The FTC is considering changing franchising rules for companies like McDonald’s

The franchising industry is eager to see whether the U.S. will change how it regulates a structure that drives brands MC Donalds To Marriott.

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

The move suggests the FTC may be considering stricter regulation of the sector – with major implications for some of the largest restaurant and hospitality companies in the US and their employees. The agency declined to comment on possible changes or the timing of those changes.

Now the industry is waiting for a result.

The FTC told CNBC that it received more than 5,500 comments on the investigation, indicating that “there is a strong interest in ensuring fairness in franchising.”

“We review each comment thoroughly and consider 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 expose how unequal bargaining power is inherent [franchise] Contracts impact franchisees, employees and consumers.”

Franchising is an important contributor to the US economy. The International Franchise Association, the industry’s leading advocate, says its members cover more than 300 business format categories and approximately 800,000 companies in the country, employing millions of workers.

A potential change to franchise regulations fits into the FTC’s broader regulatory agenda, as the agency proposes a ban on non-compete clauses and is considering whether the policy should apply to clauses between franchisors and franchisees. FTC Chairwoman Lina Khan’s regulatory push has begun also targeted corporate giants like Microsoft and Activision, Twitter and Amazon.

Aside from possible rule changes 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 will shift more liability to the parent companies of franchises.

Industry observers assume that the FTC’s first proposal to change the franchise rules could be available as early as the end of the year. In its submission to the FTC, IFA expressed concerns about how the FTC might use the public comments to formulate new rules.

“We are particularly concerned that the Commission may rely on these anecdotal reports, many of which were produced anonymously, to initiate a formal rulemaking process that would detrimental to the growth of franchises through overly restrictive regulation of franchise relationships of consumers and businesses. “Owners and workers,” the advocacy group said.

IFA President and CEO Matt Haller said the group was concerned about “uniform” regulatory changes. Customers want an experience that is consistent but also adapts to their needs, he said.

“If the FTC restricts franchisors’ ability to evolve their systems to meet customer needs, it will negatively impact franchisees because customers will stop supporting these businesses if they are unable to do so “To get the products and services they want.” “Consistent and comfortable fashion,” Haller said in an interview, pointing to successful operational changes franchisors made during the pandemic as an example.

Some labor advocates hope possible changes in oversight will improve working conditions for franchise employees. In their application, the Service Employees International Union and the Strategic Organizing Center had strong language about franchising and employee relations.

“The extractive franchise model, which relies on franchisors having careful control over numerous small businesses but taking virtually no responsibility for them, leaves low-margin businesses under constant pressure to cut costs and cut corners , with labor costs being almost the only cost variable for franchisees.” “Our evidence of worker harm shows that workers ultimately bear the brunt of this exploitative system, which is primarily designed to exploit the company at the top – the franchisor. to enrich,” says the groups’ comments.

Major brands using the model including Marriott, Hilton, Yummy! Brands and Sport Clips, along with franchisees, submitted comments highlighting the positive aspects of franchising. Some called on the FTC not to make regulatory changes or to treat the industry as a single entity, as many concepts operate under the umbrella of the broader sector.

McDonald’s was among the major restaurant brands where both operators and the company submitted comments to the FTC. The National Owners Association, an advocacy group for over 1,000 McDonald’s franchisees, encouraged its members to submit comments to the FTC on the franchising and non-compete clauses contained in their contracts.

Some owners have clashed with the fast food giant about changes made last year to restaurant classification and franchise agreement renewals.

The NOA’s public statement stated, “The McDonald’s system has been, and could once again be, the gold standard for the franchise business model.” The comments and examples provided here by members of the NOA are intended to illustrate that time has not made the franchisee a franchisor “The model is stronger, but unfortunately more controversial, less cooperative and strongly broken.”

In a statement to CNBC responding to the FTC’s request for public comment, McDonald’s emphasized the role of its franchise system in supporting small business and job creation. McDonald’s said it shared the agency’s view that the model “should benefit everyone: customers, franchisees, workers, suppliers, franchisors and local communities,” adding: “That’s exactly what our franchise system has been doing for over six decades.”

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

National Franchisee Leadership Alliance President Danielle Marasco echoed that sentiment in a statement shared with CNBC.

“The NFLA, the sole elected representative voice of McDonald’s franchisee organizations in the United States, opposes any regulation that would undermine our franchise system and jeopardize our independent ownership rights,” Marasco said. “Since McDonald’s was founded in 1955, our franchising model has successfully served the brand, franchisees, employees and the local communities in which we operate.”