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Massachusetts Statutory Environment Creates “Chilling Effect” on Franchise Development

Franchisors operating in Massachusetts ponder reducing individually owned establishments in favor of corporately owned stores.

Negative economic consequences created by the Massachusetts legislature by amending the Commonwealth’s current statutory worker classification test are restricting franchise development there. The International Franchise Association testified July 16 regarding the current law and how it is negatively affecting franchisors who are seeking to develop new locations and threatening job creation by current and prospective franchisees.

Developing a Legislative Solution

Massachusetts’ current statutory three-pronged “ABC Test,” as well as recent related litigation to assess whether an employment relationship exists between franchisees and franchisors, has created a chilling effect on franchise growth in the Commonwealth, which I outlined during my testimony. IFA and our members are eager to work with lawmakers to develop a legislative solution that protects franchisees from being classified as employees while they act as their own bosses through franchise ownership.

The ABC Test evaluates whether the individual is free from control and direction, whether the individual’s service is performed outside the usual course of business of the entity for which the service is performed, and whether the individual can conduct the business independently of the other entity. Massachusetts’ statute assumes an employment relationship unless all three prongs of the test are met.

During my testimony that was presented before the Joint Labor & Workforce Development Committee, I noted that IFA urges support for Senate Bill 886, House Bill 1736, Senate Bill 870 and House Bill 1778, all of which would clarify that franchisees are not employees.

IFA has received reports from several franchisors who have advised franchise systems without locations in Massachusetts not to develop locations there until the relationship between a franchisor and a franchisee is clarified as an independent contractor relationship and not an employment relationship. The committee was told of numerous examples of franchisors already operating in Massachusetts that are considering reducing the number of individually owned establishments in favor of corporately owned stores.

While franchisees and other small-business owners are the engines of the American economy, regulations that force franchisees to be treated as “employees” while they act as their own boss will serve only to deprive the economy of the entrepreneurial drive and talent of franchisees, and thereby hinder economic growth. In the Commonwealth of Massachusetts, there are more than 13,500 franchise establishments employing more than 149,000 individuals and generating $15 billion in economic output annually.

Dean Heyl is senior director, state government relations, public policy & tax counsel, for the International Franchise Association. Find him at fransocial.franchise.org via the directory.

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