By Michael H. Seid, CFE | Managing Director, MSA Worldwide

I spend about fifteen to twenty percent of my practice time as a testifying expert in complex legal matters and, in the process, it has become relatively easy to identify the weaknesses in some franchisor’s core documents and practices.

We are fortunate to have some brilliant litigators on both the franchisor and franchisee side in franchising; I have worked with many and have sparred with a couple over the years. What I have experienced is that while joint or co-employment is not directly listed as a cause in their legal arguments, it can often be the underpinning of some of the claims involved in both franchisor/franchisee and third-party disputes. This is why the International Franchise Association has made passage of the American Franchise Act (AFA) one of its highest legislative priorities.

Imagine spending decades building a franchise system. You’ve invested millions in developing your brand, your operations manuals, your training programs, and your franchisee support infrastructure. You’ve recruited hundreds of franchisees who left careers, mortgaged their homes, and bet their financial futures on your system. And now an unelected federal agency – through a regulatory ruling rather than an act of Congress – has the power to tell you that you are legally responsible for the employment decisions of every one of your franchisees’ employees. Employees you have never met, who you did not hire, do not schedule, do not pay, and cannot fire. Imagine if the claimant is a franchisee looking for the added benefits of claiming they are also your employee when you go to terminate their franchise agreement for cause. These are not hypotheticals – they are at the heart of the joint employer problem.

If you are a franchisor – emerging or established – and you are not paying close attention to this issue, you are making a very expensive mistake.

What is the American Franchise Act?

Despite the efforts by the IFA and others who have written about joint employment, there is still a great deal of confusion about what the AFA does and does not do.

• First, it’s not going to eliminate the risk of joint employment – and nothing can. Joint employment is a product of your core documents and what you say and what you do as a franchisor.
• The AFA is simply proposed federal legislation designed to do one thing: establish in statute a clear legal definition of the franchise relationship that protects franchisors from being classified as joint employers of their franchisees and their franchisees’ employees.

The core principle of the AFA is straightforward: a franchisee is an independent business owner.

• The franchisee hires, manages, schedules, compensates, and terminates their own employees.
• The franchisor provides the brand, the system, the training, and the support.

While franchisors and franchisees frequently share the same brand, they have fundamentally different roles, arguably are in different industries, and the law should reflect that.

The AFA would create a federal safe harbor. A franchisor that sets brand standards and enforces quality controls (as required by the Federal Lanham Act that established trademark protections), provides training, and requires franchisees to use its systems in the management of their individually owned and operated businesses, would not — by virtue of those activities – be deemed a joint employer of the franchisee or their workforce. The legislation draws a bright, clear line between brand stewardship and employment control. Franchising is after all a method that relies on brand standards (the outcome) and not on day-to-day control (how those outcomes are achieved). That line, right now, does not clearly exist in federal law. And that ambiguity is costing the franchise industry dearly.

How We Got Here: The Joint Employer Threat

The modern joint employer crisis in franchising traces directly to the National Labor Relations Board’s 2015 decision in Browning-Ferris Industries. In that ruling, the NLRB dramatically expanded the joint employer standard, holding that indirect or even potential control over workers could be sufficient to establish joint employer status.

For franchising, the implications were staggering. Every brand control in franchise agreements – often required by existing federal law – could trigger liability. Every provision in a franchisor’s brand standards manuals – how products are prepared, how services are performed, how customers are greeted, what uniforms are worn, what hours the location operates – could now be characterized as evidence of control over a franchisee’s employees. The very systems that make a franchise a franchise became a legal liability.

On the heels of Browning-Ferris, McDonald’s found itself named as a respondent in NLRB joint employer proceedings which they settled in 2019, avoiding a ruling that would have made them liable for the labor violations of their franchisees. But the threat faced by McDonald’s did not only apply to the largest brands. Every franchisor – from a small emerging system to a major global brand – faced the same exposure.

Then the standard began to whipsaw. The Trump administration’s NLRB narrowed the joint employer definition. The Biden administration’s NLRB expanded it again. A federal court struck down the Biden-era rule and the issue went back to the regulatory drawing board. Throughout all this back and forth, franchisors, franchisees, lenders, and investors have been left navigating a profound legal uncertainty that is not a stable environment in which franchisees can confidently invest their life savings.

What Happens If the AFA Is Not Passed?

The government relations team at the IFA has been charged with the responsibility of getting the AFA through the legislative process and to the President’s desk. Having worked with them, I know they have the talent to do so; as an IFA Board member, I know they have the resources necessary. However, nothing is for certain in the current political climate and the consequences of congressional inaction are serious because they are structural to the meaning of franchising.

Without a federal statute defining joint employment, the definition will remain a creature of regulatory and judicial interpretation and every new administration will have the ability to rewrite it and the incentive to expand it. Franchisors will face a perpetual cycle of legal uncertainty that no amount of careful drafting will be able to fully resolve.

While I believe the reaction of many in franchising was excessive during the Browning-Ferris period, it was based on the advice received from their lawyers and from the lectures at IFA and other conferences. Franchisors were forced into an impossible and damaging choice that, in order to minimize their exposure to joint employment claims, they would need to reduce the support they provided to their franchisees.

However, the brand standards and controls embedded in operations manuals and training programs were precisely what protected brand quality, customer safety, and enabled franchisees to perform to the brand standards of the system. A franchisor who pulled back on field support and operational guidance to avoid liability was not providing the benefits that franchisors historically delivered, and this resulted in some franchisees feeling abandoned. In many systems, franchisee support was hollowed out.

Franchisors began to sanitize their operations manuals and train their field consultants to avoid any conversation that touched on staffing, scheduling, or employee management – even when a franchisee desperately needed their guidance. The irony of the NLRB’s actions was profound: the joint employer doctrine, ostensibly designed to protect workers, ended up depriving franchisees of the very support that helps their businesses – and their employees – succeed.

Without a clear definition of joint employment, capital will become more expensive and harder to access. Banks and private equity firms that underwrite franchise deals will always have an eye on legal risk, as they do in any of their transactions. Joint employer exposure – particularly with multi-unit and multi-branded franchisees – adds a layer of uncertainty that is reflected in lending terms, valuation multiples, and investment appetite. Without the ability of the IFA to get the AFA over the line, that uncertainty premium does not go away.

The AFA matters enormously to the next generation of franchise brands, many of which are being built by entrepreneurs in communities that have historically had less access to capital and legal resources. I would expect that the plaintiffs’ bar will continue to exploit any ambiguity in the definition. As I have witnessed, some lawyers have built their entire careers around certain types of claims; thus, ambiguity in the definition of joint employer in franchising only strengthens their hands and leaves every franchise system a potential target. The litigation costs alone – regardless of the outcome – are sufficient to destabilize a growing system.

I expect that if the AFA does not pass, the states will fill the vacuum. The IFA established the Coalition to Save Local Businesses to unify efforts with other trade associations to lobby states to enact legislation to clarify the definition of joint employment. At least eighteen (18) states have already defined joint employment, including Alabama, Arizona, Arkansas, Georgia, Indiana, Kentucky, Louisiana, Michigan, New Hampshire, North Carolina, North Dakota, Oklahoma, South Dakota, Tennessee, Texas, Utah, Wisconsin and Wyoming.

While these states share the same goal, their legal mechanisms differ and in the absence of federal clarity, we can expect more states to enact their own joint employer definitions and their own regulatory frameworks. The result will be a 50-state compliance patchwork that imposes enormous costs on franchisors operating across multiple jurisdictions. That is not good for franchisors or franchisees, and ultimately not good for the employees the joint employment regulations are meant to protect.

What Franchisors Should Do Right Now

Whether or not the AFA passes – and it is imperative that every franchisor become active in supporting the IFA in its efforts to make it happen – there are concrete steps that you as a franchisor can take to manage joint employer exposure and manage your risk.

Step One: Joint-Employer Audit

First, you need to conduct a joint-employer audit of your entire system. MSA routinely performs these audits for our clients; you can also have experienced lawyers perform this work for you.

Start with your franchise agreement, FDD, operations manual, and training materials, and identify every provision that could be construed as control over franchisee employees. Triggers for concern include specific hiring criteria, scheduling requirements, wage guidance, and human resource protocols. While providing advice and recommendations, and even sample forms and human resource policies, are perfectly fine when properly languaged, if your core documents read like an employment policy, they need to be rewritten.

Step Two: Update your Franchise Agreement and FDD

While your FDD and franchise agreement were likely drafted by competent transactional legal counsel, we recommend to our clients that you have litigation counsel or litigation experts review them. Ensure that your franchise agreement is unambiguous about employer status and contains clear definitions that reflect your precise business:

• Your franchise agreement should state clearly, repeatedly, and specifically that the franchisee is the sole employer of all persons working in the franchised business.
• It should prohibit the franchisor from involvement in franchisee employment decisions and establish the franchisee’s independent authority over all HR matters.

Remember to review your indemnification and insurance requirements:

• Your franchise agreement should require franchisees to indemnify the franchisor for employment-related claims, and to carry adequate employment practices liability insurance.
• These provisions do not eliminate joint employer risk, but they do create important contractual and financial protection.

Step Three: Update Your Operations Manuals and Training Materials

Franchising is in the brand standards and measurements business, not in the day-to-day control business. Rewrite your operations manual to focus on outcomes, not mandatory methods to achieve those outcomes.

• It’s perfectly fine to have a brand standard requiring the windows to be clean – but do they get any cleaner if you specify how the franchisee achieves that brand standard?
• Similarly, a brand standard regarding wait time is perfectly appropriate, but does mandating the number of staff accomplish anything?

These distinctions matter enormously in joint employer analysis. Work with your third-party advisor and your operations team to draw that line clearly throughout your core documentation and practices.

Step Four: Train Your Field Staff on Joint Employment

Train your field staff and provide them with clearly written manuals and other training materials. Your field consultants are your front-line team and need to understand exactly what they can and cannot do when working with franchisees.

• Is it acceptable to advise franchisees on labor and scheduling issues and if it is, what is the limitation of that advice?
• A well-meaning field consultant advising a franchisee to let an individual employee go is clearly out of bounds; but is pointing out deficiencies – or requiring retraining – control, or enforcement of brand standards?

Untrained field staff create actual risk, and written protocols for their conduct are necessary. You should also be prepared to enforce these protocols.

Step Five: Ongoing Documentation

In litigation, the paper trail matters. Routinely document the independent decisions and actions of your franchisees. Correspondence, field visit reports, and operations reviews should consistently reflect the franchisee’s role as an independent business owner making independent employment decisions.

Step Six: Advocate for the AFA and Encourage Your Franchisees to Do the Same

Become active with the IFA’s advocacy efforts. The AFA needs franchisors of all sizes to be vocal – with their representatives in Congress, with their industry associations, and within their own franchisee communities. This is not someone else’s fight. If you are a franchisor, this is your fight.

Brief your franchisees and make sure they understand the joint-employer issue and why it affects them directly. A franchisee who believes that the franchisor’s legal exposure is not their problem is a franchisee who does not understand the stakes. The AFA is designed to protect franchisee independence, and they should be its strongest advocates. Request that they reach out to their congressional representatives and senators to ask for their support of the AFA.

The American Franchise Act Needs Your Advocacy

Franchising is one of the most powerful vehicles in the American economy for building our middle class and creating private sector jobs. It accounts for almost 9 million direct jobs and over $920 billion of economic output and has given countless individuals the opportunity to build businesses and create economic independence.

Franchising rests on a simple premise: the franchisor provides the system, and the franchisee invests in and independently manages their business on a day-to-day, minute-to-minute basis. When the law undermines that premise – when it treats franchisors as the de facto employers of franchisees and their workers – it does not just create legal exposure, it corrodes the fundamental architecture of the relationship.

The American Franchise Act is an attempt to restore clarity and protect that architecture through an act of Congress, rather than leaving it to the shifting winds of regulatory interpretation. Its passage would not solve every problem in franchising, but its failure to pass would leave one of the most consequential problems in franchising permanently unresolved.

A franchise relationship clouded by joint employer ambiguity serves no one well. Not the franchisor, not the franchisee, and not the employees at the center of this debate. Franchisors cannot afford to wait and see what happens: the legal landscape is too uncertain, the exposure too significant, and the stakes too high. Advocate for the AFA – and make sure that everyone in your franchise system, your business associates, and your members of congress understand exactly what is at risk.

For more information about the American Franchise Act, visit the IFA’s website at https://www.franchise.org/advocacy/american-franchise-act/.

Michael Seid is Managing Director of MSA Worldwide. You can reach him at mseid@msaworldwide.com or (860) 523-4257.

This article is for informational purposes only and does not constitute legal advice. Franchisors should consult with qualified franchise counsel regarding their specific circumstances.