Don’t be misled by SEI’s so-called franchise suspension

The June 29, 2020 e-mail to all California franchisees is a cynical and transparent attempt to interfere in the affairs of the National Coalition and California-based FOAs,  all of which are independent franchisee associations, by undermining franchisee support for those organizations in general and the misclassification cases pending in California, Illinois and Massachusetts, in particular.

SEI has issued a public announcement stating that they’re no longer going to franchise corporate stores in California.  This was followed up by a video featuring Greg Franks. Both communications contain seriously misleading and inaccurate statements.

This is a political boycott- not a legal necessity. It is similar to the time in the early 1990s when Iowa enacted a very strong franchise relationship law. The International Franchise Association, the lobbying group that represents franchisors and with whom SEI is allied in this  lobbying initiative, stated that its members would no longer sell franchises in Iowa. But what really happened was that the number of franchise outlets in Iowa actually went up in the years after the law was passed.

This boycott is also hypocritical. SEI says that it will not franchise corporate stores but it will permit franchisee to franchisee transfers. Because the buyer of a franchise store must sign a new franchise agreement, that transaction is also the sale of franchise under California and federal law. So SEI is really not suspending franchising.

Mr. Franks claims that both franchisors and franchisees are facing serious challenges from AB5. This misses the point entirely. The solution is not to change the law but change the way SEI treats its franchisees.

He also claims that one aspect of the independent contractor status of franchisees is they set their own hours. This is categorically false based on the franchise agreement and the written  communications issued by SEI itself during the pandemic, indicating that franchisees who wanted to close between midnight and 6 AM needed SEI’s approval on a case-by-case basis.

 Mr. Frank’s statement that AB5 contains a new definition of independent contractor status is also inaccurate, because that same standard exists in many other states and franchising has not come to an end in any of those states.

Mr. Franks goes on to state that franchisee have to be able to answer each of the three questions in the three prongs in the affirmative.  This is wrong, because it is SEI’s burden to demonstrate that its franchisees actually are an independent contractor based on the franchise agreement that it created unilaterally without input any independent franchisee organization.

It also claims that California franchise law requires franchisors to exercise some control over their franchisees’ operations. This is also false.  Exercising control over franchisees is one of the elements of the definition of a franchise. But SEI turns that definition upside down and suggests that because it’s a franchisor, it must exercise that control. That is simply nonsense.

SEI lumps 7-Eleven in with other mainstream franchisors like McDonald’s, Pizza Hut Taco Bell and Dunkin’ Donuts, but this system, which SEI alone chose to design and perpetuate, is very differently structured. In those systems, the franchisees actually own the furniture, fixtures and equipment, they deposit their sales proceeds in their own bank accounts, they process their payroll independent of franchisor oversight, and they control the temperatures in their stores. Comparing SEI to these mainstream franchise systems is like comparing apples to oranges.

This so-called franchise suspension is an effort to manufacture a crisis that does not exist. If SEI loses the misclassification cases, they stand to be liable for damages which could amount to hundreds of millions of dollars.

The solution is not to change the law, but to radically change the day-to-day relationship between SEI and its franchises, the written agreement which governs their relationship and the culture of the  franchise system, and by doing so convert SEI franchisees from glorified store managers into the independent contractors and business owners they yearn to be.

Eric H. Karp
NCASEF General Counsel