The American Franchise Act: What It Could Mean for Canadian Franchisors

To listen to an audio recording of this article, click here.

The American Franchise Act (“AFA”), a bipartisan bill currently moving through U.S. Congress, could help bring clarity to franchising as a business model, with implications for Canadian operators.

A fundamental tenet of franchising is that franchisees are not employees but independent operators that conduct business on their own account. Despite this principle and specific exemptions provided for in Canadian provincial franchise legislation, such as the carve-out for employee-employer relationships in Ontario’s Arthur Wishart Act (Franchise Disclosure), 2000, judges have blurred the lines between franchisees and employees. This has caused significant disruption to franchising as a business model in both Canada and the U.S.

The AFA, introduced in the House of Representatives by Kevin Hern (R-OK) and Don Davis (D-NC), with a companion bill in the Senate led by Roger Marshall and Angus King, would codify a clear U.S. federal standard for when a franchisor is considered a “joint employer” of a franchisee’s employees.

The Joint-Employer Standard

At its core, the AFA would help address a decade of regulatory instability by clarifying that a franchisor is only a joint employer if it possesses and exercises substantial, direct and immediate control over essential employment terms, such as hiring, firing, wages and discipline.

Since 2015, the U.S. joint-employer standard has shifted four times through agency rulemaking and litigation, particularly at the National Labor Relations Board. Industry groups argue this “regulatory whiplash” has increased litigation, raised costs and chilled expansion across a sector that supports more than 830,000 U.S. franchise businesses and millions of more jobs.

The AFA would amend the joint-employer provisions of the Fair Labor Standards Act and the National Labor Relations Act, establishing a franchise-specific standard and limiting future swings driven by political change.

Implications for Canadian Franchisors

Canadian franchisors would do well to pay attention to legislative discussion surrounding AFA for the following reasons:

1. Legislative Signals Travel North: Canada has its own evolving discussions around common employer worker classification and franchisor liability. While Canadian law is distinct, a clear and durable U.S. federal standard, particularly one with rare bipartisan backing, provides a comparative framework that courts, policymakers and industry stakeholders may reference in future debates.
   
2. Many Canadian Brands Operate Extensively in the U.S.: Canadian-based franchise systems with American footprints structure their training, compliance and operational oversight around U.S. liability risk. A clarified joint-employer rule reduces uncertainty and may encourage renewed investment and expansion, with financial and operational spillover effects into Canadian headquarters and supply chains.
   
3. U.S. Legal Risk Affects Canadian Franchisees: Many Canadian entrepreneurs operate U.S.-based brands. When franchisors face uncertain exposure, they often scale back system-wide support, innovation and expansion to avoid triggering joint-employer findings. Stability in the U.S. could strengthen the brand ecosystem on both sides of the border.
   

Key Takeaways

The AFA is framed as a narrow U.S. labour law clarification. In practice, it is structural reform aimed at stabilizing the legal foundation of the franchise model in a market that drives global brand development.

For Canadian franchisors and franchisees, developments in the U.S. rarely remain domestic for long. In a cross-border franchise economy, legal certainty in the U.S. can directly influence investment, growth and risk allocation north of the border.

The AFA may be American legislation, but its implications are likely to ripple here in Canada.

The Franchising Group at Aird & Berlis LLP advises franchisors and franchise systems on regulatory compliance, disclosure obligations and cross-border operational issues. For guidance on the evolving joint-employer landscape and potential implications for Canadian franchisors, please contact the authors or a member of the group.

Aird & Berlis LLP is a proud supplier member of the International Franchise Association and a strong supporter of this initiative.