Mid-Year 2024 Franchise Developments 

Lusthaus Law likes to provide perspective on the rules and laws impacting franchising on state, federal or industry levels. Critical developments arise, as do new ideas intended to strengthen and govern franchising. Let’s discuss a few updates that might affect your NY franchise.

NASAA Proposes Rule to Govern Franchise Brokers

We previously discussed the role of the franchise consultant or franchise broker, and how they can help franchisors. Franchisors traditionally hire brokers to help develop the franchise system and expand into new territories, particularly by pairing them with qualified, prospective franchisees.

But the North American Securities Administrators Association (NASAA) has noted that franchise brokers have been the subject of complaints, “including allegations of misrepresentations, hard sell tactics, and confusion about their role.”

There are few franchise rules governing the actions of franchise brokers. New York and Washington are the only two states that require franchise brokers to register with a state franchise administrator (the attorney general). For context, franchisors are required to register with franchise administrators in 15 states. 

In May 2024, NASAA proposed its Model Franchise Broker Registration Act and described its objective of reining in irresponsible and unethical practices: “The Franchise Broker Act is loosely based on Washington State’s current franchise broker registration requirements and incorporates elements of broker-dealer and securities salesperson requirements.”​ 

The proposed act addresses prohibited practices, disclosure obligations, and recordkeeping obligations for franchise brokers. 

Public comment on the proposed act closed in June and may be submitted for approval to the NASAA membership, which includes various franchise stakeholders. Should it pass, state legislatures could use the act as a template for adopting their own rules to curb the negative impact of franchise brokers. Read the full text of the proposed Act.

Franchisors and franchisees should speak with a NY franchise lawyer to help understand their relationships with franchise consultants. Franchise brokers and consultants are also encouraged to reach out to Lusthaus Law to learn more about their potential legal requirements.

The FTC Rule On Non-Competes and Impact on Franchises  

In April, the Federal Trade Commission (FTC) issued a final rule banning non-competes poised to impact the private sector. The nationwide rule will be effective Sept. 4, 2024.

The FTC previously announced it would not apply the rule to the franchisor-franchisee relationship. Specifically, franchisees are expressly excluded from the definition of “worker.” Under New York common law, non-compete agreements are enforceable with respect to the franchisor-franchisee relationship. In those instances, non-compete agreements are presumptively valid as they help to ensure that the franchisor can protect its proprietary business methods. This is not the case in every state. 

However, the FTC’s compliance guide, Noncompete Clause Rule: A Compliance Guide for Businesses and Small Entities provides further clarity: 

“…the Rule does not apply to noncompetes in franchisor/franchisee contracts, but it does apply to noncompetes between employers and workers at franchises.”

The franchisee is not an employee of the franchisor. But the worker at a franchisee’s location is the franchisee’s employee, and, barring application of an exception noted in the Rule, can generally leave the franchise for a competitor without violating law.

The rule is presently subject to judicial review. In July, a federal judge in Texas issued a preliminary injunction blocking the FTC from enforcing its rule banning non-compete agreements against the plaintiffs in that case, including the U.S. Chamber of Commerce. The court cited the agency’s lack of authority to implement broad regulations prohibiting practices it deemed unfair. However, the court did not impose a nationwide block on the rule. A final ruling is expected to be issued by Aug. 30, 2024.

Franchisors and franchisees should speak with a NY franchise lawyer regarding the proposed rules and non-compete agreements at state and federal levels.

NLRB’s Joint-Employer Rule Struck Down, Franchise Advocacy Groups Rejoice

In November 2023, the International Franchise Association (IFA) and other advocacy groups filed a suit against the National Labor Relations Board (NLRB) for issuing its joint-employer rule, which was set to supersede the 2020 rule. 

The revised joint-employer rule in 2020 provided a four-factor balancing test to determine when a person or entity acted, “directly or indirectly in the interest of an employer in relation to the employee.” 

As previously discussed, the test weighs whether the potential joint employer:

  1. hires or fires the employee;
  2. supervises and controls the employee’s work schedule or conditions of employment to a substantial degree;
  3. determines the employee’s rate and method of payment; and
  4. maintains the employee’s employment records.

The suit was filed in the U.S. District Court for the Eastern District of Texas, and in March 2024, the court vacated the portion of the 2023 rule (which rescinded the 2020 rule). 

The 2023 rule could have exposed franchisors to claims that their franchise agreements and brand standards make them joint employers of their franchisees’ employees for purposes of collective bargaining and labor disputes. Furthermore, the IFA noted that the 2023 joint employer rule expanded on a previous joint employer rule that purportedly destroyed 376,000 jobs, cost small businesses $33.3 billion, and led to a 93% spike in lawsuits in the franchise sector alone.

The lawsuit took aim at the NLRB for exceeding the scope of its authority and violating the Administrative Procedure Act by failing to respond to comments regarding the rule’s harmful economic consequences.

A bipartisan Congressional Review Act is expected to be drafted by the Senate and sent to President Biden to be passed into law. 

“[The] court ruling is a landmark win for franchising,” said IFA President and CEO Matt Haller. “The ruling preserves the franchise business model – the best vehicle for small business formation on Main Street – by rejecting a flawed regulation enacted solely for the benefit of advancing the political goals of organized labor.” 

Read the full complaint

Lusthaus Law will continue to observe how these proposed and updated laws impact clients and the franchising industry. Our Insights installment covers federal- and state-level corporate transparency laws.

Contact Lusthaus Law

Lusthaus Law’s website is a resource for New York franchisors and franchisees. We have published two downloadable and complimentary e-books and our Insights blog is regularly updated to reflect industry trends and recent achievements in client representation.

Contact us today to learn more about how Lusthaus Law P.C. can help you navigate a clear path for your franchise’s successful future.


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