On July 14, 2023, a new attempt to regulate the fast-food industry in California was delayed after its proponents pulled the bill from a Senate Judiciary Committee hearing. Assembly Bill 1228 (AB 1228), introduced in February 2023 by Assemblymember Chris Holden (D-Pasadena), is the newest effort in a series of bills that seek to regulate wages, working conditions, and rules concerning civil liability in the fast-food industry. As currently written, AB 1228 would implement a joint-employer theory of liability between a fast-food restaurant’s franchisor and franchisee, by requiring the franchisor to share “all civil legal responsibility and civil liability for the fast-food restaurant franchisee’s violations.”

Background

In September 2022, California Gov. Gavin Newsom signed into law AB 257, the controversial Fast Food Accountability and Standards Recovery Act, also known as the FAST Act (previously covered in a September 2022 GT Alert). The Fast Act, which was a product of union-backed efforts to unionize the restaurant industry, sought to impose sweeping regulations on the fast-food industry in California, reshaping the way fast food employers and owners operate. An important piece of the FAST Act was to establish a “Fast Food Sector Council,” consisting of ten representatives from different groups within the fast-food industry, as well as representatives from the Department of Industrial Relations and the Governor’s Office of Business and Economic Development. The Council would have been empowered to establish industry wide “minimum standards on wages, working hours, and other working conditions related to the health, safety, and welfare of . . . fast food restaurant workers.”

The FAST Act defined a “Fast Food Restaurant” as a restaurant that (i) provides food or beverages, (ii) for immediate consumption on or off the restaurant’s premises; (iii) to customers who order and pay for items prior to eating; (iv) with items sold or prepared in advance, including items that may be prepared in bulk and kept hot, or items that can be prepared or heated quickly; and (v) with limited or no table service. Further, the Fast Act defined a “Fast Food Chain” as a set of “Fast Food Restaurants” with 100 or more establishments nationally that share a common brand, or that have standardized options for decor, marketing, packaging, products, and services. Additionally, while it is currently unclear how the legislation will determine what constitutes an establishment, generally and for purposes of the 100 national count, only one of the establishments needs be located in California for the Act to apply to it. Notably, these broad definitions will encompass nearly every counter service restaurant in California—ranging from a traditional quick service model to certain buffets to more causal dining establishments with counter service—as well as both franchised and non-franchised restaurants.

Importantly, before the FAST Act was signed into law, a significant amendment removed a joint liability provision. That provision would have made every franchisor a joint employer of any franchisee employees and would have made franchisors liable for any Labor Code violations committed by its franchisees. The provision also prevented a franchisee from making any agreement to indemnify a franchisor for liability under the FAST Act by making any such agreements void. With these provisions removed, Governor Newsom signed the bill in September 2022.

After the bill was signed but before the FAST Act went into effect, opponents set out to garner enough signatures for a voter referendum initiative, in hopes of postponing and potentially overturning the law. On Jan. 24, 2023, the California Secretary of State verified and qualified a referendum challenging the FAST Act, suspending the Act’s implementation and putting its approval on the November 2024 ballot. The FAST Act will not take effect unless California voters approve it.

AB 1228

Even though the FAST Act is on hold pending the outcome of the vote in November 2024, proponents of the FAST Act sought to pass AB 1228. As noted, AB 1228 is intended to reinstate the joint liability portions of the FAST Act that were dropped before Governor Newsom signed it. Under AB 1228, a fast-food restaurant franchisor—defined using the same definitions as stated in the FAST Act—would share all civil liability for its the franchisee’s potential violations, including violations under the California Labor Code, the Business and Professions Code, and the Fair Employment and Housing Act, and authorize enforcement of provisions against the franchisor to the same extent that they may be enforced against the franchisee. Additionally, as was the case in the FAST Act’s liability provision, AB 1228 specifically provides that any waiver of its provisions is against public policy and would be therefore void and unenforceable. Moreover, AB 1228 provides a framework for a franchisee to sue its franchisor if the franchisor prevents or creates a “substantial barrier” to the franchisee’s compliance with state and local law.

Proponents of AB 1228 claim the bill is necessary to ensure a franchisee complies with local and state laws. They allege that franchisors often impose strict rules that impact a franchisee’s bottom line and adversely impact franchisees’ ability to “pay, support, and protect their workers,” and thereby increase the likelihood that a franchisee will be unable to comply with state and local regulations. Opponents have been vocal in their criticism of AB 1228. They argue that AB 1228 will force franchisors to exert significant control over their franchisees in order to protect against liability, thereby eroding the franchisee’s autonomy and essentially turning small business owners into middle management. Opponents also fear that AB 1228, will increase operating costs, leading to higher food costs for consumers, and invite additional frivolous lawsuits against franchisees.

AB 1228’s Removal From Hearing

Despite a July 14 deadline for the Senate Judiciary Committee to meet and discuss bills, including AB 1228, supporters of the bill requested that the hearing be rescheduled to allow for more time to modify the bill. Committee chair, Sen. Tom Umberg, (D-Santa Ana), has also requested that both sides of the issue engage in meaningful discussions to hopefully reach an agreement on any proposed modifications.

While missing the July 14 deadline would normally have delayed consideration of AB 1228 for a full year, proponents of AB 1228 hope the Senate Rules Committee will grant a waiver to hold a special hearing in August or September. Sen. Umberg has stated he will recommend this course of action to the committee.