Are Franchises Finished?

Small businesses are the backbone of the American economy employing 46% of all American workers. For that reason, it is absolutely critical that policymakers in Washington, D.C., protect America’s competitive small business environment. It’s all the more unfortunate then that Federal Trade Commission has expressed its desire to upend a successful business model that has allowed millions of Americans to run, start, and grow their own businesses.

Since the early 1800s, individuals looking to start their own business in America have benefited from a variety of offerings from established brands through the franchise model. Under the franchise model, individuals sign a contract with an established brand that permits the use of its branding and business model in exchange for an upfront fee and/or regular royalty payments.

• $860 billion
  in economic output
• 8.69
  million workers employed

Many familiar quick-service restaurants, retail centers, supermarkets, and hospitality companies operate under this model. Franchises are an important element in the U.S. economy, with an estimated economic output of over $860 billion in 2023 and representing 8.69 million workers.

Why are franchises under threat?

The FTC has regulated the franchise model since 1979. The Franchise Rule requires franchisors to disclose material information to prospective franchisees on the theory that an informed individual can determine whether a franchise deal is in his or her best interest. The agency itself has recognized that a franchisor’s control over a franchisee should not create an employment relationship.  In court, the FTC has explained that “[u]nder the Franchise Rule, ‘employee’ and ‘franchisee’ are mutually exclusive categories. 

But that may be about to change. Earlier this year, the FTC issued a solicitation to gather more information about the franchise model, with a focus on “how franchisors may exert control over franchisees and their workers.” Most of the FTC’s questions appear to reflect the agency’s view that franchisors treat franchisees unfairly and that franchisees lack any bargaining power, rather than the reality that franchisors compete heavily for franchisees. For instance, the solicitation asks about franchise provisions “that determine wages, hours or working conditions of employees of the franchise” and “that mandate franchisees to maintain certain hours of operation.” Based on the tenor of the FTC’s questions, the solicitation suggests a desire to recast franchisees as employees, create a joint employment relationship between the franchisor and the franchisee, or both. Any such broad, labor-oriented rule likely would render the franchise model effectively unworkable, to the great detriment of the economy and public.

What’s at stake?

The franchise model gives more Americans a chance to participate in the economic upside of a business as an owner, rather than just an employee. These opportunities especially benefit underrepresented communities. Nearly 30% of franchises are minority-owned, compared to 18% of non-franchised businesses. Women also have historically benefitted from the franchise model, with the rate of female-owned franchises growing by leaps and bounds. According to one report, the rate of female-owned franchises grew by around 10% from 2007 to 2012 and by 24% in the decade through 2019.

A rule converting franchisors and franchisees into joint employers could devastate the model and seriously harm consumers. By reducing or eliminating the entrepreneurial opportunities for franchisees, such a rule would discourage the creation of new businesses. The overall effect would be to leave consumers with fewer options, workers with fewer choices, women and minorities (and everyone else) with fewer opportunities to own their own businesses, and the overall economy with less investment.

About the authors

Sean Heather

Sean Heather is Senior Vice President for International Regulatory Affairs and Antitrust.

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Marc Freedman

Marc Freedman is vice president of workplace policy at the U.S. Chamber of Commerce. He develops and advocates the Chamber’s response to OSHA matters; FLSA issues such as overtime, minimum wage, and independent contractors; paid leave issues; EEOC, and other labor and workplace issues.

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