California Looks to Place More Liability on Fast-Food Franchisors

    The State Assembly recently passed a bill that would hold large fast-food franchisors responsible for violations happening at the franchisee level. 

    Legal | June 2, 2023 | Sam Danley
    Two men choose food in a fast food restaurant.
    Adobe Stock
    The potential rule is facing pushback from the industry.

    California legislators on Wednesday approved a measure that could bring about significant changes to fast-food restaurants and franchisees operating in the Golden State. 

    Introduced by Assemblymember Chris Holden, AB 1228 (also known as the Fast Food Franchisor Responsibility Act) would hold fast-food franchisors responsible for labor violations committed by their franchisees. The bill passed in the State Assembly and is now headed to the Senate.

    AB 1228 comes on the heels of recent events related to another bill, AB 257 (also known as the Fast Food Accountability and Standards Recovery Act or the FAST Act), which aims to create the country’s first state-backed Fast Food Council. Under that measure, a group of employees, franchisees, franchisors, and public officials would have the authority to establish industry-wide standards and regulations for working conditions and wages at fast-food restaurants in California. 

    An initial version of the FAST Act included a provision that would’ve made restaurant companies jointly responsible for labor law violations committed by their franchisees. That language was stripped from the bill during last-minute negotiations. 

    California Gov. Gavin Newsom signed the controversial bill in September. A coalition of restaurant groups and business owners successfully sued to block enforcement pending a statewide referendum in 2024. More than $13 million already has been raised by fast-food brands and industry organizations to thwart the bill’s passage at the ballot box. 

    With the FAST Act in limbo for the next year and a half, labor groups and legislative members who drafted the measure are returning to the issue of joint liability that was dropped from the initial bill. 

    Fast-food companies currently cannot be held responsible for any labor violations if individual stores are owned by franchisees. If AB 1228 becomes law, franchisors of brands with a minimum of 100 units nationwide will become the primary party responsible for addressing allegations of labor law violations in their franchised stores in the state. The franchisor would have 30 days, or 60 days with an extension, to resolve the issue. Otherwise, both the fast-food restaurant and the franchisee who employs the accuser will be subject to court actions and sanctions. 

    In a statement, Assemblymember Holden said the bill will make it easier for franchisees to pay, support, and protect their employees.

    "I believe many franchisees want to do right by the people that work for them but may not see it as possible under their franchisor's terms and conditions,” he said. “This can help to provide some relief while protecting employees and businesses.”  

    In an earlier statement announcing the bill, he cited his own experience as a former owner of a Subway franchise. 

    “I know how much pressure maintaining a safe and healthy working environment puts on local owner-operators, especially when global corporations refuse to contribute their share,” he said. 

    Advocates for the bill, including the Service Employees International Union and other worker groups, argue that the current franchise model shelters large corporations and leads to widespread wage theft, sexual harassment and discrimination, and workplace injuries and violence.

    AB 1228 is facing pushback from the same coalition that opposed AB 257. Vocal critics include the National Restaurant Association, the International Franchise Association, and a number of major quick-service restaurant chains, like Chick-fil-A, Jack in the Box, and Burger King. Those groups claim this latest bill—as well as a similar measure introduced this spring in New York—will eliminate franchisee independence, impose punitive regulatory constraints on one segment of the industry, and create confusion among operators and employees. 

    Opponents also argue the measure would result in fewer job opportunities and increased prices for consumers. 

    “AB 1228 has the potential to destroy tens of thousands of local franchised restaurants by taking away their independence in favor of corporate control and more government intervention,” said Jeff Hanscom, IFA vice president of state and local government relations, in a statement. “This will eliminate the equity local restaurant owners have built over decades and take away any future opportunities for franchise business ownership, especially people of color, women, immigrants, and other underrepresented communities. The California Senate should reject this misguided bill before it will force restaurant closures, crush jobs, and raise prices on hard working Californians.”

    Last month, more than 100 franchise owners from 21 brands traveled to Sacramento to share their concerns with legislators. Recent polling from Oxford Economics suggests there’s little support for the measure among California franchised restaurant owners. Ninety-two percent of those surveyed by the advisory firm in May said they “strongly oppose” the bill. Ninety-eight percent of respondents said they believe AB 1228 would interfere with their freedom to run their business. Ninety-three percent said they would be “very concerned” if their franchisor or brand took more control of the operations of their restaurants should the bill become law.

    “Local restaurant owners are overwhelmingly opposed to AB 1228 because it strips our ability to run and operate our own small businesses,” said Alex Johnson, a Bay Area franchisee who owns Cinnabon and Auntie Anne’s franchises. “Proponents are ridiculously claiming that AB 1228 is good for franchisees, but these survey results speak loud and clear that restaurant owners do not want more corporate control over our restaurants. Legislators should listen to thousands of local franchised restaurant owners and reject this terrible bill.”