Uniting Behind the American Franchise Act: A Bipartisan Effort to Clarify the Joint Employer Standard

Over the last 10 years, the United States franchise industry has faced see-sawing uncertainty around the joint employer standard. Courts and federal agencies applied either a narrow “direct and immediate control” standard that favored the franchisor or expanded the standard to include the mere right to exercise such control.

Multiple swings in both directions within a relatively short period has caused practical challenges for both franchisors and franchisees to manage risk and maintain legal compliance. The American Franchise Act, or H.R. 5267, seeks to address these challenges.

The bipartisan act currently under review in the U.S. House of Representatives creates a consistent definition and set of conditions for when the National Labor Relations Act (NLRA) and Fair Labor Standards Act (FLSA) can consider a franchisor a joint employer.

How the American Franchise Act Works

The pending bill only considers a franchisor a joint employer of a franchisee’s employees, “if the franchisor possesses and exercises substantial direct and immediate control…” over essential terms and conditions of employment.

“Substantial direct and immediate control” occurs when a franchisor regularly exercises continuous, meaningful control over significant parts of a franchisee’s employees’ jobs.

Examples of essential terms and conditions of employment and what would qualify as “direct and immediate control” follow:

• Wages – A franchisor determines the compensation for franchisee employees, either individually or by job type.
• Benefits – When a franchisor dictates plan options or amounts.
• Hours of Work – The franchisor determines work schedules or work hours of franchisee employees.
• Hiring – The franchisor directly decides which individuals the franchisee may hire or not hire.

The bill also defines discharge, discipline, supervision, and direction as essential terms and conditions of employment. Additionally, while protecting franchisors and franchisees, the Act still defends workers’ rights and allows them to unionize.

Why This Matters

The National Labor Relations Board (NLRB) currently interprets a joint employer as a business that shares control and responsibility for a worker’s employment with another organization. The NLRB changed the definition’s scope four times over the last decade, dependent on the sitting President’s political party.

If passed, the American Franchise Act codifies the definition of a joint employer into federal law and maintains consistency with the NLRB’s 2020 standard. By providing a consistent definition, the Act gives franchisors and franchisees clarity about their roles and responsibilities.

As Rep. Don Davis, one of the bill sponsors, explains, “The American Franchise Act aims to restore stability by clarifying that franchisors and franchisees operate as independent employers.”

In 2024, franchising contributed nearly $900 billion to the U.S. economy, and over 800,000 franchise establishments in the country supported almost 9 million jobs directly. Highlighting the importance of protecting this system, the International Franchise Association President and CEO Matt Haller says:

“The American Franchise Act allows franchisors to properly support their franchisees…without the fear of an overly broad joint employer standard undermining the unique benefits of the franchise relationship.”

The pending legislation also allows franchisors to protect their brand while ensuring franchisees remain accountable for managing their own employees by establishing clear federal guidelines for compliance.

Enforcement

Seven Republican and seven Democratic Congressional members introduced the bipartisan act and limited its application to future proceedings only, preventing retroactive implications. If approved, the American Franchise Act only applies to joint employer matters regarding franchising; it is not a universal modification to all employer relationships.

Franchising Outlook

Various organizations, including the International Franchise Association and the Coalition to Save Local Businesses, support the American Franchise Act. These organizations support eliminating shifting rules and business owner stability.

By eliminating regulatory uncertainty, the legislation limits franchisors’ liability for franchisee employees while ensuring franchisees retain their status as independent employers who “…can focus on running their businesses and creating opportunity in communities across the country,” according to Rep. Hillary Scholten.

As the House Committee on Education and Workforce reviews the bill in Congress, franchisors, franchisees, and supporters continue to monitor progress. If Congress passes the American Franchise Act, it could transform the franchise landscape for years to come.

Matthew J. Soroky is a Certified Specialist in Franchise & Distribution Law by the State Bar of California Board of Legal Specialization.