Mark Vandegrift 
Welcome to the latest episode of FranSimple, the podcast designed to make the concepts of franchising simple. I'm your host, Mark Vandegrift, and with me is the guru of franchising, the king of the American Franchise Act, Steve Vandegrift. Steve, how you doing?

Steve Vandegrift 
Doing well, Mark. How are you?

Mark Vandegrift 
Good. Before we get started today, I wanted to let our listeners know that we're coming down to the final couple episodes of the season and we'll be taking a break until January, but no worries. We are always available to answer your questions and we love hearing from our listeners about topics that are on their minds. So send in what you have and we'll get back to you right away. And just maybe, just maybe, one of your topics may be used for next season. Today we're gonna cover the American Franchise Act, which you probably figured out from what I was introducing Steve as the guru of. And that may not sound overly sexy. I saw it and I was like, but you know what, it's extremely important. So, Steve, why don't you let our listeners know why the American Franchise Act matters and what exactly the American Franchise Act is.

Steve Vandegrift 
Sure. And I think we'll cover a number of different things about why it matters and the importance, et cetera. But at the basic level, the AFA is simply federal legislation designed specifically to clarify when a franchisor can be considered a joint employer of an employee who works for an independently owned franchise. So under the House bill, a franchisor would be considered a joint employer only when it possesses and exercises substantial control and direct and immediate control over one or more essential terms or conditions of employment. And so some of those employment matters include areas such as wages, benefits, hours, hiring, discharge, discipline, etc. So the significance is that Congress would establish a franchise specific standard in federal law rather than leaving the issue primarily to changing administrative interpretations and court decisions. So it gives it a level playing field.

Mark Vandegrift 
Well, before we go any further, you know words mean things and a joint employer may not mean what it used to mean, if you know what I mean. But tell us tell us what a joint employer actually means and why someone who's in franchising should even care about it.

Steve Vandegrift 
Sure. So in simple terms, hopefully, joint employer status addresses whether two businesses can both be considered employers of the same employees for purposes of certain federal labor and employment laws. So in a typical franchise arrangement, the franchisee employs the people working at the franchise locations. The franchisee generally hires them, schedules them, compensates them, disciplines them, and manages them in terms of day-to-day employment. But the franchisor, on the other hand, establishes standards necessary to maintain the brand and franchise system and the consistency. So the difficult question has really been: at what point does the franchisor's involvement become sufficient to make it an employer as well? And that's important because joint employer status can potentially bring responsibilities and liabilities under such laws as the National Labor's Relations Act and the Fair Labor Standards Act. So the AFA specifically addresses joint employer determinations under those two laws, so very, very important.

Mark Vandegrift 
Well, why has this joint employer standard become kind of the I don't know, not the issue, but an important issue for franchising?

Steve Vandegrift 
Well, a a major concern has really been regulatory consistency. So the International Franchise Association, they argue that the federal joint employer standard has changed repeatedly over the past decade, which it has, as administrations and regulatory approaches have changed. So from the industry's perspective, that makes long-term planning difficult because franchisors and franchisees need to understand where certain responsibilities reside. So supporters of the AFA they see legislation as a way of creating a more durable standard that doesn't change as frequently when presidential administrations or agency rule making changes.

Mark Vandegrift 
Okay, so we're looking at uncertainty here right before the midterms, right? That's an example of uncertainty so people understand. And as business owners, we know that a lot of folks that might buy from you would not make a move until after the elections are over and they decide on something. How could uncertainty over joint employer status affect the support a franchiser provides to its franchisees?

Steve Vandegrift 
Well, this is where an employment law issue can become an operational issue. So franchisors commonly provide franchisees with training programs, operating systems, operation manuals, technology, suggested procedures, required procedures, and obviously other resources that are simply intended to help them successfully operate within the system and protect that brand consistency. So if franchisors believe providing certain types of assistance could increase the risk of being characterized as a joint employer, they're certainly or may become more cautious about the support that they provide. So, supporters of the legislation they argue that a clearer standard would allow franchisors to provide useful resources and obviously protect brand standards without automatically creating a joint employer relationship. And that distinction is important because supporting the franchisees' business is not necessarily the same thing as managing the franchisees' employees.

Mark Vandegrift
Well, explain that a little bit more. What would the American Franchise Act allow a franchisor to do without automatically becoming a a joint employer?

Steve Vandegrift 
That's a great question. The legislation's really designed to distinguish a brand and system oversight from direct employment control. So, for example, the IFA explains that establishing minimum standards to protect trademarks, intellectual property, providing training manuals or operational resources would not by themselves constitute the type of direct and immediate employment in terms of control that's contemplated by this legislation. And that distinction matters because consistency is really fundamental to franchising. A customer certainly expects a brand to deliver a reasonably consistent experience regardless of which franchisee owns a particular location. That's so critical to successful franchising. So franchisors, they need some ability to establish and enforce brand standards without being concerned about joint employer liability.

Mark Vandegrift 
Does the American Franchise Act then essentially give franchisors immunity from this joint employer liability?

Steve Vandegrift 
Definitely not. That's an important misconception to avoid. The legislation does not say that a franchisor can never be a joint employer. Rather, it establishes a threshold. So a franchisor could still qualify as a joint employer when it possesses and exercises substantial and direct control and immediate control over essential employment terms or conditions. So the issue isn't simply whether the company is called a franchisor, the issue is what control the franchisor actually exercises over the franchisees employees.

Mark Vandegrift
So legislation that is questionable. Hmm, never heard of that before.

Steve Vandegrift 
No. Shocking, isn't it?

Mark Vandegrift
Okay, so if you're a sub if you're a supporter of this, and I'm not saying you are or you aren't, but why do supporters believe this legislation is important for franchisees, not just franchisors, but specifically for franchisees?

Steve Vandegrift 
Well and I don't mind sharing that I am a supporter and you know supporters really believe that franchisee independence is one of the fundamental characteristics of franchising. A franchisee isn't simply managing a corporate location. The franchisee has invested their capital, owns the local business, and typically assumes responsibilities for its employees and the day-to-day operations. So from that perspective, supporters believe a clear joint employer standard really reinforces the franchisee's role as an independent business owner while still allowing the franchisee to receive substantial support from the franchisor so the IFA which obviously strongly supports the legislation argues that regulatory uncertainty can discourage franchisors again as I mentioned from providing support and can complicate the basically the investment and the expansion decisions and even the American Association of franchisees and dealers has also stated its support for the AFA.

Mark Vandegrift 
Okay, so you support it, but not everyone supports it obviously, because there's always two sides to all the legislation that's out there. What are the principal arguments against it then? So put your mind on the other side and tell our listeners, I guess, what give us some key arguments against it why I wouldn't want it.

Steve Vandegrift 
Sure. Well, opponents, including the AFL CIO and other labor organizations, argue that the proposed standard is too narrow. Their position is that a franchisor may influence working conditions without directly supervising employees. They point, for example, to contractual requirements, operating standards, staffing expectations, even technology systems and scheduling requirements that could indirectly affect workers. From their perspective, requiring substantial direct and immediate control could make it more difficult to hold a franchisor responsible, even in situations where the franchisor meaningfully influences employment conditions. Supporters respond to that, however, that brand standards and operational requirements are really inherent to franchising, and they should not, without sufficient employer control, convert the franchisor into the employer of a franchisee's workplace. That disagreement really gets to the heart of the policy debate.

Mark Vandegrift 
Hmm. Well, okay, let's suppose it passes and I'm thinking about franchising my business, which we have several clients that come to us on a regular basis monthly, thinking about that. How is this gonna affect a business owner that goes, hmm, I'm thinking about franchising my business?

Steve Vandegrift 
Great question. So for an emerging franchisor the issue highlights something that we discuss quite frequently, and that is the importance of clearly defining the roles of the franchisor and franchisee. So a properly developed franchise system should identify what the franchisor controls to protect the brand and the system, and what the franchisee controls as an independent business owner. So employment practices are an especially important area. And a franchisor may provide resources, by the way, recommendations, training, but emerging franchisors should work closely, I believe, with qualified franchise and employment council when developing policies involving franchisee employees. So the AFA would not eliminate the need for that discipline. In many respects, it reinforces why carefully designed franchise systems are really so important.

Mark Vandegrift 
Well, maybe I'm slow, but help me out here, and I'm sure some listeners are questioning this. How is this legislation gonna impact franchise operations manuals and training programs?

Steve Vandegrift 
Well, potentially, and this is particularly relevant when developing a franchise system, operations manuals have to strike an important balance, I like to say. They need enough detail and specificity to protect the brand, establish the operating standards, and help franchisees replicate the business model successfully. But franchisors also need to understand the distinction between establishing operational standards and taking responsibility for the franchisees' employment decisions. So that means areas involving hiring, compensation, scheduling, discipline, termination, and employee supervision, they all deserve careful legal review. And this is one more reason a franchise operations manual shouldn't simply be a copy of the company's corporate operating manual. The document really needs to be developed specifically for the franchise relationship. And I'll share an example. Before the joint employer liability raised its head with the McDonald's Labor Department dispute, franchise attorneys were very comfortable with the franchisor providing a sample employee handbook, putting all the caveats into the agreement in the FDD that they need to get it reviewed, make sure it's compliant. As soon as that issue came up every franchise attorney we work with said, no longer. We're not gonna do that. So we've actually been able to work around that issue. We simply provide a list of codes of conduct in the operations manual. We provide resources where they can actually download manuals, et cetera, employment handbooks or employment manuals, but they themselves will have to consider which codes of conduct they want to implement and what those codes of conduct are. So that separates any liability we believe from being a joint employer.

Mark Vandegrift 
It's interesting though. I guess I'm going back to the scenario where we have a lot of prospects come to us and they think all they needed is an FDD, and they don't take into consideration the bulk of franchise development and the services that we offer regarding ops manuals and training manuals. What would a franchisor right now who just has an FDD in place and a really I don't know, you called it a corporate operations guide or something like that, but they really haven't developed the training program and the ops manuals. Are they going, oh crap, we better get our stuff together at this point, or what do you think their reaction is to all of this? Or maybe they are aware.

Steve Vandegrift 
Well, that's another great question. I'm certain that the franchisors that are keeping up with these matters, if I'm them, I'm certainly taking a hard look at my manual right? And it and we actually recommend certain protocols, even without this potential joint employer liability, that you need to regularly review and make sure that everything's still current. Yeah, I don't care if it's an equipment list or a certain way of making a hamburger. Well, if I'm them, I certainly would be looking very deeply into my manual, especially anything that's quote unquote employee related. And then seek out legal counsel, right? Talk to the franchise attorney, ask them, is this potentially going to get us in trouble? And ultimately they might spend a few bucks, but they're also protecting their ability to continue operating successfully without suddenly being considered a joint employer. I love that question.

Mark Vandegrift 
Are there any you know, a lot of legislation will grandfather in certain entities based on age or something else, or even a threshold of number of franchisees. Are you seeing any thresholds built into this legislation, or is it still too much in motion to really get a gauge of that?

Steve Vandegrift 
Yeah, we'll have to see what the final versions basically become. I'm not to date, I haven't really seen anything like that that alarm me. No.

Mark Vandegrift 
Okay. So speaking of that, where does the American Franchise Act stand as of, you know, October 2026?

Steve Vandegrift 
Well, shortly over a month ago, so as of September 16th, the house version is HR 5267.

The House Education and the Workforce Committee voted on July 21st to report the bill, and the reported version was formally filed on September 8th. Now it has been placed on the House Union calendar, meaning it's positioned for potential considerations by the full House, but it's not yet become law. Now there's also a Senate companion, S3525, which was introduced by Senator Marshall and Senators King and Lankford. Tim Sheeley was also involved in Susan Collins and it was referred to the Senate Committee on Health, Education, Labor and Pensions. So this is very much an ongoing legislative issue which is starting to gain some traction.

Mark Vandegrift 
Am I allowed to roll my eyes at some of those names you listed?

Steve Vandegrift 
Yes. Do you know them personally?

Mark Vandegrift
Let's just say the Titanic comes to mind running into an iceberg.

Steve Vandegrift 
Right.

Mark Vandegrift
I mean well, let's just let's throw that out and say regardless of what happens with this legislation there's always a a reason that it's happening, right? You don't legislate something that isn't a problem in society or in business or in government. So what's that larger lesson that franchisors and franchisees should take away from these current ongoing legislative matters?

Steve Vandegrift 
Well, I think a major lesson is that franchising depends upon maintaining the proper balance between the system consistency and the independent business ownership. The franchisor certainly has to protect its trademarks, its IP, its operating system, the cut overall customer experience. The franchisee, however, needs the ability to independently operate its business, including managing its workforce without that system. So, whatever ultimately happens with the AFA, franchisors should clearly define responsibilities, certainly establish appropriate operational boundaries, and then make sure their franchise agreements, their operations manuals, their training programs, and even the field support practices all work together to that end. And that's certainly not simple in terms of a legal consideration. It's part of building a well-designed franchise system. It goes hand in hand.

Mark Vandegrift 
So if someone owns a business today and is considering the franchise method of expansion, what should they take away from today's conversation? What's that? You know, I always challenge you, one thing.

Steve Vandegrift 
Sure. Well, I would say don't think of franchising as simply licensing your name and teaching someone how to operate your business. To your point, you have an attorney draft an FDD, you're off to the races races, but there's no operations manual, there's no protocols and procedures that clearly dictate who's responsible for what. You're basically creating a relationship between two independent businesses. A strong franchise system really defines that relationship carefully. What the franchisor controls, what the franchisee controls, and how brand standards are maintained, how support is delivered, and where employment responsibilities reside. So the AFA it brings attention to one specific legal issue. But the larger principle that I believe is much broader: a successful franchise system begins with clearly defined roles, responsibilities, and expectations.

Mark Vandegrift 
Well, that's a great principle and probably the perfect place to close out our conversation today. Let's wrap up today's episode of FranSimple. Thanks for joining us, Steve. And as always, to our listeners, please like, press that share button, press that subscribe button to FranSimple, the podcast designed to make the concept of franchising simple. Until next episode, may your business expand through the power of franchising.