Opinion: Could a bill to help franchisees raise fast-food wages?

The Times’ editorial board urged Gov. Jerry Brown on Wednesday to veto a bill (SB 610) that would give franchise operators more protection in contract disputes with their chains. Hours later, the editorial board of the New York Times called on Brown to sign the measure.

Who says all liberals think alike?

The other Times appears to have been persuaded by the same argument that swayed at least some of the legislators who voted for SB 610. The Service Employees International Union, which is trying to unionize fast-food workers, has framed the measure as a way to help those low-paid Californians organize and win raises.

“By improving the legal rights of franchisees, the bill would begin to offset damaging trends in antitrust and contract law that have given corporations ever more control over franchisees,” the N.Y. Times editoral states. “Equally important, by proving that significant reforms to the franchise system are possible, the bill could provide momentum in the fight to raise the pay of franchise workers.”

The Los Angeles Times, by contrast, argued that SB 610’s reforms aren’t a significant advance beyond what courts already provide. Nor would they do much, if anything, to improve franchise operators’ profit margins, which are the biggest factor in what their workers are paid.

The proposal by Sen. Hannah-Beth Jackson (D-Santa Barbara), which cleared the Legislature last week, would amend a 1980 state law governing the relationship between chains and the companies that operate their franchises. The typical franchise agreement gives an operator a license to use a chain’s trademarks (that is, its brands) for a limited time period, possibly with a right to renew. But it also requires the operators to comply with the chain’s operating rules, which are extensive and subject to (often unilateral) change.

If that sounds one-sided, it often is, although consolidation among franchise operators has leveled the playing field a bit. Operators are particularly vulnerable to chains putting competing franchises in their markets, launching new products or services that require significant additional investments, or changing the terms of the agreement when it’s due for renewal.

In other words, it’s a tough business with many elements outside the operator’s control. Still, no one is required to become a franchise operator. Nor have the courts turned a blind eye to chains that violate franchise agreements, although franchise operators complain that they’ve had to resort to the courts too often.

The most bitterly disputed provision of SB 610 would bar chains from terminating franchises unless the franchise operator had committed a “substantial and material breach” of a lawful requirement of the franchise agreement. Current law requires chains to have “good cause” to terminate, which supporters of the bill say gives chains the leeway to cancel franchises for trivial reasons. But “for practical purposes,” said Jonathan Solish, a partner at Bryan Cave in Los Angeles who specializes in franchise law, “no court is likely to endorse termination for good cause for an immaterial and unsubstantial breach of a franchise agreement.” The law also requires chains to give franchises 30 days to fix such breaches.

Other provisions of SB 610 would prohibit chains from unreasonably blocking an operator from selling a franchise to a qualified buyer and allow operators to regain franchises that are improperly terminated. The courts provide similar remedies today, according to several lawyers active in the field, although they’ve stopped short of reinstating lost franchises.

The bill would clearly break new ground on one point: it would bar chains from requiring operators to waive their right to sue if the chains act in bad faith. Such requirements, which have been appearing in some franchise agreements, may not be enforceable because they blatantly violate longstanding principles of contract law and public policy. But the Legislature would still be right to underscore that point, and to do so for all contracts.

Notably, nothing in the bill limits the demands a chain can make in its franchise agreements or operations manual. Chains can still dictate prices and hours of operation, as well as imposing service and appearance standards that effectively set a floor for the number of employees. They can still require the use of certain suppliers. And they can continue to demand whatever fees and royalty payments the market will bear.

Those are the factors that squeeze profit margins, limiting franchise operators’ ability to raise workers’ pay or hours. That’s not to say they can’t do those things; it’s just to point out that the bill won’t make it any easier for them to do so.

Rochelle B. Spandorf, a partner at Davis Wright Tremaine in Los Angeles who specializes in franchise law, said “smart” chains don’t tell their franchise operators what to pay employees, or get involved in any other essential employment decisions. The point is to assure that the operator, not the chain, is considered those workers’ employer, with all the obligations that entails.

This distinction may be getting harder to keep, however. The National Labor Relations Board’s general counsel recently issued an opinion (which still hasn’t been released publicly) apparently holding that the requirements McDonald’s imposed on franchises had so much effect on employees, it effectively was a “joint employer” in more than 40 alleged unfair labor actions by franchise operators.

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