A new federal bill, The American Franchise Act, introduced on September 10, 2025 as H.R. 5267, represents a significant legislative effort to address the evolving landscape of the "joint employer" test, particularly as it pertains to the relationship between franchisors and franchisees. If passed, the bill, which is sponsored by Republican Rep. Kevin Hern and a bipartisan group of lawmakers, will amend the National Labor Relations Act ("NLRA") by providing definitions that delineate when a franchisor is considered to be exercising "direct and immediate control" over a franchisee's employees, a critical factor in determining whether the franchisor is a "joint employer" of the worker.
The joint employer test has been a contentious issue, with significant implications for franchisors and franchisees alike. The test determines when two separate entities are both considered legal "employers" of a particular employee, thereby sharing liability for certain labor and employment law violations. The test focuses on the degree of control each entity exerts over the worker. However, ambiguity surrounding what constitutes "control" has led to varying interpretations and legal challenges, creating uncertainty for businesses operating under the franchise model, where franchisors often expect its franchisees to retain exclusive liability for employment issues.
The bill's text acknowledges that a franchisor must "protect the integrity of its system of operations" by enforcing "uniform quality, marketing, and operational standards," while franchisees are independent business owners who must comply with such standards but nonetheless control the day-to-day mechanics of its operations and labor relations. Therein lies the issue: if a franchisee is required to comply with the franchisor's standards but manages its own day-to-day operations, which entity really has control over the franchisee's employees?
The Current Joint Employer Rule
The NLRA defines an "employer" to include "any person acting as an agent of an employer, directly or indirectly" and also defines an "employee" to be any employee, not limited to the employees of a particular employer. Thus, under these broad definitions, a franchisee operator could be an indirect "agent" of a franchisor, technically making the franchisor an "employer" of the franchisee's workers. Under the current rule issued by the National Labor Relations Board ("NLRB") in 2020, two or more entities are considered joint employers of the same employee if they possess and exercise "substantial direct and immediate control" over one or more essential terms or conditions of employment. The 2020 rule defined "substantial direct and immediate control" to mean "direct and immediate control that has a regular or continuous effect on an essential term or condition of employment of another employer's employees" and does not include control that is exercised "on a sporadic, isolated, or de minimis basis." In 2023, the NLRB issued a new rule that expanded the NLRA's joint employer test, but that rule was struck down by the court system. We discussed the vacated 2023 rule in a webinar last year.
The Proposed Bill
The proposed American Franchise Act provides additional clarity on the phrase "direct and immediate control." For example, it states that a franchisor exercises direct and immediate control over wages if it "actually determines" the wage rate paid to a franchisee's employee. Likewise, according to the proposed legislation, a franchisor does not exercise direct and immediate control over discipline or discharge if the franchisor merely brings the employee's poor performance to the attention of the franchisee or expresses a negative opinion about the employee to the franchisee. With respect to supervision and direction, the bill states that a franchisor only exerts control where it "consistently and directly" instructs a franchisee's employee how to perform their work or by actually issuing performance appraisals. Supervision and direction does not include providing instructions that are (i) limited and routine, (ii) consist primarily of telling a franchisee's employees what work to perform or where and when to perform the work, (iii) offering training materials or establishing training requirements, (iv) setting brand standards, or (v) offering resources or tools for a franchisee to consider using to direct the work schedules, positions, and tasks of the franchisee's employees.
These proposed definitions are particularly significant as they provide franchisors with more room to maintain operational standards without having to worry that each action will result in joint employer liability. By clarifying that certain routine actions do not equate to "direct and immediate control," the bill is likely to achieve a more predictable legal environment for franchisors.
The bill is still in committee in the U.S. House of Representatives and is subject to change, but has support from members of both parties, as well as industry groups such as the International Franchise Association, according to the association's website. Saul Ewing is closely monitoring the progress of H.R. 5267 and its potential impact on the operations and legal responsibilities of franchisors and franchisees. In addition, even if the bill passes, it is not immediately clear whether other state or federal authorities that have their own "joint employer" tests in other contexts will follow suit in their analysis.
