The functional test made the definition of franchisee and franchisor a reality based test: who was doing what.
The functional test never depended upon what the words in the contract stated the relationship was. This was critical for regulatory oversight. Actions and not words defined the franchise relationship.
The functional test gave a great deal of leeway to different franchise systems to prosper. By refusing to identify the franchisee as something apposite an employee or independent contractor, the law correctly sought to identify a franchisee by its relationship to the franchise network.
Franchisors are protected by the functional test because they are not vicariously liable for those actions which are properly in the sphere of the franchisee, which the franchisee may perform negligently.
Franchisors are protected by the functional test because their franchisees exercising local business expertise and benefiting from local sales were clearly something different from employees or independent contractors.
Franchisors benefited from the functional test because they were not required to deduct either state or federal payroll taxes from their franchisees.
Franchising thrived because of this functional test.
Now, amazingly the IFA has thrown this all away in supporting a state law which allows for the first time a definition of franchising to simply depend upon what the contract states, a complete abandonment of the functional test.
Oklahoma has passed a law which threatens the entire franchising industry - by discarding the functional test, Oklahoma is signalling to the rest of the US states the functional test is no longer valid.
This is extremely dangerous, especially for states who need more worker's compensation contributions, unemployment contributions, and other payroll taxes.
Now a state can point to the IFA's abandonment of the functional test and so simply define a franchisee to be a type of dependent contractor, for which the franchisor is responsible for the payroll taxes.
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