REGULATORY THREAT TO FRANCHISING

Regulators across the country are taking the position that the  franchise providers of janitorial, security guard, industrial gardening, delivery and other services to commercial clients  who sign on as “unit franchisees” under master franchisees, are really employees of the master franchisees.  Laws vary from state to state.  California uses “substantially associated” as one criteria.

As to what makes one business “substantially associated” with another, the test is whether a business uses another’s trademark to identify its business. If so, the two are substantially associated, and if not, not. A business may also qualify as a franchisor if it allows the associated enterprise to use its trademark and if it:

  • Provides the associated enterprise with advice and training,
  • Retains significant control over the conduct of the associated enterprise,
  • Grants the associated enterprise exclusive territory rights, or
  • Requires it to purchase or sell a specified quantity of your goods or services.

In the eyes of state regulators, whether the master franchisees in the janitorial and other industries under scrutiny meet these tests with respect to their unit franchisees is not clear, given the differences between their relationships and those common in the franchising industry as a whole.

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