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 them in first jobs like underprivileged youth and newcomers. immigrants. Alex’s family has spent 30 years building their small business. They never had to close a store.

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

Alex is one of 14,000 franchise owners who have been targeted for extinction by California executives. Last year, lawmakers passed the “FAST Act,” creating a council of unelected bureaucrats with the unilateral power to raise the minimum wage by nearly $7 an hour and set other rules of the work. It only covers the fast-food industry, affecting both small, family-owned business owners like Alex and the national brands these entrepreneurs license as franchisees. However, the board’s mandates will not apply to unionized businesses. Franchisees are essentially coerced into unionizing.

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

In February, Assemblyman Chris Holden, author of the FAST Act, introduced a bill mandating the so-called “Joint Employer Standard”. Assembly Bill 1228 – which was passed by the Assembly on May 31 – would hold big corporations accountable for the operations of their franchisees, ostensibly to end labor violations such as unpaid wages and improper working conditions. In the case of unpaid wages, this policy is a solution in search of a problem, since quick-service restaurants represent less than 2% of California’s wage claims – and franchisees less than 0.7%. It also doesn’t make sense, since local franchisees are responsible for pay and working conditions. Perversely, this would actually force big business to start exercising control, taking away the independence of franchisees as small business owners.

Stopping labor rights violations is not the issue. By forcing thousands of small businesses under a handful of corporate umbrellas, labor unions and litigators will find it easier to organize and sue fast food brands. Mary Kay Henry, the head of the Service Employees International Union who has spent decades targeting the fast-food industry, took credit for the new bill. (The SEIU also spearheaded the FAST Act.) She made it clear that it was a response to the referendum, saying the SEIU is “operating[ing] on several fronts.

Joint and several liability sounds the death knell of the franchise model. Since small businesses will be liable alongside the larger companies they are franchised with, they will face significant legal and administrative costs, which will hurt already thin profit margins. Worse still, big business will take over franchisees and pursue a California business ownership model, ending opportunities for new and long-time small business owners.

A new survey from the International Franchise Association shows that 98% of California franchisees say they will no longer be independent small business owners if AB1228 becomes law. Almost two-thirds say they wouldn’t have started a small business in the first place. And nearly 100% of franchisees expect to pass the resulting higher costs onto consumers — and nearly half believe they will have to cut employee hours or even jobs. While some argue that the joint employer standard will level the playing field for franchisees, it will actually tilt it decisively against small businesses.

When the FAST law was passed, Alex felt that his small business was unlikely to survive. It is certain that it will not be under joint responsibility. Soaring costs will squeeze already thin profit margins, and with a corporate entity taking more control, the independence that is franchising’s greatest appeal will be gone. That’s why he’s pinning his hopes on Nevada, where he can still run a small business instead of becoming a cog in the business machine.

Will the Silver State be better than the Golden State? In the short term, yes. But Mary Kay Henry has already announced that the SEIU is applying the new California laws to other states, while pushing for federal warrants. The SEIU is also the biggest cheerleader in the stalled nomination of former California labor commissioner Julie Su to head the US Department of Labor, who could implement these harmful policies nationwide. . Su’s allegiance is clear since she appeared via video conference at a rally in favor of the FAST Act last year.

If the union succeeds in this crusade, more than 800,000 small business owners could suffer, many of them minorities and women entrepreneurs. Job creators like Alex can run for now, but maybe not for long.

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

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