Legislative developments at the state and federal level impacted NY franchisees and franchisors in 2024. And if ideas floated by the next Trump administration materialize, then both franchisees and franchisors will need to strategize with their NY franchise lawyers immediately. Let’s review the key updates from the past year and the changes they might signal in 2025.
Transparency at the Federal Level
The federal Corporate Transparency Act (CTA) was enacted on Jan. 1, 2024, and applies to many U.S. companies, including franchises. The CTA requires reporting companies to file beneficial ownership information (BOI) with the Financial Crimes Enforcement Network (FinCEN). The law’s purpose stems from the U.S. Department of the Treasury’s efforts to crack down on shell companies and combat the financial anonymity that enables crimes such as corruption, drug trafficking, and terrorism.
But just last week, transparency matters became more complicated. Texas Top Cop Shop, Inc. et al. vs. Garland put CTA enforcement plans on hold when the U.S. District Court for the Eastern District of Texas issued a nationwide preliminary injunction on Dec. 3, 2024. Notably, the Court extended its ruling beyond the plaintiffs, applying the injunction nationwide to all existing reporting companies.
This nationwide injunction applies to the enforcement of the law and the upcoming filing deadline on Jan. 1, 2025, or sooner for reporting companies with a 90-day deadline from formation. The Court noted: “…reporting companies need not comply with the CTA’s January 1, 2025, BOI reporting deadline pending further order of the Court.”
NY franchises should remember, however, that a preliminary injunction is temporary. It is possible that companies will subsequently be required to comply with the law. Reporting companies should speak with their NY franchise lawyer for additional updates and proceedings that could modify or change this order.
New York Franchises and Transparency
It is worth noting that regardless of the fate of the federal CTA, New York’s LLC Transparency Act is still active. This state transparency act mirrors some of the federal law’s objectives. Signed into law in 2023, the New York law requires LLCs to disclose ownership information to a state-level database.
This adds a compliance requirement for franchises and other businesses operating in New York, and members of those LLCs should contact NY franchise lawyers to ensure they navigate both state and federal reporting rules.
Joint Employer Rule Struck Down
In 2024, the International Franchise Association and other franchise and business advocacy groups secured a win against the National Labor Relations Board (NLRB) and its 2023 joint-employer rule, which was set to supersede the 2020 rule.
The suit was filed in the U.S. District Court for the Eastern District of Texas, and in March 2024, the court vacated the portion of the 2023 rule which rescinded the 2020 rule.
As previously discussed, the 2023 rule could have exposed franchisors to claims that their franchise agreements and brand standards make them joint employers of their franchisees’ employees for purposes of collective bargaining and labor disputes.
The FTC Rule on Noncompetes and Franchise Relationships
Legal drama surrounded the Federal Trade Commission’s (FTC) rule on noncompete agreements in 2024. The FTC took the position that noncompete agreements were unfair methods of competition. The rule also required employers to send notices informing their employees that the noncompetes were unenforceable.
Interestingly, the rule would not apply to the franchisor-franchisee relationship, as franchisees are expressly excluded from the definition of “worker.” Notwithstanding, the rule would apply to the franchisee’s employees.
However, in August, a federal judge in Texas enjoined enforcement of the rule which was scheduled to go into effect Sept. 4, 2024.
New York franchisors and franchisees should note that under New York common law, noncompete agreements are generally enforceable with respect to the franchisor-franchisee relationship. In those instances, noncompete agreements are presumptively valid, as they help to ensure that the franchisor can protect its proprietary business methods. But this is not the case in every state. Franchisors and franchisees should speak with a NY franchise lawyer regarding the proposed rules and noncompete agreements at state and federal levels.
The next Insights installment will examine what NY franchises could expect in the way of changes to the FTC’s leadership, tariffs and other policies in 2025.
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Lusthaus Law’s website is a resource for New York franchisors and franchisees. We have published two downloadable and complimentary e-books and our Insights blog is regularly updated to reflect industry trends and recent achievements in client representation.Contact us today to learn more about how Lusthaus Law P.C. can help you navigate a clear path for your franchise’s successful future.
