NACS Informs FTC on Franchise Agreements and Business Practices

The FTC requested this information from members of the public in early March.

June 09, 2023

ALEXANDRIA, Va.—NACS has sent a letter to the Federal Trade Commission (FTC), providing information on franchise agreements and franchisor business practices.

The FTC requested this information from members of the public in early March. The agency wants to know more about how franchisors may exert control over franchisees and their workers. In particular, the agency is interested in how franchisors disclose certain aspects and contractual terms of the franchise relationship, as well as the scope, application and effect of those aspects and contractual terms.

“Franchising has benefits as a business model for both the franchisor and franchisee,” wrote NACS in the letter. “Businesses have invested and structured these business relationships based upon the current state of the law. The combination of regulations and court decisions governing these businesses provide legal protections for both parties to these relationships.”

NACS discussed the current state of franchising. There are 805,000 franchise establishments in the U.S. today employing 8.7 million people. Franchised businesses generate $860.1 billion in economic output, and franchises make up 3% of the U.S. gross domestic product.

“Uniformity and brand consistency are critical to the success of the franchise model. The benefits from a productive franchise relationship don’t only help the franchisor and individual franchisee but also a whole network of franchisees working with that same franchisor,” wrote NACS.

The letter then goes on to describe standard franchise agreements, the legal status of franchising, franchising regulations, the effectiveness of the FTC’s franchise rule and joint-employer liability.

NACS noted that although the FTC’s Franchise Rule protects franchisees through disclosure requirements, they can be complex, long, and difficult to understand, even sometimes requiring legal counsel to interpret the disclosures.

“Since franchisees face a difficult task to fully comprehend the disclosures, and they are entering into franchise agreements to take advantage of the benefits of brand partnerships, disclosure requirements could be adjusted to make this partnership easier,” wrote NACS.

NACS also expressed concern about any potential changes to joint-employer liability for franchisors, as the association believes that franchisors and franchisees generally should not be viewed as joint employers. Only if the franchisor were to actually exercise control over the key areas of employment (hiring and firing, supervision, employee wage rate and maintaining employment records) would there be a justification to find a franchisor to be a joint employer, says NACS.

“New tests that look at a theoretical ability to control those areas are not helpful and should be rejected. Franchise contracts often reserve limited rights in case there are problems that occur in the franchise operations. But, those reserved rights should not be mistaken for the actual exercise of such rights. Conduct, not theory, should govern the joint employer analysis,” wrote NACS.

NACS also pointed out that because many franchisees are small businesses, regulators should carefully consider the effects of any proposed regulation on all relevant small business entities.

“Regulations could potentially cause franchisors to turn to direct ownership of locations rather than working with franchisees,” wrote NACS. “A rule that restricted the number of franchising opportunities would be bad for small businesses and the economy as a whole.”

NACS concluded the letter by telling the FTC that it’s important to maintain the profitability and success of the franchising business model, and that the current model provides substantial benefits to franchisees and franchisors.

“Substantial regulatory schemes and legal doctrines exist that have protected these business relationships and allowed them to thrive,” wrote NACS. “Full consideration should be given to the benefits of these models and the investments made based upon existing legal schemes before considering changes to it.”