The American Franchise Act draws a line between running a franchise system and employing your franchisee’s staff. It hasn’t passed yet, and if it does you don’t need to file or register anything. What matters is there has been years of unstable joint-employer rules that have made franchisors pull back support from their networks. In this article, I cover what the AFA does, where it stands, what its critics say, and show you how you can support your franchisees the way they would want you to whether the Act passes or not.
If you’re running a franchise, you’ve probably heard of the American Franchise Act by now. And if you’ve already started your research, you’ll have found what everyone else has - the legal text, the IFA advocacy page, and a bunch of law firms explaining joint-employer doctrine.
If you’re reading this, I assume you’ve got a good grasp of the legal issues. So today, I want to talk about how it can affect your franchise operations.
You may ask yourself, does it change how I run my network? Do I need to redraft my operations manual, retrain my field team, or update next quarter’s roadmap?
Probably not. But, there is a key distinction you need to be aware of. One that, if you get it wrong, could lead to legal complications in the long run if the AFA is passed.
But, if you get it right, whether or not the act passes you can provide the best possible support to your franchisees and their employees without worry.
The American Franchise Act (H.R. 5267 in the House, S. 3525 in the Senate) amends both the Fair Labor Standards Act and the National Labor Relations Act.
For franchisors it sets a single employment test.
Per the act, a franchisor is a joint employer of a franchisee’s employees only where it “possesses and exercises substantial direct and immediate control over one or more essential terms or conditions of their employment”.
In this context, “substantial” means something that has a regular or continuous effect. So not anything sporadic, isolated or “de minimis”.
Now, to be clear, the AFA:
Since 2015, the joint employment standard has changed four times. This is because these rules can be rewritten by different administrations. Whereas a statute has to be repealed at the Congressional level.
The instability of these rules has significantly affected franchising. In fact the IFA says that between 2015-2017:
This was bad enough by itself. But, it led to something worse.
Franchisors started withdrawing support. Because the more help they gave to their franchisees, the more likely they were to be labelled a joint-employer under the rules as written.
Every act of franchisee support - training programs, compliance checklists, field consultants doing in-person coaching, onboarding guidance could be used as proof in litigation that head office was liable as employer.
We agree with the IFA that the rules, as they stand, punish franchisors that want to provide excellent support to their franchisees.
Franchising should be a business model where everybody wins. But if franchisors can’t fully support their franchisees, everybody loses out.
The amended bill being put to the house lists 8 essential terms and conditions of employment. So you’re aware, here is what would trigger each condition.
Each of the above is something that only an employer does. So if you think about your franchise system management it may look something like this:
Now obviously this is not legal advice, always listen to your lawyers but this illustrates the principles you should follow both to ensure you don’t fall foul of the AFA and ensure that you are providing everything your franchisee needs to make a successful business.
Opponents to the American Franchise Act say that it should be about who really sets the pay rates of franchisee employees.
Because of the expectations, policies and extensive operation manuals found in franchise networks one of the few profitability levers that franchisees have is around employee pay.
They argue that because suppliers, equipment, opening hours, staffing ratios, royalties and operational workflows are set by HQ it’s the franchisee employees that absorb any financial pressures that the location is under.
They also argue that if there were any employees or wage related issues at a franchise unit, even if the employee wins their case the franchisee may not be solvent enough to pay. So the employee suffers, while the head office stays out of reach.
This is understandable, but as the IFA themselves say, these system-level decisions are what separates a franchise from any other independent or multi-site business.
I’m not going to say how Congress should vote or if any other amendments might be appropriate.
But, if a franchise is to stay a franchise, it has to be in charge of the operational model. That’s part of the business model’s attraction to franchisees.
If the American Franchise Act passes, franchisors no longer need to be afraid of providing more comprehensive support to their network. But this doesn’t mean carrying out more audits, or breathing down their necks. It means better franchisee enablement.
All of which means your franchisees grow their business while you grow and develop a thriving franchise network.
Also, something to consider. 64% of franchisees are first-time business owners, and about 30% say they wouldn’t have gone into business without a franchise model.
This means that a majority of franchisees want head office support. If you are more able and willing to provide it then, once again, everybody wins.
Now, here’s the thing. If you’re going to do it, do it right. To build the best possible franchisee support system you need:
Building your support system is the hard part, and in my experience I see too many franchise networks use toolsets that work against them rather than with them.
Too many have separate softwares for recruitment, training, SOPs, audits, and no single place they can monitor and support their network.
You shouldn’t have to struggle or adapt your systems to make your franchise network perform better. You should be able to access software that adapts to how you work, rather than the other way around.
Claromentis Franchise Hub is our dedicated franchise management product built to help you unify, streamline and monitor operations, communications, training and onboarding across your entire network.
Within a single platform, Franchise Hub enables both large and growing franchises to:
Our Franchise Expansion Manager application runs your entire development lifecycle. It has:
And when a candidate signs, their unit’s dashboard, onboarding project, and access permissions are automatically created on the same record.
Post-launch, your established franchisees keep access to this for marketing and support requests, each with a budget, funding type, and deadline attached.
As part of Franchise Hub’s integrated intranet is a knowledge base and digital asset manager that franchisees can access. You can keep version controlled documentation with scheduled content reviews that ensure franchisees understand how to run their business.
Share network wide and location targeted communications with your franchise. Depending on how important your message is this can be through news articles or pop-up announcements with mandatory read receipts.
You can also create discussion rooms, events, polls and surveys with engagement analytics to see which communications land and what your franchisees need from you.
Franchise Hub contains a SCORM-compliant learning management system that enables your franchisee training and onboarding. You can make sure that mandatory training is always on schedule with our courses, learning pathways, quizzes, and certificates.
Plus you can ensure mandatory training gets retaken on schedule with our course validity dates.
Franchise Hub records completion by location, so you can monitor your whole network and also see which franchisee’s may need the most support.
Franchise Hub’s integrated AI policy manager distributes policies with acceptance tracking, update notifications and audit logs - all tracked and logged automatically as compliance evidence. It also helps franchisees and their employees understand your policies via an AI chatbot that can answer questions in plain language.
Our no-code franchise automation engine enables your operations team to build out your own, complex workflows without a developer. Or, if you don’t have your operations ready yet we provide launch ready franchise operations templates to get you started quickly.
Each of these templates are fully customizable, and included in every Franchise Hub deployment as standard. Our templates include processes for:
Arguably one of the best features of Claromentis Franchise Hub is our Locations application. Built exclusively for franchise and multi-site businesses it gives every unit its own dashboard covering financial performance, training completions, policy acceptance, audit status, territory maps and employees.
All of which gives you network wide visibility, enabling you to spot which locations need the most support. Both helping your franchisees grow their business while enabling your network growth and protecting your brand.
Claromentis Franchise Hub enables multi-brand theming, multilingual content, and granular permissions - meaning this one product can serve an entire worldwide enterprise-scale franchise network with multiple brands within one secure deployment.
Franchise Hub is ISO 27001:2022 and HIPAA compliant, and comes with SSO, two-factor authentication, IP-based access, encryption, and audit logs as standard. What’s more you can choose the best deployment for your business with cloud, on-premise, and private cloud with data residency in the US, UK or Europe available.
Note that nothing in the above list affects hiring, pay, scheduling, or discipline. Ensuring that your system, and your franchisee’s employee management are completely separated for the purposes of the American Franchise Act.
But, whether it passes and becomes law - ensuring that you can provide your franchisees with the best support possible is fundamental to your network growth and success.
So no matter what way the vote goes, if you’d like to see how Claromentis Franchise Hub helps you build a better franchise book a discussion call with one of our experts today.
We’ll listen to how your network runs today, walk you through the platform, and show you how we can help you become the franchise you want to be.