USA – CALIFORNIA Trends and Developments Contributed by: Dawn Newton and Hayley M. Lenahan, Donahue Fitzgerald
New Franchise Broker Registration One of the newest requirements is the obligation to register franchise brokers in California. California requires a person or entity to register with the DFPI as a franchise broker if that person or entity: • takes part in offering or selling a franchise; and • got paid for that service by the franchisor or its related parties. However, as of September 2026, the funds to support the registration system were not yet appropriated. The registration requirement will go into effect one year after appropriations are made. The DFPI website maintains current information about the status of this matter. California’s Prohibition on Post-Termination Non- Competition Many franchisors find California’s public policy against post-termination non-competition agreements chal - lenging. Whereas in many other states a franchisor can force a former franchisee not to compete after the end of the franchise agreement, in California it is relatively common for franchisees to engage in “sign flipping” whereby a franchisee will change its busi - ness name and redecorate in order to avoid infring - ing on any brand rights, but the former franchisee will otherwise continue to engage in the same business from the same location after the end of their franchise agreement. A franchisor’s options to prevent this are limited and can contain unpalatable trade-offs. Most franchisors require franchisees to incorporate into their lease a right for the franchisor to assume the lease if the fran - chise agreement ends, but many franchisors are not in a financial position to assume each lease when the time comes. An exception to California public policy against non-competition agreements exists where a buyer purchases the goodwill of a business, but most franchisors do not want to concede that a franchisee owns any goodwill of the business, because the fran - chisor is the owner of the trade mark and the brand. An exception also exists where the franchisor buys the entire interest in the franchisee’s business entity, but the franchisor would acquire all of the past liability of that business entity in such a transaction.
In 2025, California’s law prohibiting post-termination non-competition agreements was expanded to apply to all current California residents, regardless of where they signed a non-competition agreement. This per - mits an employee who previously resided in a state where non-competition agreements are fully enforce - able to move to California in order to compete. The law also makes it unlawful for any business to include a non-competition agreement in any employ - ment contract where it would be void under Califor - nia public policy. Franchisors that maintain a standard confidentiality and non-competition agreement that all franchisees are required to have their employees sign should consider creating an alternate version that omits the language that California franchisees would be legally prohibited from presenting to their employ - ees. California Is Highly Regulated California maintains a significant number of laws that affect businesses. An exhaustive list is impossible, but an illustrative set includes the following. Challenging employment laws California typically enacts new or materially modified employment laws every single year, and California businesses often anticipate needing to revise their practices and employee handbooks every year in response to these changes. California laws make it very difficult to classify workers as independent contractors. A three-part test applies, and in most industries any person who engages in the same type of work that the business regularly per - forms is likely a mandatory employee rather than an independent contractor. Employees must be paid according to California’s rig - orous wage and hour laws, which include daily work limitations in addition to weekly measurements. A non-exempt employee who works no more than 40 hours per week must still be paid some overtime if they exceeded eight hours in a single day. These restric - tions can sometimes be frustrating for both employers and employees, since they can make it unpalatable for an employer to approve an employee’s request for flex time or make-up time. There are also numerous
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