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IFA Protects and Promotes the Independent Contractor Status of Franchisees

A widely used test for determining independent contractor status in some states does not account for the franchise relationship.

When it comes to legislation, the International Franchise Association is always ready to act both proactively and reactively.  Nowhere is this proven more than in legislation related to the independent contractor status of franchisees.  2013 has been an incredibly active state legislative session, and although detrimental franchise relationship bills justifiably receive the most attention, there are many other pieces of legislation that are important to franchising.  One such area of law is the independent contractor status of franchisees.

Almost everyone knows that franchisees operate as independent contractors. They make the employment decisions, have their own Employee Identification Numbers, place purchase orders, bring in new business and process payrolls.  They are active participants in their local communities, create jobs for residents and give back to the communities that support and embrace them.

Unfortunately for franchisees, there is a widely used test for determining independent contractor status in some states that does not account for the franchise relationship, clouding their status when it comes to filing taxes, applying for bank loans, and completing other functions associated with owning and operating a small business.  Just over one-half of the states use this test.

Employee or Independent Contractor Test

The “A-B-C” test asks three questions to determine if an individual is an employee or an independent contractor:

  • Does the individual perform the work free from the employer’s control and direction over the performance of the employee’s services?
  • Is the individual customarily engaged in an independently established trade, occupation, profession or business?
  • Does the individual perform work which is outside of the usual course of business of the employer for whom the work is performed?

Many federal agencies and state governments use their own methods of determining independent contractor status, and some include lists of dozens of factors that must be taken into account.  For example, for federal tax purposes, a 20-factor test is generally used.  Among those 20 factors are structures for payment, setting of work hours, providing tools and materials, and whether or not an individual offers services to the general public.  The U.S. Department of Labor and many states use an “economic reality” test, a five-part test proscribed by the U. S. Supreme Court in 1947.  Some states, California for one, take into account the “totality of the circumstances” surrounding the small business or individual being examined.  Under these other tests, franchisees are determined to be independent businesses.

While these tests may be more complicated, they tend to properly account for the business relationship between franchisors and franchisees, despite the obvious fact that they use the same brand.  Simplified government regulations normally benefit business owners, but in the case of independent contractor classification, the over-simplified A-B-C test inexcusably fails to address franchising, which supports nearly $2.1 trillion in economic output to the U.S. economy.

IFA Takes Action in Washington and Delaware

Earlier this year, lawmakers in Washington state introduced House Bill 1440, which would have created a presumption of employment for individuals, including franchisees, and would have established an A-B-C test for worker classification purposes.  IFA quickly formed a coalition to oppose the bill and leveraged its membership in the Washington Retail Association to stop the legislation.  Although the bill passed two House committees, it did not receive a floor vote by the entire House, effectively killing legislation for the 2013 session.  IFA will continue to monitor the state legislature and will be ready to fight any similar measure if it is re-introduced.

On the East Coast, IFA proactively lobbied for legislation in Delaware that would clarify that the franchisor-franchisee relationship is not an employment relationship by excluding parties to a franchise agreement from the rules of the A-B-C test.  House Bill 55, sponsored by House Rep. Bryon Short and Sen. Robert Venables, received the support of both the Delaware Restaurant Association and the Delaware Food Council, two important coalition partners in the state.  The measure passed the House unanimously in April, and cleared the Senate unanimously in May.  The bill was signed into law by Gov. Jack Markell on June 6.

The success of this measure in Delaware mirrors the successful campaign to pass similar legislation in 2012 in Georgia, where the bill also passed unanimously.  Delaware’s legislature is controlled by Democrats, while Georgia’s legislature is controlled by Republicans.  In an era of paralyzing political partisanship, it is encouraging that lawmakers from both parties realize the importance of these measures to small-business development in their states.

Delaware and Georgia are exceedingly different states, yet remarkably, in both, lawmakers realized the need for a small, yet crucial clarification that will ensure franchise small-business owners can take advantage of all the benefits of owning an independent small business.

As many state legislative sessions wrap up this spring, IFA will begin looking toward the 2014 sessions to identify opportunities for success in other states that use the A-B-C test to determine independent contractor status.  The unanimous bipartisan support for the legislation in Georgia and Delaware, combined with reluctance to pass the opposite type of bill in the state of Washington, will certainly serve as a springboard for IFA to advocate for changes that are imperative for the continued success of the franchise community.

Dean Heyl is senior director, state government relations, public policy & tax counsel, and Kevin Serafino is manager, government relations & public policy, respectively, for the International Franchise Association.  Heyl can be reached at 202-662-0792 or dheyl@franchise.org and Serafino at 202-662-0837 and kserafino@franchise.org.

 

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