Legislative Changes in 2024 for Franchisors
On September 28, 2023, the Legislature passed AB 1228 which creates new standards for National Fast-Food Chain Restaurants. The bill is operative January 1, 2024. The Department will be reviewing the Franchise Disclosure Documents (FDDs) of franchisors impacted by the new law to ensure that adequate disclosures are provided to prospective franchisees about the impact from the law.
AB 1228 increases the minimum wage for fast food employees to $20 per hour, beginning April 1, 2024. The bill authorizes the Fast-Food Council to set fast-food restaurant standards for minimum wage and develop minimum standards on working hours and other working conditions, including health and safety standards and training. The bill also authorizes the Fast Food Council to set wages for fast food workers until January 1, 2029. The Council and its authority sunset January 1, 2029.
National Fast Food Chain Definition
AB 1228 defines National Fast Food Chain to mean a set of limited-service restaurants consisting of more than 60 establishments nationally that share a common brand, or that are characterized by standardized options for decor, marketing, packaging, products, and services, and which are primarily engaged in providing food and beverages for immediate consumption on or off premises where patrons generally order or select items and pay before consuming, with limited or no table service.
The following businesses are exempt (not included) from the definition of National Fast Food Chain, and therefore not subject to the new law:
- An establishment that on September 15, 2023, operates a bakery that produces for sale on the establishment’s premises bread, so long as it continues to operate as a bakery. This exemption applies only where the establishment produces for sale bread as a stand-alone menu item and does not apply if the bread is available for sale solely as part of another menu item.
- A restaurant located and operating within a grocery establishment and the grocery establishment employer directly employs the individuals working in the restaurant.
- A limited-service restaurant with 60 or fewer establishments nationally that share a common brand.
Working Conditions Definition
AB 1228 defines working conditions to include, but not be limited to, wages, conditions affecting fast food restaurant employees’ health and safety, security in the workplace, the right to take time off work for protected purposes, and the right to be free from discrimination and harassment in the workplace.
Fast Food Counsel Definition
AB 1228 provides that the Fast-Food Council is an 11member council, comprising of fast-food employees, worker advocates, franchisors, franchisees, and government officials within the Department of Industrial Relations and the Governor’s Office of Business and Economic Development to provide direction to, and coordinate with, the Governor, executive and local agencies regarding the health, safety, and employment of fast-food restaurant workers.
General Responsibilities of the Franchisor
For franchisors of National Fast Food Chains who are not exempt from AB 1228, the Department will be reviewing FDDs to ensure that the impacts of AB 1228 on prospective franchisees are properly disclosed.
The following guidance is to assist franchisors in compliance.
- A franchisor should review its franchise system to ensure that it meets the minimum fast food restaurant employment standards, including, as appropriate, standards on wages, working conditions, and training, as are reasonably necessary or appropriate to protect the welfare, including the physical well-being and security, of fast-food workers, as set forth by the Fast Food Council.
- A franchisor should amend its FDD (including exhibits) to comply with the state and federal disclosures requirements.
General Responsibilities of the Franchisees
A franchisee should ensure that the requirements mandated by the bill are followed.
Additional Disclosures Required in the Franchise Disclosure Document
For National Fast Food Chains that are not exempt from AB 1228, the Department will expect FDDs demonstrating compliance with state and federal franchise disclosure laws as applicable:
The Department will expect disclosures demonstrating compliance with state and federal franchise disclosure laws as applicable:
- In Item 1, requires a franchisor to disclose any laws or regulations specific to the industry in which the franchise business operates. The Department will expect to see AB 1228 disclosed under the section related to rules and regulations.
- In Item 5, requires a franchisor to disclose initial fees. The Department will expect the Franchisor to disclose additional fees charged to the franchisee for any initial training and any safety or security measures specific to AB 1228’s requirements and standards.
- In Item 6, requires a franchisor to disclose all fees a franchisee must pay to the franchisor or its affiliate. The Department will expect any additional training and assistance specific to AB 1228’s requirements and standards to be included.
- In Item 7, requires a franchisor to disclose the estimated initial investment. The Department will expect the franchisor to include increased costs related to AB 1228 training, assistance, and standards implementation.
- In Item 11, requires a franchisor to disclose any assistance and training provided to franchisees. . The Department will expect disclosures related to safety measures to be taken by the franchisee at its outlet, in the section related to the business site specific to AB 1228’s requirements and standards.
- In Table of Contents of the Franchisor’s Operations Manual Exhibit the Department will expect to see measures required under AB 1228 are established and disclosed in the Table of Contents.
- In the California State Addendum to FDD the Department will expect to see a disclosure about AB 1228:
“Under California AB 1228, you must comply with the minimum wage standards for your employees beginning April 1, 2024. You must also adhere to certain working conditions, including health and safety standards and training, as set forth in the Operations Manual. Failure to comply could lead to violation of the law and possible fines and lawsuits brought by your employees.”
- In the California State Addendum to Franchise Agreement the Department will expect the Franchisor to include:
- A specific disclosure regarding AB 1228 and its impact.
- An acknowledgment that Franchisor has made all appropriate amendments in its operations and included the required amendments in its operation manual to comply with the requirements.
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