Why the American Franchise Act deserves to become law, and why I’ll be saying so, again, in Washington next week.
I can reliably say that our firm represents more franchisors than any other in the country, which means that for the better part of 15 years I have watched hundreds of franchise systems react in real time every time the rules change. The day-to-day work is building systems that let a franchisee in Tampa open a sandwich shop using the same playbook as a first-generation entrepreneur in Tulsa, without either of them needing a law degree to understand who’s liable for what. The definition of “joint employer” is one factor that sets that line, and for more than a decade, nobody has been able to tell a client where it sits. When franchisors cannot predict the answer, they do less of everything: less coaching, less oversight, less growth. That’s why H.R. 5267, the American Franchise Act, is the most consequential piece of franchise legislation to move through Congress in my career, and when I sit down next week with Senators, Members of Congress, and their legislative staffs during the Franchise Advocacy Summit, I’ll be telling anyone who’ll listen why they owe it to their constituents to get it across the finish line.
A decade of regulatory back-and-forth
Anyone who’s represented franchisors for the past decade and a half is accustomed to a certain amount of regulatory whiplash. The legal definition of “joint employer” has shifted repeatedly over that time with regulators and courts sometimes requiring a franchisor to exercise direct, hands-on control over pay or scheduling before liability attaches, and at other times requiring the mere right to control aspects of a relationship, whether exercised or not. The National Labor Relations Board alone has rewritten its own standard roughly four times in a decade, tracking closely with which party holds the White House.
We’ve advised franchisor clients, some running a few dozen units, some running a few hundred, who have asked a version of the same question every eighteen months or so: does today’s standard mean I’m on the hook for a franchisee’s scheduling dispute three states away? For years my honest answer has had to be “it depends on which administration currently controls the NLRB.” That is not a satisfying answer for a client trying to plan for five or ten years ahead, as a responsible franchisor should do.
This isn’t some fringe concern. By one widely cited estimate, the joint-employer standard for franchisors touches the working conditions of some five percent of the American workforce, nearly nine million workers. When the rules of the road change every time the administration changes, franchisors respond rationally: they tighten operational guidance, they pull back on the kind of hands-on support that actually helps struggling franchisees and their employees. Uncertainty carries a cost and small-business owners and the workers and families dependent on them pay the price.
What the bill does
For an area of law that has generated this much heartburn, the fix Congress is proposing is a narrow one. H.R. 5267 would amend both the National Labor Relations Act and the Fair Labor Standards Act to establish, for the first time, a franchise-specific test for joint-employer status. Under the bill, a franchisor could be treated as a joint employer of a franchisee’s workers only when it both holds and actually exercises substantial, direct, and immediate control over one or more of the essential terms the bill enumerates: wages, benefits, hours of work, hiring, discharge, discipline, supervision, or direction.
Just as important, the bill spells out what doesn’t count. Control that’s sporadic, isolated, or minor doesn’t trigger joint-employer status, and it has to produce a regular, ongoing effect on those essential terms rather than a one-off. Setting a suggested price on the menu board or requiring baristas to wear the company apron does not make a franchisor its franchisee’s HR department. Actually setting the wages does. I have spent years explaining this distinction to opposing counsel, arbitrators, and the occasional judge encountering the franchise model for the first time, it is a welcome change to see Congress try to write it into the statute books rather than leaving it to whoever holds a majority on the Board in a particular year.
The politics here are not as predictable as you would expect
What makes this bill worth watching rather than dismissing as sector special-pleading is that it isn’t a party-line exercise. It was introduced by Republican Kevin Hern of Oklahoma alongside Democratic co-lead Don Davis of North Carolina, and it has since picked up 158 cosponsors in the House at last count, including more than a dozen Democrats. A bipartisan Senate companion followed, introduced by Roger Marshall (R-KS) and Angus King (I-ME). The House Education and Workforce Committee voted it out this past July and sent it to the floor. The committee vote itself broke on party lines, which tells you more about the committee than about the bill’s coalition. Its endorsements have come in not just from the expected franchise-industry trade groups but from the Problem Solvers Caucus and a coalition that includes the Hispanic Chamber of Commerce, the U.S. Black Chambers, and the National Taxpayers Union. Critics like to say the bill benefits “executive suites at giant franchise headquarters.” That is not what a coalition like this one looks like.
I’d be doing my job badly, though, if I pretended the opposition isn’t serious or well organized. It is. The AFL-CIO, joined by a long list of affiliated unions, has argued forcefully that narrowing the standard this way lets franchisors off the hook even when their operational rules, required software, or staffing formulas are what actually drive wage and hour violations on the ground, leaving the local franchisee to absorb all the liability for conditions the franchisor effectively created. It’s a coherent argument, and franchisor advocates don’t do themselves any favors by waving it away.
But I think that argument reaches further than it should. Nearly any operational standard a franchisor imposes, whether food-safety protocols, uniform requirements, or customer-service scripts, could be recast as “control” under a definition broad enough to satisfy that critique. We essentially operated under that broader standard for a stretch of the last decade, and in my experience it didn’t produce safer workplaces or better pay so much as it produced franchisors pulling back from the coaching and support that helps a struggling franchisee actually succeed. A bright line that still holds a franchisor accountable when it’s truly setting wages or making staffing calls, while protecting the ordinary business of running a consistent brand, strikes me as the more workable answer, even if it’s a harder one to fit on a picket sign.
The employees on the other side of this ledger
The critique I take most seriously is that this bill is a gift to franchisors at their workers’ expense. My experience points the other way, for a reason that almost never makes it into the debate. Under a broad and unstable joint-employer test, a franchisor’s safest posture toward its franchisees’ employees is silence. If weighing in on how a franchisee handles overtime, or worker classification, or a harassment complaint might later be characterized as “control,” then the risk-minimizing advice is to say nothing at all. I have given clients that advice more than once, and I have never felt good about it.
Consider what that looks like on the ground. A franchisor with a compliance department, employment counsel on retainer, and visibility across four hundred locations notices that one franchisee is rounding time entries in a way that will not survive an FLSA audit. Under a clear standard, somebody picks up the phone. Under a vague one, that franchisor’s lawyer has to ask whether the call becomes Exhibit A in a joint-employment finding three years from now, and when the honest answer is a shrug, the call usually doesn’t happen. The employees at that location are the ones who lose out. Instead of a correction, they eventually get a lawsuit, filed against a single-unit franchisee who may not have the money to make them whole.
This is where the shifting standards problem stops being an annoyance and becomes structural. A typical franchise agreement may run ten years, with another ten-year renewal. The Board’s definition of joint employment has changed roughly four times in the past ten years alone. So, we are drafting agreements today for four or five standards nobody can see yet. We cannot solve that by reserving the right to weigh in on employment practices and then using the right sparingly, because under several of the standards we have actually lived under, the reserved right is itself the problem. An unexercised contractual right to control has been treated as evidence of joint employment. So the right never makes it into the agreement at all. The clause that would let a franchisor step in on an employee’s behalf gets struck in drafting, years before anyone knows whether it would have been needed.
H.R. 5267 addresses precisely that, and the point deserves more attention than it has gotten. The statute requires a franchisor to both possess and exercise substantial, direct, and immediate control before joint-employer status attaches. Possession alone is not enough. That one conjunction is what makes it safe to write the clause, and more to the point, safe to use it. A franchisor could reserve the right to require a franchisee to correct a wage-and-hour problem and exercising it in the isolated case where it is needed would not convert an entire system into a joint employment relationship.
I am not claiming franchisors will always do the right thing once the law stops punishing them for it. Some won’t. But the current calculus is worse than that. A franchisor deciding whether to intervene for the benefit of a franchisee’s employees has to weigh that benefit against a legal risk it cannot size, under a rule that will likely change before the agreement expires. Congress cannot legislate good corporate behavior, but it can stop penalizing it. Only a statutory definition, one that does not move with the next election, gives a ten or twenty-year contract something to be written around.
Why franchisors should care about more than the litigation risk
Something people outside this practice area don’t always appreciate is that the joint-employer standard doesn’t just affect who gets sued. It shapes behavior long before any lawsuit is filed. When the standard is vague or subject to change, in-house counsel tells operations teams to pull back: fewer field visits, thinner training materials, more distance from the franchisee relationship generally, all in the name of avoiding the appearance of “control.” That is counterproductive for a business model that depends on franchisors staying engaged. The sector contributed more than $900 billion to the U.S. economy last year and supports nearly nine million jobs, and it will continue to do so and grow, so long as franchisors are willing to actually support their franchisees rather than keep them at arm’s length for fear of a lawsuit.
See you in Washington
Next week in Washington, between sessions, I’ll be doing what franchise lawyers do at these things: comparing notes and reminding anyone with a vote or a hand in drafting that behind every “joint employer” headline is a franchisee trying to make payroll and a franchisor trying to figure out how much operational guidance it can offer without becoming an accidental defendant. H.R. 5267 won’t end every dispute over who’s responsible for what in a franchise relationship. No single bill does that. But it would replace a decade plus of shifting standards with something franchising has been begging for: a definition we can actually plan around.
That is what small-business owners in this industry need most, more than any tax break or regulatory carve-out. Certainty makes for dull legislation and good policy.
