recruitment and selling techniques, to ensure that you are not running afoul of any state law.

By complying with the Federal Trade Commission Franchise Rule, you are exempt from the 25 states that have business opportunity laws. In addition, some states are more hostile to employers or have higher minimum wages; others don’t permit corporate practice of medicine. It’s critically important to ensure that your operation can legally be conducted where you intend to transact business.

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