Franchise liability debate grows as American Franchise Act advances

Franchising offers a key route to business ownership, but the proposed American Franchise Act raises concerns about responsibility, worker protections, and franchise owners’ accountability.

On the latest Business Trends Today episode, we’re joined by Karla Walter, Senior Fellow for the American Worker Project at the Center for American Progress, to discuss what this legislation could mean for franchise owners, franchisors, and workers.

According to Walter, the current rules allow enforcement agencies to hold more than one company accountable when both influence working conditions, even if only one issues paychecks. She notes that these protections have existed for nearly a century and reflect shared control in modern business structures.

“These joint employer protections have been around for nearly a century. They're infrequently used, but they're a powerful tool that recognizes that the company that signs a worker's paycheck may not be the only company that is controlling workplace conditions.”

Under the proposed changes, Walter said franchisors would face fewer instances where courts could hold them jointly liable for workplace violations, even in cases where they maintain considerable influence over franchise operations. She explained that the shift would place greater legal and financial responsibility on franchise owners across more than 800,000 franchise establishments that collectively employ nearly 9 million workers.

Impact on the franchise system

Walter points to common franchise systems in the fast-food industry, where franchisors often set extensive operational requirements. She notes that corporate franchisors typically issue detailed operations manuals, training standards, branding rules, approved supplier lists, and technology systems that guide day-to-day business activity.

She explains that franchisors might still avoid a formal employer designation under the proposed framework, provided they do not directly make staffing decisions, even if they influence when, where, and how workers perform their duties through operational systems and software.

Walter also raises concerns that tighter cost controls imposed at the corporate level can increase pressure on labor costs at the franchise level, which she said may heighten compliance risks for franchise owners.

Wage violation concerns

For labor enforcement issues like wage violations, Walter argues that regulators would seldom hold franchisors accountable under the proposed standard, even when scheduling tools and operational requirements influence workplace conditions.

She notes that critics of the legislation argue it would shift more liability onto franchisees and potentially increase legal exposure for small business owners operating within tightly controlled franchise systems.

However, Walter observed that existing enforcement frameworks enable regulators to assess the actual level of control exercised in franchise relationships. She said the proposed legislation would limit regulators’ ability to evaluate those real-world conditions when determining shared responsibility between franchisors and franchisees.

Regulatory oversight

Walter notes that enforcement strategies have varied across administrations, with some applying joint-employer standards more strictly and others less so, though no clear evidence shows how this affects franchise growth. She added that the proposed legislation is part of a broader set of federal labor proposals addressing subcontracting relationships, though the franchise-specific bill does not extend to other models, such as temporary staffing agencies.

“We see the enforcement of the rule really vary from administration. So we've seen much more stronger enforcement of the rule happen during the [one] administration [versus others] and weaker standards within that rule.”

She said franchisees would bear a disproportionate share of responsibility under the proposal, particularly in cases where franchisors retain significant operational influence without formal employer designation.

As the legislation moves through federal discussion, Walter urged franchise owners to pay close attention to how liability standards may change and how those changes could affect day-to-day operations.