The American Franchise Act: Protection for Franchisees or Protection for Franchisors?
Relevant FDD Topics: Item 1, Item 3, Item 4, Item 7, Item 11, Franchise Agreement
This report is for educational purposes only and is not legal, financial, or investment advice. It is based on publicly available information and reflects independent analysis and opinion protected under applicable law.
In Part One, we looked at the International Franchise Association’s Responsible Franchising framework and asked a foundational question. Is the IFA primarily advancing protections for franchisees, or is it focused on protecting the franchise model itself?
That question cannot be answered by disclosure recommendations alone. It requires looking at the policies the IFA actively supports and promotes.
One of the most significant of those policies is the American Franchise Act.
At first glance, the name suggests a piece of legislation designed to strengthen protections for franchisees. It sounds like the kind of reform many people in franchising have been asking for. However, once you move past the name and into the substance of the bill, a more nuanced picture begins to emerge.
What the American Franchise Act Actually Does
The American Franchise Act is primarily focused on one issue. It addresses how franchisors are treated under federal labor law, specifically in relation to the concept of joint employer liability.
Under existing legal debates, a franchisor can, in some cases, be considered a joint employer of a franchisee’s employees if it exerts sufficient control over working conditions. This concept has been expanded and narrowed over time through regulatory changes and court decisions, creating ongoing uncertainty for the franchise industry.
The American Franchise Act seeks to establish a clearer standard. It limits joint employer status to situations where a franchisor exercises direct, immediate, and significant control over essential employment decisions such as hiring, firing, wages, and supervision.
In practical terms, this means that most franchisors would not be considered employers of franchisee staff, even if they provide operational systems, brand standards, training programs, or technology platforms that influence how the business is run.
Why This Matters to the Industry
From the perspective of franchisors and industry organizations like the IFA, this clarification is critical. The argument is that expanding joint employer liability creates legal risk that discourages franchisors from providing support, guidance, and operational resources to franchisees.
The concern is that if franchisors can be held liable for employment practices across independently owned locations, they may pull back from involvement in areas that could be interpreted as control. That could include training programs, hiring guidance, scheduling tools, or other forms of operational support that franchisees rely on.
Under this view, limiting joint employer liability protects the franchise model by allowing franchisors to continue supporting franchisees without exposing themselves to widespread legal risk.
That is the rationale behind the IFA’s strong support for the bill.
What the Act Does Not Do
While the American Franchise Act provides clarity on franchisor liability, it is equally important to understand what it does not address.
The Act does not create new rights for franchisees within the franchise relationship. It does not regulate franchise agreements or establish standards for fair termination. It does not limit the use of personal guarantees or address transfer restrictions that can make it difficult for franchisees to exit the system.
It also does not require franchisors to provide financial performance representations or improve the substance of disclosures within the FDD. Issues related to supplier relationships, required vendors, and rebate structures are not addressed. Nor does the Act create a private right of action for franchisees under the FTC Franchise Rule.
In other words, the Act does not directly change the contractual or economic realities that franchisees face once they enter into a franchise agreement.
The Core Tension
At the center of this issue is a fundamental tension within franchising. Franchisees are described as independent business owners, yet they often operate within systems that impose detailed operational standards, approved vendor requirements, and brand controls.
This creates a situation where franchisors can exert significant influence over how a business operates while maintaining that they are not the employer of the individuals working within that business.
The American Franchise Act reinforces that distinction. It protects the legal separation between franchisor and franchisee by narrowing the circumstances under which that separation can be challenged.
For some, that is a necessary protection of the franchise model. For others, it raises questions about accountability when control and responsibility do not fully align.
Why Multiple Organizations Support the Act
One of the more interesting aspects of the American Franchise Act is the range of organizations that support it. The IFA’s position is relatively straightforward. As a trade association representing the broader franchise industry, it seeks to preserve the structure and stability of the model.
However, support from organizations that are more closely aligned with franchisee advocacy, such as the AAFD and CFA, requires a closer look.
The reason lies in how franchisees themselves view the issue of joint employer status. While expanded liability could increase franchisor accountability, it could also fundamentally change the nature of franchise ownership. If franchisors are treated as employers, franchisees risk being viewed less as independent business owners and more as intermediaries within a larger corporate structure.
That shift could lead to increased control from franchisors, higher compliance costs, and changes to how franchise systems are structured and operated. For many franchisees, maintaining independence is a priority, even if it means accepting certain limitations in legal protection.
As a result, some franchisee-focused organizations support the Act not because it strengthens franchisee protections directly, but because it preserves the independent ownership model they believe is worth protecting.
Connecting Back to the IFA
When viewed alongside the Responsible Franchising framework discussed in Part One, the American Franchise Act provides additional context for understanding the IFA’s approach.
The IFA emphasizes better disclosures, improved education, and more informed decision making during the pre-sale process. At the same time, it supports policies that limit franchisor liability once the franchise relationship is in place.
Taken together, these positions suggest a consistent strategy. Strengthen the front end of the process by encouraging better-informed buyers, while maintaining the legal and operational structure of the franchise model after the agreement is signed.
This does not necessarily indicate bad intent. It does, however, reflect a clear prioritization of preserving the model itself.
Where This Leaves Franchisees
For prospective franchisees, the American Franchise Act does not fundamentally change the decision-making process. It does not alter the need for thorough due diligence, nor does it reduce the importance of understanding the terms of the franchise agreement before signing.
What it does is clarify the legal boundaries of the relationship. It reinforces the idea that franchisees are independent operators responsible for their own employment practices, even within highly structured systems.
That clarity can be beneficial in some respects. It reduces uncertainty and helps define the roles of each party. At the same time, it also underscores the importance of understanding what protections do and do not exist within the franchise relationship.
Because once the agreement is signed, those boundaries are largely set.
Final Thought
The American Franchise Act is not a franchisee protection law in the traditional sense. It is a structural law designed to preserve the legal framework of franchising by limiting the expansion of joint employer liability.
Whether that ultimately benefits franchisees depends on how the balance between independence and protection is viewed.
If franchisors are insulated from certain forms of liability, the natural follow-up question becomes whether franchisees should receive stronger protections elsewhere within the system.
That is a conversation that extends beyond this bill, but one that remains central to the future of franchising.
The information provided in this article is for educational purposes and general public-interest reporting. It does not offer legal, financial, or investment advice. Franchise purchasers should consult qualified professionals before making decisions. Franchise Reality Check™ analyzes publicly available documents, including Franchise Disclosure Documents (FDDs), state regulatory filings, and court records. Under Oklahoma Statutes and applicable federal law, analysis of publicly filed franchise documents, commentary on matters of public concern, and reporting on franchise industry practices are protected forms of speech.
