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Franchise Newsletter Article February 2006

peyman@mohajerian.com (Mohajerian Inc.) — Thu, 09 Feb 2006 22:53:41 -0700

Franchise Registration & Renewal Requirements

In states that mandate presale registration, franchises cannot lawfully be granted until the franchisor has complied with the registration requirements. Failure to comply can result in administrative proceedings, public or private civil actions, or even criminal prosecution.

What are Registration and Renewal Requirements?

All registration states accept the Uniform Franchise Offering Circular format. Some also accept the FTC disclosure format. However, the laws and regulations of each state must be consulted in order to ensure compliance with its individual registration and disclosure provisions. These laws and regulations are included in the GUIDE, as are the UFOC and FTC forms.
Registrations are not necessarily immediately effective; instead, waiting periods of up to 30 days might be imposed in order to give the regulators the opportunity to review the filed documents for completeness. By law or regulation, many states require franchisors to renew a registration, or file a report, annually.

The North American Securities Administrators Association (NASAA) has developed a coordinated review procedure for franchise registrations in multiple states. The procedure is designed to streamline the franchise registration process by funneling communication and comments on registration applications through a "lead state" chosen to coordinate the review. In order to be eligible for coordinated review, a franchisor must file applications in two or more participating states and must provide audited financial statements with its registration application. The franchisor must be filing an initial registration application in each participating state. There is no additional fee for coordinated review; however, the franchisor still must pay the applicable registration fees for each state in which it is registering.
A franchisor could not be refused registration of an offering prospectus on the grounds that the franchisor's felony conviction created an unreasonable risk to prospective franchisees without the procedural due process rights of a fair hearing, cross-examination of witnesses, and notice of evidence to be considered. Lee Myles Associates Corp. v. Abrams (NY S Ct 1982).
An offer to sell a franchise need not qualify as an "offer" under ordinary contract law standards. "Offer to sell" is often defined broadly enough to include the attempt to offer to sell or the solicitation of an offer to buy a franchise or an interest in a franchise. The Illinois statute specifically includes coverage of the offer or sale of an option to purchase a franchise.
However, the renewal or extension of an existing franchise is not generally considered a sale if there has been no interruption in the franchisee's business.
Furthermore, the effect of registration laws is not restricted to what are commonly thought of as sales. "Sale" normally includes any disposition of a franchise for value.

What Affect does Non-Compliance have on these Requirements?

State laws frequently give officials the authority, without a prior hearing, to order a halt to franchise sales if there has been a failure to register successfully. The violation of such a stop order could constitute a criminal offense. In some states, any violation of the registration laws is a crime, regardless of whether there is a stop order in effect.
Whether a franchisee can rescind an agreement that was not properly registered before the sale varies from state to state. Some always allow a rescission, while others provide the remedy if there was a willful violation of the state laws or regulations. A "willful" violation is usually considered to be one that was performed knowingly or willingly, not necessarily one that was intended to injure or defraud another. Liability for a failure to register is not limited to the franchisor. Owners, shareholders, officers, and others who control the franchise seller, directly or indirectly, can be liable.

Who Regulates the Registration and Renewal Requirements?

State franchise registration regulators have been given broad enforcement and rulemaking authority. In various states, their powers include the ability to: sue for equitable relief or damages; undertake investigation inside or outside of the state; hold hearings; administer oaths, subpoena witnesses, and compel the production of evidence; order franchise sales stopped pending a hearing; accept service of process for nonresidents; make rules; prescribe forms; issue interpretive opinions; grant exemptions from registration or disclosure requirements; and deny, suspend, or revoke registrations.
Of course, the powers --both rulemaking and enforcement --must be exercised within constitutional limitations.

Are there Exemptions to the Requirements?

Franchise offerings can be exempt from the registration requirements of state laws based on characteristics of the franchisor, the franchisee, or the offering. Exemptions can be conferred by statute, by regulation, or by a state regulator. Exemptions must be considered in light of a state's registration requirements --one state might declare an offering to be exempt from registration while another simply does not include it within those transactions that must be registered. For example, Illinois excludes from the definition of a franchise a transaction requiring the payment of a fee of less than $500, while Michigan defines the arrangement as a franchise but exempts it from registration.
Registration exemptions based on the net worth of the franchisor or the franchisor's corporate parents are perhaps the most important, existing by statute in eight states. The experience of the franchisor and the sophistication of the prospective franchisee are other factors that might qualify an offering for an exemption.

A franchisee's sale of a franchise, for its own account and not through the franchisor, is generally exempt from registration, as are offers to sell an additional franchise to an existing franchisee and renewals of existing franchises. Offers and sales to banks and other financial institutions are frequently covered by statutory exemptions.
Isolated sales --sometimes described as no more than one sale in 12 months --that are not part of a franchise distribution plan are exempt under some state laws. Franchise sales by executors or administrators and by bankruptcy trustees are frequently exempt from registration.

A franchisor must file a request with the state regulator in order to secure an exemption from registration. Prospective franchisees are entitled to notice and disclosures as provided by the various state statutes. It has been held that strict compliance with exemption requirements is necessary or the exemption will be lost.

Since each state that requires registration has unique criteria determining which offerings are subject to registration, and which of those are eligible for exemption from registration, close attention to state statutes and regulations is necessary.

ALL SUMMARY INFORMATION FOUND AT HTTP://BUSINESS.CCH.COM/
CCH BUSINESS GUIDE, FRANCHISE AND DISTRIBUTION #315, JANUARY 20, 2006.

General Recommendations:

Franchisors and franchisees need to be certain they comply with all local, state, and federal laws. The very complex nature of franchise and distribution laws can make compliance and success difficult. Experienced legal counseling is best to ensure your rights and obligations are being protected protecting your future. Mohajerian Law Corp. can help you understand the law, how it affects you, and actively protect your rights.

Franchise Newsletter Article January 2006

peyman@mohajerian.com (Mohajerian Inc.) — Sat, 07 Jan 2006 12:10:40 -0700

Understanding Franchise Agreement Relationship & Termination Laws

BASED ON THE A SUMMARY OF FEDERAL AND STATE FRANCHISE RELATIONSHIP AND TERMINATION LAWS.

This is a quick summary of the Relationship and Termination provisions of federal and state requirements. For an in-depth analysis of the specific requirements applicable to you, please contact Mohajerian Law Corp. at www.mohajerianlaw.com. This newsletter is not intended to be legal advice and is for informational purposes only.

Franchise relationship and termination laws deal directly with conduct in the context of an existing franchise agreement. Generally agreed upon is the concern by legislatures regarding franchises being wrongfully terminated or dominated unfairly by large franchisors and distributors. The conduct of concern has been discrimination, franchisor competition, market encroachment, and dilution.

What do Termination, Cancellation, and Nonrenewal Really Mean?

The act of ending a franchise relationship is deemed a termination, cancellation, or nonrenewal. While termination and cancellation generally refer to ending a relationship during its intended term, nonrenewal generally means the end of a franchise agreement at expiration. Often times, the franchise agreement will outline the grounds for termination or cancellation. As well, the basis for renewal a signified in the franchise agreement.

Regardless of the terms set forth, the franchise relationship and termination laws set standards that franchisors must follow to avoid successful legal action on the part of a franchisee. It is important that careful consideration by franchisors be made to comply with law of their applicable jurisdiction.

How is Alteration Different?

In addition to termination, cancellation, and nonrenewal some franchise relationship and termination laws govern changes to franchise agreements otherwise known as alterations. For example, under Section 1 of the Indiana Deceptive Franchise Practices Law, it is unlawful for a franchise agreement to provide for or allow substantial modification of the franchise agreement by the franchisor without written consent of the franchisees. However, the change may have to be proven to be substantial. In Wright-Moore Corp. v. Ricoch Corp. a photocopier manufacturers unilateral change in credit terms for the sale of copiers to a distributor, as authorized by the distributorship agreements, was held not to be a substantial change due to the lack of resulting harm to the distributorships business.

Are There Standards of Conduct for Franchisors?

Under the franchise relationship and termination laws, a common requirement of conduct specifies that franchisors must act fairly, justly, or with good cause. These standards apply variously in attempts by franchisors at termination, cancellation, nonrenewal, alterations, and sometimes changes in competitive circumstances. For example, the good cause standard, in most states, applies to termination, cancellation, and nonrenewal. However, under Section 20 of the Illinois Franchise Disclosure Act of 1987, the good cause standard does not apply to nonrenewal. In other cases, the good cause is defined precisely, as with the Iowa Code, Title XX, Section 523H.7 which defines good cause to be:

The failure of the franchisee to comply with a lawful requirement of the franchise agreement, provided that the termination by the franchisor is not arbitrary or capricious when compared to the actions of the franchisor in other similar circumstances. In addition, the burden of proof rests with the franchisee.

What is a Change of Competitive Circumstances?

As noted the conduct of franchisors towards franchisees requires some level of good cause in connection with termination, cancellation, and nonrenewal. Some states require good cause for what is termed a change in competitive circumstances. For example, Wisconsins Fair Dealership Law makes this requirement.

However, the question of what constitutes a change in competitive circumstances has been the subject of considerable litigation. A variety of activities have been found to fall under the definition. These have included, for example, inadequate advertising, imposition of a discount for case program, change of distributorship to a non-exclusive basis, ineffective managements, installation of other distributorships in territory, bans on mail order sales, and withdrawal from the market.

Still in some cases, fairly substantial changes imposed by a franchisor have been held not to have substantially changed the franchisees competitive circumstances. In Breslers 33Flavors Franchising Corp. v. Wokosin, an ice cream franchisors imposition of a new standard agreement on a Wisconsin franchisee requiring remodeling, advertising, and increased franchise fee did not substantially change the franchisees competitive circumstances.

General Recommendations

Understanding and complying with the complex nature of franchise relationship and termination laws can be quite a challenge for most franchisors. The best advice you can receive is to make sure you fully understand and comply with all applicable laws regarding your business. In most cases, review and counseling from an experienced franchise lawyer is the best way to ensure your compliance.

Mohajerian Law Corp. encourages you to contact our firm with questions or concerns regarding the franchise relationship and termination laws that are applicable to you. We proudly serve franchisors and franchisees in their quest for sound, prudent legal counseling.

Franchise Newsletter Article December 2005

peyman@mohajerian.com (Mohajerian Inc.) — Tue, 03 Jan 2006 15:48:04 -0700

Overtime Obligations of Employers
Exempt & Non-Exempt Employees

BASED ON THE FAIR LABOR STANDARDS ACT (FLSA), THE INDUSTRIAL WELFARE COMMISSION (IWC), AND THE A.B. 60.

This is a quick summary of the overtime provisions of federal and state requirements. For an in-depth analysis of the specific requirements applicable to you, please contact Mohajerian Law Corp. at www.mohajerianlaw.com. This newsletter is not intended to be legal advice and is for informational purposes only.

Overtime computations and the requirements regarding who should be paid overtime have always been a point of difficulty for employers. The rules by which some people are entitled to overtime payment and some are not can be extremely challenging to understand. Failure to pay overtime is one of the leading causes of claims against employers, probably more than wrongful discharge, harassment, and stress combined.

Starting Point

An important mind-set for business owners is to start with the premise that everyone is entitled to payment of the overtime they have worked. There are numerous rules that apply based on the industry you are in. However, the most common include:

Hours worked in excess of 8 in one day are paid at time and a half.
Hours worked in excess of 40 a week are paid at time and a half.
Hours worked in excess of 12 a day are paid at double time.

Further, if you have employees who work alternative schedules, such as 10 or 12-hour shifts, you need to determine further the rules which may apply.

Who Is EXEMPT From Overtime Payment Requirements?

The rules that govern the exemptions from overtime payment requirements are often narrowly interpreted by the labor commissioner, and should be given extreme care in application to avoid expensive mistakes. Exempt positions are not subject to payment for overtime requirements. While employer policy may allow for overtime payment, there are no restrictions on rates used or the number of hours for which payment is required. There are seven exemption categories under the FLSA and IWC orders.

1. Executive Exemption

Receives at least two times the states minimum wage as a salary for full-time employment also known as the minimum salary level test.
The position has a primary responsibility for the management of the company or a recognized department of the company.
The position has direct supervisory role for two or more persons.
The position has the authority to hire and fire, give consideration of pay, or make a recommendation on either.
The position can handle employee complaints and discipline issues.
The position devotes less than 50% of their time focusing on tasks other than that are managerial.
The position has the ability to use discretionary power on a regular basis.
OR, owns at least 20 percent of equity interest in the company and actively assists in its management.

2. Learned Professional Exemption

The position has the primary duty of performing work requiring advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized study.
In most cases, only certified or duly licensed occupations are exempt under state law. This can include: law, dentistry, medicine, optometry, engineering, teaching and accounting.
Wage Orders 1 (Manufacturing), 4 (Professional, Technical, Clerical, Mechanical, and Similar Occupations), 5 (Public Housekeeping), 9 (Transportation) and 10 (Amusement and Recreation) allow for exemptions for the positions that require learned professionals.
The minimum salary test must be met.

3. Creative Professional Exemption

Positions primary duties include performing work requiring invention, imagination, originality, or talent recognized in a field of artistic or creative in nature.
The positions minimum salary meets the Minimum Salary Test.

4. Administrative Exemption

Positions primary duty of performing office or non-manual work that is directly related to the management or operations of the company.
Regularly exercises discretion and independent decision-making in the performance of intellectual work.
Regularly assists a proprietor or other exempt administrator only under general supervision or duties that require special training and knowledge.
Position devotes more than 50% of time to the above activities.
Position meets the Minimum Salary Test requirement.

5. Outside Sales Exemption

Primary duty of position is to make sales, obtain orders, or solicit contracts for services.
The person filling the position is 18 years or older.
Position usually works outside of office selling items or services.
Position performs outside sales more than 50% of time.

6. Computer-related Occupational Exemption

Job titles of position can include: computer programmer, systems analyst, computer systems analysts, applications systems analysts, and systems engineer and systems specialist.
Position is primarily engaged in intellectual or creative work that requires the exercise of judgment.
The position is highly skilled and proficient in highly technical applications related to computer systems.
Position is paid; at least, $44.63 per hour (may change every year).
Position is primarily engaged in one of the following:
The application of systems analysts techniques.
The design, development, documentation, analysis, creation, or otherwise of computer systems.
The design, development, documentation, analysis, creation, or otherwise of computer software applications.
A combination of these duties.

7. Highly Compensated Positions

Any position that is guaranteed a total annual compensation of $100,000 or above.
Position regularly performs functions under exemptions listed above.
Excluded from this exemption are blue collar workers police, fire, other emergency and the like.
Total base salary for this position can include base salary, commission, non-discretionary bonuses, and more.
Total annual compensation can not include:
Medical insurance payments.
Life insurance payments.
401k pension plan payments.
Retirement plan contributions.
Other fringe benefit costs.

NOTE: If you have employees who perform exempt functions part of the time and non-exempt the other part, anytime spent in non-exempt functions must adhere to overtime requirements.

What About Seventh Day Work Rules?

There are requirements on how employers can treat overtime on the seventh day work week, according to A.B. 60. These requirements include:

Employees must be paid time-and-a-half the regular rate for the first eight hours worked on the seventh consecutive day worked in a work week.
Double time must be paid for all hours worked beyond eight on any seventh consecutive day of a workweek.
Part-time exemption is eliminated. Part-time employees who work on the seventh consecutive day must be paid according to the rules.
Workweeks must remain constant. If the workweek runs from Monday to Sunday, the seventh workday in the workweek will be Sunday.

Are There General Overtime Rules I Should Follow?

Only straight time hours apply toward computing overtime hours worked in excess of 40 hours in a week.
Only work hours actually work count toward computation.
An employees regular pay rate is used for overtime calculations.

Which Work Order Applies to My Company?

California employers are subject to both state and federal wage and hour laws. Typically, whichever law is more favorable to the employee will prevail. In California, there are 17 wage orders that may apply to your company.

Wage Orders set forth information such as the minimum wage, hours, overtime requirements and limitations, and meals/rest periods. Employers are generally classified by the main function/purpose of the company. To comply, it is very important to determine the appropriate Wage Order that is applicable to your company. However, determining the correct Order can be difficult and costly if mistakes are made. Any Wage Order determination should be made with your companys legal counsel to ensure you are in full compliance of all laws and orders.

General Recommendations

Have a detailed job description in the employee manual that outlines the status of the position, its functions, and other pertinent information.
Keep detailed written time records for all employees, exempt or non-exempt.
Pay for all overtime worked, as required by applicable IWC regulations.
Post the required IWC Order that pertains to your industry.

Franchise Newsletter Article November 2005

peyman@mohajerian.com (Mohajerian Inc.) — Tue, 03 Jan 2006 15:30:14 -0700

Overtime and Non-Exempt Employees

California and federal law both provide for payment of overtime compensation based on a multiple of the employees regular rate of pay (generally time-and-a-half) for hours above the statutory maximum (generally over 40 hours in a week under federal and state law, but also over eight hours per day under California law.

Under both federal and California law, a workweek means seven consecutive days beginning with the same calendar day each week.

State law requires employers to authorize rest periods of specified minimum duration (generally 10 minutes of paid rest for every four hours worked). No employer may require an employee to work during any meal or rest period under IWC Wage Order mandates.

Employees who work more than five hours in a day are entitled to a meal period of at least 30 minutes and a second meal period of at least 30 minutes if they work more than 10 hours in a day. An employer who fails to provide meal or rest periods as required by an applicable Wage Order must pay the employee one additional hour of pay at the employees regular rate of pay for each work day that the meal or rest period was not given.

When Does Overtime Start?

In California, the IWC Wage Orders broadly define hours worked to include the time during which an employee is subject to the control of the employer, and includes all the time the employee is suffered or permitted to work, whether or not required to do so.

The critical issue in determining hours worked is whether the employee was suffered and permitted by the employer to work. It is irrelevant whether it was necessary for an employee to work long hours in order to complete an assignment, or whether another employee could have done the work in less time. It is immaterial whether it was necessary for (the employee) to work long hours, so long as he did, with the actual or constructive knowledge of his employer. Donovan v. Kentwood Develop. Co., Inc.; see also Skipper v. Superior Dairies, Inc. fact another employee could or did perform same duties in less time does not negate claimants right to overtime pay; Davis v. Food Lion no overtime pay where employer had no actual or constructive knowledge of employees off the clock work.

An employee must be paid for time considered to be on duty while on the employers premises. See Bartholomew v. Heyman Properties. Preparatory activities that are an integral part of the employees principal activity are compensable as time worked. Examples include: Mitchell v. King Packing Co. in meatpacking plant, time spent sharpening knives before and after work considered integral and compensable; Alvarez v. IBP, Inc. time spent donning and doffing unique protective gear, walking to job station and waiting for assembly line to begin, were integral and indispensable to job and therefore compensable; but see Tum v. Barber Foods, Inc. employer not required to compensate employees for time spent walking to place where safety gear was stored and a short amount of time waiting in line to obtain protective gear.

Employers need not compensate employees for activities preliminary or postliminary to their principal duties unless those activities are an integral and indispensable part of the principal activities for which the workers are employed. See Alvarez v. IBP, Inc. donning and doffing required by law and done for the benefit of employer is integral and indispensable part of workday; compare Turner v. Barber Foods, Inc. time spent donning and doffing of non-required gear not compensable.

Some activities that may qualify as work and nevertheless do not require compensation because the activities involve such little time that they are adjudged de minimis: A few seconds or minutes of work beyond the scheduled working hours may be disregarded. Anderson v. Mt. Clemens Pottery Co. Whether the additional time spent on preliminary and postliminary activities is de minimis may depend on:

The aggregate amount of time spent on such activities;
The activitys regularity;
The practical administrative difficulty of recording the additional time. Reich v. Montfort, Inc.

As little as 10 minutes spent on preliminary and postliminary activities goes beyond the level of de minimis. Reich v. Montfort, Inc. time spent in donning and removing safety gear and cleaning knives at meat processing plant.

Who is responsible for record-keeping?

Every employer is required to make, keep, and preserve such records of the persons employed by him and of the wages, hours, and other conditions and practices of employment maintained by him, and shall preserve such records for specified periods of time.

The following records must be maintained for at least three years from the last date of entry:

Payroll records, including each employees name, address, occupation hours worked each day and week, wages paid and date of payment, amounts earned as straight-time pay and overtime, and deductions;
Plan, trusts and collective bargaining agreements;
Employee notices; and
Sales and purchase records.

The following additional records must be retained for a minimum of two years from the date of last entry:

Basic time and earning cards;
Wage rate tables;
Work schedules;
Order, shipping, and billing records; and
Records of additions to or deductions from wages.

Employees are not penalized because of their employers failure to keep adequate records. They can meet their burden of proof in wage actions by their own testimony showing that they have in fact performed work for which they have not bee properly compensated. They need not prove the precise hours worked; they need only produce sufficient evidence to show the amount and extent of such work as a matter of a just and reasonable inference. Beliz v. W.H. McLeod & Sons Packing Co. Because precise evidence of the hours worked by each individual is not available due to the failure of (employers) to keep adequate records, the workers may satisfy their burden with admittedly inexact or approximate evidence; see also Mumbower v. Callicott court properly relied on plaintiffs own recollections to determine number of hours she worked where employer failed to maintain adequate records.

The burden then shifts to the employer to come forward with evidence of the precise amount of work performed or that negates the reasonableness of the inference the employees evidence supports. If the employer fails to produce such evidence, the court may then award damages to the employee, even though the result is only approximate. Anderson v. Mt. Clemens Pottery Co.

The employer must provide an employee or former employee copis of his or her payroll records within 21 days after a request, or permit the employee to inspect those records. (Failure to comply results in a $750 fine, and the employee may sue to obtain the information and recover

costs and fees). Also with each pay check the employer must give an itemized wage statement showing the hours worked by the employee. A knowing failure to comply can result in a $100 penalty per an offense and a maximum statutory penalty of $4,000.

How can unauthorized overtime be prevented?

Courts examine the employers personnel documents to determine if there is an implied agreement. Tomlison v. Qualcomm, Inc., Thus, an employee handbook may give rise to an implied-in-fact contract, by setting self-imposed limitations, such as discipline and termination procedures. Foley v. Interactive Data Corp. When an employer promulgates formal personnel policies and procedures in handbook, manuals, and memorandua disseminated to employees, a strong inference may arise that the employer intended workers to rely on these policies as terms and conditions of their employment, and that employees did reasonably so rely. Guz v. Bechtel Nat. Inc.

Failure to have a handbook will not necessarily prevent a finding o an implied-in-fact contract since the implied contract may be based in part on employer policies and procedures. Whether those procedures have been memorialized in a handbook does not seem to be determinative. See, for example, Harden v. Maybelline Sales Corp. (no discussion of handbook, yet court concluded that employee could state action based on implied-in-fact contract based in part on oral representations from personnel department of just cause for standard for termination.)

The first step to prevent employees from taking unauthorized overtime is to have a firm policy stated in an employee handbook prohibiting overtime or permitting overtime only if certain requirements are met. Although an employees failure to follow the procedures in an employee handbook may not be able to defeat a wage and hour claim, the employee handbook should help greatly when it comes time to determine what the employers stated policy regarding overtime was. Obviously you must be sure to enforce your own written policies and not make regular informal exceptions to the written policy.