American Franchise Act and 2026 Franchise‑rule Changes: What U.S. Franchisors Must Do Now

The American Franchise Act, introduced in the U. S. House of Representatives as H. R. 5267 on September 10, 2025, and in the Senate as S. 3525 on December 17, 2025, represents the most significant federal legislative effort to reshape the franchise business model in decades. Running in parallel, the Federal Trade Commission’s amended Franchise Rule imposes tightened disclosure timelines, expanded Item 23 receipt requirements, and new obligations around performance claims and broker identification that every franchisor selling in the USA must address.

For in‑house counsel, franchise development executives, and PE investors with portfolio franchise brands, 2026 is a compliance inflection point: the combined effect of the American Franchise Act USA legislative push and the FTC’s regulatory updates demands an immediate, coordinated response spanning franchise disclosure document redlines, state franchise registration filings, and operational safeguards against joint employer liability.

Executive Summary: The American Franchise Act USA and the 2026 Compliance Imperative

The American Franchise Act (AFA), filed as H.R.5267 in the House and S.3525 in the Senate, is designed “to preserve the franchise business model” by clarifying joint‑employer standards across federal labor and employment statutes. Its core mechanism amends the National Labor Relations Act and other federal laws to ensure that a franchisor’s exercise of brand‑protection controls, such as enforcing “uniform quality, appearance, and customer experience standards”, does not, by itself, establish joint‑employer status with a franchisee’s employees.

Simultaneously, the FTC’s amended Franchise Rule requires franchisors to provide potential franchisees with a franchise disclosure document containing 23 specific items of information, with updated delivery timing and expanded receipt‑page content under Item 23. The amended Rule also mandates that franchisors disclose the “name, principal business address, and telephone number of each franchise seller” on the Item 23 receipt page.

The three immediate actions every franchisor should take are:

• Audit and redline your FDD. Review Items 1 through 23 against the amended FTC Franchise Rule requirements and prepare updated language addressing joint‑employer definitions.
• Run a 50‑state franchise registration audit. Identify which state filings require amendment and build a staggered filing calendar.
• Implement operational safeguards. Segregate franchisee employment decisions from franchisor brand‑standards oversight to reduce joint employer franchising exposure.

What the American Franchise Act Would Change: Legislative Summary

The American Franchise Act was introduced in the 119th Congress with bipartisan support, and the Problem Solvers Caucus endorsed H.R.5267 in February 2026. The bill’s stated purpose is to “preserve the franchise business model” by drawing a clear statutory line between legitimate brand‑standards enforcement and the kind of operational control that could make a franchisor the joint employer of a franchisee’s workforce. The legislation amends multiple federal statutes simultaneously, including the National Labor Relations Act, to install a franchise‑specific carveout for joint‑employer determinations.

Supporters, including the International Franchise Association and a broad industry coalition, argue that recent shifts in federal labor law interpretation have created uncertainty for the roughly 800,000 franchise establishments operating in the United States. Labor‑advocacy groups, however, have argued that the AFA “would let corporate franchisors off the hook when they undermine workers’ rights and leave small businesses exposed.” Both perspectives underscore the practical stakes: how the final statutory text defines “control” will determine whether franchisors must restructure their operations manuals, field support programs, and technology platforms.

Key Statutory Definitions Franchisors Should Watch

The bill text acknowledges that a franchisor must “protect the integrity of its system of operations” by enforcing uniform quality and appearance standards. The critical definitions to monitor include:

• “Joint employer” carveout. Section 3 of S.3525 provides a clarification of joint employment specifically for franchising, amending the NLRA to exclude brand‑protection activities from the joint‑employer calculus.
• “Franchisor” and “franchisee” definitions. The AFA adopts definitions consistent with the FTC Franchise Rule, tying the legislative framework to existing regulatory infrastructure.
• Scope of “control.” The bill distinguishes between operational control over employment terms (hiring, firing, wages, scheduling) and brand‑standards control (product quality, décor, customer protocols). Only the former triggers joint‑employer analysis.

Timeline of Legislative Milestones

Industry observers expect that even if the AFA does not reach final enactment in the current session, its definitions will influence regulatory guidance and court interpretations of existing joint‑employer tests, making early compliance planning valuable regardless of the legislative outcome.

What Changed in the FTC’s Amended Franchise Rule

The FTC Franchise Rule requires franchisors to provide all potential franchisees with a disclosure document containing 23 specific items of information about the offered franchise. The amended Rule introduced several changes that directly affect how franchisors prepare, deliver, and document their franchise disclosure documents. Understanding these changes is essential for any franchisor selling franchise opportunities in the USA during 2026.

Under the amended Rule, the franchise disclosure document must be provided to a prospective franchisee at least 14 calendar days before the prospective franchisee signs a binding agreement or pays any consideration. This timing requirement, while not new in concept, now carries enhanced procedural documentation obligations, particularly around the receipt page and the identification of franchise sellers.

The amended Rule also requires franchisors to disclose on the Item 23 receipt page the name, principal business address, and telephone number of each franchise seller involved in the offering. This seemingly simple addition has significant operational implications: franchise systems using broker networks must now identify and update seller information for every transaction, maintain accurate records, and ensure that brokers themselves are trained on proper disclosure procedures.

Key Item Changes and Required Franchisor Actions

Compliance teams should treat the Item 23 changes as the highest‑priority technical update. Failure to include accurate seller information on receipt pages creates a documentary gap that could support rescission claims or FTC enforcement actions, a risk far out of proportion to the apparent simplicity of the requirement.

Immediate Franchise Compliance Checklist: What Franchisors Must Do Now

The convergence of the American Franchise Act’s legislative momentum and the FTC’s amended Franchise Rule creates a compliance environment where delay carries measurable legal and financial risk. The following checklist is organized into five operational categories and further broken into 30‑day quick wins and 90‑day technical tasks.

Quick‑Win Items for the Next 30 Days

1. Inventory all active FDDs and state registration filings. Create a master spreadsheet listing every jurisdiction in which you hold an active franchise registration or exemption, the FDD version currently on file, and the next renewal or amendment deadline.
2. Run an Item 23 compliance gap analysis. Pull your current receipt page and compare it against the amended Rule’s requirements for franchise seller identification. Flag any missing fields.
3. Update sales scripts and broker communications. Ensure every franchise seller, internal and external, understands the 14‑calendar‑day delivery rule and knows how to document proof of delivery.
4. Issue an internal memo to legal and HR. Instruct franchise operations teams to begin segregating brand‑standards oversight from any involvement in franchisee hiring, discipline, scheduling, or payroll decisions.
5. Schedule an FDD redline legal review. Engage franchise counsel to perform a full Items 1–23 review against the amended Rule and the AFA’s proposed definitions.

90‑Day Technical Tasks: Legal Drafting and Registration

6. Draft and circulate FDD redlines. Prepare marked‑up versions of Items 1, 5, 19, and 23 reflecting all amended‑Rule changes and any AFA‑anticipatory language for joint‑employer carveouts.
7. Redline franchise agreements. Update the franchise agreement, area development agreement, and any sub‑franchise or master‑franchise agreements to include updated joint‑employer clarification provisions and indemnity language.
8. File amended state registrations. Submit amended registration applications in registration states (e.g., California, New York, Maryland, Minnesota, Illinois) and filing states as required. Stagger filings to manage regulator review timelines.
9. Update broker/intermediary contracts. Revise agreements with franchise brokers and consultants to include disclosure obligations, seller‑information update procedures, and indemnification for non‑compliance.
10. Conduct a franchise operations audit. Review operations manuals, field consultant protocols, and technology platforms (POS systems, scheduling software) for any features that could be characterized as direct operational control over franchisee employees.
11. Review insurance coverage. Confirm that franchise‑specific errors and omissions (E&O) and employment practices liability insurance (EPLI) policies are current and adequately sized for joint‑employer defense costs.
12. Build a monitoring calendar. Set legislative and regulatory tracking alerts for the AFA’s committee progress, any FTC rulemaking notices, and state‑level franchise law amendments.

Updating Your Franchise Disclosure Document: Practical Redlines and Sample Clauses

The franchise disclosure document is the single most important compliance artifact a franchisor maintains. Every amendment to the FTC Franchise Rule and every material change triggered by emerging legislation like the American Franchise Act must flow through the FDD before the next franchise sale. The following redline guidance addresses the highest‑impact items.

Item 1, The Franchisor and Any Parents, Predecessors, and Affiliates. The amended Rule’s expanded affiliate‑disclosure requirements mean that any corporate restructuring, acquisition, or change of control since the last FDD update must be reflected. For franchise systems owned by PE funds, this frequently means disclosing fund‑level entities and their management companies, a step many portfolio companies overlook.

Item 19, Financial Performance Representations. The strengthened substantiation requirements under the amended Rule demand that every earnings claim be supported by written documentation available for FTC inspection. Franchisors choosing to make an Item 19 disclosure should redline their representations to include clear methodological statements and ensure that underlying data sets are preserved in auditable form.

Item 23, Receipts. The receipt page must now list the name, principal business address, and telephone number of each franchise seller. For systems with large broker networks, this requires a dynamic receipt‑generation process rather than a static PDF template.

Sample Redline: Joint‑Employer Carveouts and Operational Control Language

Sample language, practitioner draft:

“Franchisee acknowledges and agrees that Franchisee is an independent business operator solely responsible for all employment decisions regarding Franchisee’s employees, including hiring, termination, compensation, scheduling, and discipline. Franchisor’s brand‑standards requirements, including specifications for product quality, facility appearance, and customer experience, do not constitute control over Franchisee’s employment relationships and shall not be construed to create a joint‑employer, agency, or partnership relationship between Franchisor and Franchisee or Franchisee’s employees.”

Sample Redline: Broker Disclosure and Fee Allocation Clause

Sample language, practitioner draft:

“Franchisor may engage third‑party franchise brokers or referral sources (‘Franchise Sellers’) to assist in the offer and sale of franchises. Each Franchise Seller’s name, principal business address, and telephone number shall be disclosed on the Item 23 receipt page of the Franchise Disclosure Document provided to Prospective Franchisee. Franchise Seller shall be contractually obligated to comply with all applicable federal and state franchise disclosure requirements and shall indemnify Franchisor for any losses arising from Franchise Seller’s failure to do so.”

Sample language, practitioner draft (indemnity clause):

“Franchisee shall indemnify and hold harmless Franchisor from and against any claims, losses, or liabilities arising from any allegation that Franchisor is a joint employer of Franchisee’s employees, except to the extent caused by Franchisor’s direct and actual control over Franchisee’s specific employment decisions in violation of this Agreement.”

State Franchise Registration: A Practical 50‑State Approach

Federal changes to the FTC Franchise Rule do not eliminate state‑level franchise registration obligations. The North American Securities Administrators Association (NASAA) publishes Franchise Registration and Disclosure Guidelines intended to “facilitate compliance with disclosure requirements under state franchise investment laws.” These guidelines provide a standardized framework, but individual states impose their own filing requirements, timing constraints, and fee structures, meaning that a federal‑only compliance strategy is incomplete.

States generally fall into three categories for franchise registration purposes:

How to Run a State Registration Audit

A registration audit should capture the following data fields for every state in which the franchise system has active registrations, pending applications, or planned development:

• Current registration status (active, expired, pending renewal, exempt).
• FDD version on file (date of most recent amendment accepted by the state).
• Next renewal or annual filing deadline.
• Fee schedule (initial registration, renewal, and amendment fees).
• Specific state addenda required (e.g., California requires a specific cover page; New York requires an addendum with additional franchisor representations).
• Development priority (high, medium, or low based on current and projected franchise sales activity in that state).

Prioritize amendments in high‑development registration states first. Industry observers expect that state examiners in jurisdictions like California and New York will be looking for AFA‑responsive language and updated Item 23 receipt pages as part of their routine review of renewal and amendment filings throughout 2026.

Joint‑Employer Risk in Franchising: Operational and Drafting Safeguards

The joint employer question lies at the heart of the American Franchise Act. Under current law, multiple federal agencies and courts apply different tests to determine whether a franchisor is the joint employer of a franchisee’s workers. The NLRB’s standard focuses on whether an entity exercises “substantial direct and immediate control” over essential employment terms. The Department of Labor applies an economic‑realities test. Federal courts in various circuits have adopted their own multi‑factor analyses. The AFA’s proposed clarification aims to replace this patchwork with a franchise‑specific statutory standard.

Regardless of where the legislation ultimately lands, franchisors should implement the following operational safeguards immediately:

• Hiring independence. Franchisees must make all hiring and termination decisions without franchisor approval or direction.
• Payroll separation. Franchisees must operate independent payroll systems. Franchisors should not process, fund, or directly influence franchisee wage rates.
• Discipline autonomy. Performance management of franchisee employees must be conducted exclusively by the franchisee. Field consultants should confine their role to brand‑standards compliance.
• Scheduling independence. Franchisors should not mandate individual employee schedules, even through technology platforms or POS system configurations.
• Training scope limits. Franchisor‑provided training should address brand standards and product quality, not employment policies, wage‑and‑hour practices, or HR procedures specific to the franchisee’s business.

Litigation Examples and What to Avoid

Franchise joint‑employer disputes have generated significant case law over the past decade. The practical lessons for franchisors are consistent across jurisdictions: courts and agencies look beyond contract language to actual operational conduct. A franchise agreement that clearly states the franchisee is an independent operator will not insulate the franchisor if, in practice, the franchisor dictates employee schedules, mandates specific wage rates, or exercises veto power over hiring decisions.

The likely practical effect of the AFA, if enacted, will be to give franchisors a stronger statutory shield, but only for brand‑standards enforcement activities. Conduct that crosses the line into direct employment control will remain exposed. Franchisors should therefore conduct a thorough operational audit alongside their document‑drafting exercises, ensuring that field practices match the independence language in their agreements.

Franchise Broker Registration and Enforcement Risks

Franchise broker registration has emerged as a compliance pressure point under both the amended FTC Franchise Rule and state‑level regulatory scrutiny. The amended Rule’s requirement that the Item 23 receipt page identify each franchise seller by name, address, and telephone number effectively creates a documentation mandate for every broker‑assisted sale. Franchisors that fail to track and disclose broker information face enforcement risk at both the federal and state level.

Practical compliance steps for franchisor broker programs include:

• Contractual compliance obligations. Update broker agreements to require timely disclosure of seller contact information and to impose indemnification for non‑compliance.
• Training requirements. Implement mandatory training for all franchise brokers covering FDD delivery timing, receipt‑page procedures, and prohibited earnings representations.
• Record retention. Maintain records of broker contact details, commission payments, and proof of FDD delivery for each broker‑referred prospect for a minimum of three years, or longer if required by state law.
• State‑specific broker registration. Several states require franchise brokers to register independently. Confirm that each broker in your network holds required state registrations.

Enforcement, Penalties, and Private Litigation Risks

The FTC enforces the Franchise Rule through civil penalty actions, injunctive proceedings, and consent orders. Violations can result in significant monetary penalties per violation, and the FTC has historically pursued enforcement actions against franchisors that fail to provide required disclosures or that make misleading financial performance representations. State attorneys general and franchise regulators in registration states also maintain independent enforcement authority and can suspend or revoke franchise registrations for non‑compliance.

Private litigation represents an equally significant risk vector. Franchisees and their counsel routinely assert claims based on allegedly deficient FDD disclosures, particularly around Item 19 financial performance representations and failure to deliver the FDD within the required timeframe. Successful claims can result in rescission of the franchise agreement, return of all fees paid, and consequential damages.

Insurance and Indemnity Checklist

• Franchise E&O coverage. Confirm policy limits, retention amounts, and coverage for disclosure‑related claims including rescission.
• Employment practices liability insurance (EPLI). Verify that the policy covers joint‑employer defense costs and settlements.
• Broker indemnification provisions. Ensure that broker agreements include robust indemnification clauses backed by broker insurance requirements.
• Dispute resolution clauses. Review mandatory arbitration and venue‑selection provisions in franchise agreements for enforceability under current case law in key jurisdictions.

Conclusion: Five Priority Actions for the American Franchise Act USA Compliance Cycle

The American Franchise Act and the FTC’s amended Franchise Rule together represent a generational shift in U.S. franchise regulation. Franchisors that act now, rather than waiting for final legislative text, will be positioned to avoid enforcement actions, reduce joint‑employer litigation exposure, and maintain uninterrupted franchise sales activity. The five priority actions for 2026 are:

1. Complete a full FDD audit and redline (Items 1–23) against both the amended FTC Franchise Rule and AFA‑anticipatory language.
2. Run a 50‑state franchise registration audit, prioritizing high‑development registration states for immediate amendment filings.
3. Implement operational safeguards that separate brand‑standards enforcement from any involvement in franchisee employment decisions.
4. Update broker contracts and train all franchise sellers on Item 23 receipt procedures and FDD delivery documentation.
5. Review insurance coverage and dispute resolution provisions to ensure readiness for joint‑employer and disclosure‑based claims.

Franchisors, in‑house counsel, and private equity investors with franchise portfolio companies should treat these steps not as optional future planning but as immediate compliance obligations. The franchise compliance checklist outlined in this guide provides a structured 30‑ to 90‑day execution framework. For bespoke FDD redlines, 50‑state registration filings, and joint‑employer risk assessments tailored to a specific franchise system, consulting qualified franchise counsel is strongly recommended.

Sources

1. Congress.gov, H.R.5267 (American Franchise Act)
2. Congress.gov, S.3525 (American Franchise Act, Senate)
3. Federal Trade Commission, Franchise Rule
4. Federal Trade Commission, Amended Franchise Rule FAQs
5. NASAA, Franchise Registration and Disclosure Guidelines
6. International Franchise Association, American Franchise Act
7. Saul Ewing LLP, Understanding the American Franchise Act
8. Sheppard Mullin, Congress Introduces the American Franchise Act
9. Center for American Progress, The American Franchise Act Would Harm Workers and Small Businesses