FTC considers changing franchising rules for companies like McDonald’s

The franchising industry is bracing to see whether the U.S. will change how it regulates a structure that fuels brands from McDonald’s to Marriott.

Last month, the Federal Trade Commission wrapped up a public comment period in response to its request for information on the sector and its business practices. The agency sought input from stakeholders, including franchise operators, workers and parent corporations, as it scrutinizes franchising practices.

The move suggested the FTC is potentially considering closer regulation of the sector — with big implications for some of the largest restaurant and hospitality companies in the U.S. and their employees. The agency declined to comment on any potential changes or when they could come.

Now the industry awaits an outcome. 

The FTC told CNBC it received more than 5,500 comments on the inquiry, indicating “broad interest in ensuring fairness in franchising.”

“We are thoroughly reviewing each comment and are assessing next steps. All options are on the table,” an FTC spokesperson said in a statement. The agency’s statement earlier this year on its request for information said it “would begin to unravel how the unequal bargaining power inherent in [franchise] contracts is impacting franchisees, workers, and consumers.”

Franchising is a major contributor to the U.S. economy. The International Franchise Association, the industry’s leading advocate, says its membership covers more than 300 business format categories and some 800,000 businesses in the country that employ millions of workers.

A potential change to franchise regulations fits into the FTC’s broader oversight agenda, as the agency proposes banning noncompete clauses and considers whether the policy should apply to clauses between franchisors and franchisees. FTC Chair Lina Khan’s regulatory push has also targeted corporate giants like Microsoft and Activision, Twitter and Amazon.

Aside from potential rulemaking shifts at the FTC, the industry is also watching for changes to joint employer rules and local regulations like AB 1228 in California, both of which stand to shift more liability to parent companies of franchised businesses. 

Industry watchers say an initial proposal from the FTC on franchise rule amendments could come as soon as the end of year. In its submission to the FTC, the IFA raised concerns about how the FTC could use the public comments to shape new rules.

“We are particularly troubled that the Commission might rely on those anecdotal accounts, including many made anonymously, to engage in a formal rulemaking process that would halt the growth of franchised businesses with overly restrictive regulation of franchise relationships, to the detriment of consumers, business owners and workers,” the advocacy group said.

IFA President and CEO Matt Haller said the group is concerned about “one-size-fits-all” regulatory changes. Customers want a consistent experience, but also one that evolves to meet their needs, he said.

“If the FTC limits the ability for franchisors to evolve their systems to meet customers’ demands, then that’s negatively going to impact franchisees, because customers will stop patronizing these businesses if they’re not able to get the products and services they want in a consistent and convenient fashion,” Haller said in an interview, pointing to successful operating changes that franchisors made during the pandemic as an example.

Some labor advocates hope potential oversight changes improve working conditions for franchised employees. In its submission, the Service Employees International Union and the Strategic Organizing Center had pointed words about franchising and worker relationships.

“The extractive franchise model, based on franchisors having meticulous control over – but virtually no responsibility for – numerous small businesses, results in lowmargin businesses under constant pressure to reduce costs and cut corners, in which labor costs are almost the only cost variable the franchisees control. Our evidence of worker harm demonstrates that workers ultimately bear the brunt of this exploitative system designed primarily to enrich the firm at the top – the franchisor,” the groups’ comments said.

Major brands that use the model including Marriott, Hilton, Yum! Brands and Sport Clips, along with franchisees, submitted commentary highlighting the positive aspects of franchising. Some urged the FTC not to make regulatory changes or treat the industry as one, as many concepts operate under the broader sector’s umbrella.

McDonald’s was among the large restaurant brands that saw comments submitted to the FTC from both operators and the corporation. The National Owners Association, an advocacy group of over 1,000 McDonald’s franchisees, encouraged its membership to submit comments to the FTC on both franchising and noncompete clauses found in its contracts.

Some owners have clashed with the fast food giant over changes its made over the last year to how restaurants are graded and how franchise contracts are renewed.

The NOA’s public submission said, “The McDonald’s system was, and could again be, the gold standard for the franchise business model. The comments and examples provided here by members of the NOA are meant to illustrate how time has not made the franchisee-franchisor model stronger, but sadly more adversarial, less cooperative, and severely fractured.”

In a statement to CNBC on the FTC’s request for public comment, McDonald’s highlighted the role its franchise system plays in boosting small business owners and creating jobs. McDonald’s said it shares the agency’s view that the model should benefit “everyone: customers, franchisees, workers, suppliers, franchisors, and local communities,” adding, “that’s precisely what our franchise system has done for over six decades.” 

“Our franchise model thrives on having a common set of standards and requirements that ensure equitable treatment of franchisees, protection of franchisee investments and secured value for the McDonald’s brand,” the company said. “A one-size-fits-all regulation threatens the successful investments these small business owners have made in themselves and their communities.”

The National Franchisee Leadership Alliance’s Chair Danielle Marasco echoed that sentiment in a statement shared with CNBC.

“The NFLA, the only elected representative voice of McDonald’s franchisee organizations across the U.S., is opposed to any regulation that would undermine our franchise system and threaten our independent ownership rights,” Marasco said. “Since McDonald’s founding in 1955, our franchising model has successfully served the brand, franchisees, employees and the local communities we operate in.”