Although still at an early stage in the legislative process, the AFA is being closely watched by the franchising community because it seeks to fundamentally stabilise how U.S. federal law treats the franchisor–franchisee relationship — particularly in the context of employment liability.
For Canadian brands accustomed to a comparatively stable regulatory environment at home, the volatility of U.S. “joint employer” rules over the past decade has been a recurring source of uncertainty. The AFA is expressly intended to address that instability.
The joint employer problem in the U.S. franchise context
At the heart of the AFA is the concept of “joint employment.” Under U.S. labour and employment laws, a company that is deemed a joint employer of another entity’s workers may be held legally responsible for those workers’ wages, working conditions and benefits, as well as the other entity’s unfair labour practices, employment tax and withholding responsibilities, and union-related obligations.
In a franchising context, this issue has been particularly fraught. U.S. regulators and courts have repeatedly expanded and contracted the joint employer standard, sometimes taking the position that a franchisor’s indirect or even unexercised authority over a franchisee’s operations could expose it to employment liability and potential unionising efforts by unit-level employees. These swings have made it difficult for franchisors — especially foreign franchisors unfamiliar with U.S. labour law — to assess risk with confidence.
What the American franchise act would do
The American Franchise Act seeks to codify a clear, narrow and franchise-specific joint employer standard under federal law. In simple terms, the bill would provide that a franchisor is not a joint employer of a franchisee’s employees unless the franchisor both possesses and actually exercises “substantial direct and immediate control” over essential terms and conditions of employment.
Those essential terms are defined narrowly and include matters such as hiring, firing, wages, hours of work and discipline. Importantly, the AFA makes clear that actions traditionally associated with franchising — such as brand standards, operational manuals, quality control requirements, marketing standards and training — are not, on their own, sufficient to create joint employer status.
The policy objective is explicit: franchisors should be able to protect their brands and franchise systems without being treated as the employer of their franchisees’ workforce.
Why this matters for Canadian franchisors
For Canadian franchisors with U.S. operations, the potential enactment of the AFA is broadly positive. If enacted, it would significantly reduce the risk that a Canadian franchisor is drawn into U.S. employment disputes solely because it provides robust operational support or enforces brand standards. This clarity should make it easier for Canadian systems to scale in the United States, maintain consistency across borders and support franchisees without constantly second-guessing whether ordinary franchise controls might trigger unexpected liability.
That said, the AFA is not a safe harbour for overreach. Canadian franchisors should not misinterpret the bill as a licence to become involved in day-to-day employment decisions. Direct participation in setting wages, approving hires or terminations, supervising staff or disciplining employees could still expose a franchisor to joint employer liability — even under the AFA’s more franchisor-friendly framework.
What the AFA does not change
It is equally important to understand the limits of the proposed legislation. The American Franchise Act does not modify U.S. franchise disclosure law, which continues to be governed by the Federal Trade Commission’s Franchise Rule. Canadian franchisors must still comply fully with U.S. disclosure requirements, including the preparation and annual updating of a compliant franchise disclosure document.
Importantly, the AFA does not override employment laws, nor does it affect state “franchise relationship” laws. Many U.S. states impose their own relationship and termination requirements, which can differ materially from Canadian norms. It is also not clear whether the AFA would pre-empt or otherwise affect a franchisor’s joint employer risk in states with more employee-friendly laws, whether now or in the future. The compliance burden for Canadian franchisors operating in multiple U.S. states will therefore remain complex, even if federal joint employer risk is reduced.
Practical takeaways
Although the American Franchise Act has not yet become law, it reflects a potential legislative intent to stabilise and protect the franchise model in the United States. Trade organisations such as the International Franchise Association (IFA) have been lobbying Congress to enact this legislation as a matter of bringing much-needed clarity and predictability to a historically uncertain issue.
Canadian franchisors should monitor the bill’s progress closely and consider using this period to review U.S. operations, franchise agreements and field practices — particularly where operational support and supervision may stray into employment oversight. Canadian franchisors with operations in, or those contemplating expansion into, the United States should speak with experienced U.S. employment and franchise counsel to ensure their operations and practices do not inadvertently cross this line.
If enacted, the AFA would mark a meaningful step toward greater predictability for franchisors operating south of the border. For Canadian brands with U.S. growth ambitions, that predictability may prove just as valuable as the legal protections themselves.
