California franchise owners should take note of a new trend in state enforcement. A focus is emerging on business models that have previously bypassed higher minimum wage pay by operating separate legal entities under the umbrella of a franchise. This tactic, previously employed by various business models including fast-food businesses, is undergoing increased scrutiny, as evidenced by a recent multimillion-dollar wage theft citation leveled against a California franchise operation.
JD Supra reports that the California Labor Commissioner’s Office’s Bureau of Field Enforcement has initiated an effort to target businesses that do not register as large employers but operate their business sites as distinct legal entities. By structuring their operations in this manner, they were able to sidestep requirements for higher minimum wage pay.
This recent enforcement activity exemplifies a clear warning to all franchise operations: the state of California is watching and will not hesitate to act against wage theft. Foregoing the traditional route of operating as a large employer and instead utilizing the franchise model as a subterfuge to avoid higher minimum wage compliance may no longer be a viable strategy in California.
The providers of legal services and corporate legal departments should be aware of these emerging shifts in the regulatory landscape, in order to offer sound legal advice around compliance strategies, mitigate potential risks, and be prepared to adequately respond if targeted with similar wage theft citations. It is time to review business structures, specifically those pejoratively referred to as ‘low-road’ franchising enterprises, ensuring they meet regulatory requirements and are prepared to adapt to new enforcement focuses.
In this changing atmosphere, professionals advising businesses should stay informed about emerging legislation and enforcement trends. They should proactively take measures for their clients to ensure compliance and avoid negative fiscal and reputational impacts that may result from non-compliance.