Franchise Compliance Guide: Laws + Agreements

Some of the biggest restaurant businesses on the planet are franchises. They employ thousands of people and have served billions, and with so many people affected, it's understandable why there are franchise-specific laws and regulations in place.

Franchise compliance is one of the biggest considerations when entering into and running a franchise business, as failing to follow federal and applicable city/state laws could result in serious consequences.

Here's an overview of what franchisors and franchisees need to understand about franchise compliance to ensure a smooth-running, legally-sound franchise.

What Does Franchise Compliance Even Mean?

Put simply, franchise compliance refers to the actions that corporations, their franchisors, and their franchisees take in order to stay compliant with any applicable federal, state, and/or regional laws.

As part of the franchisor-franchisee relationship, there may also be legally-binding obligations these parties must uphold for one another – and these are just as important to franchise compliance as well. Below, we've outlined the key components that go into franchise compliance.

Federal Law Compliance

From a federal standpoint, franchises must comply with the Federal Trade Commission's Amended Franchise Rule, also known as the FTC Rule. The FTC Rule largely pertains to franchisors supplying prospective franchisees with a franchise disclosure document – a document from franchisors providing 23 key information points to franchisees regarding need-to-know information about the business. These points include:

• Initial fees.
• Trademark rules.
• Financing information.
• Franchisee's obligations.

To stay compliant, franchisors must supply prospective franchisees with the following:

• The disclosure document at least 14 days before money is given to the franchisor.
• If applicable, any updates made by the franchisor to the document at least seven days before the revised agreement can be signed.
• Information about the franchisor (name, business type, contact info, etc.).
• The previously referenced 23 fields of information.

Franchisors who do not supply this info to prospective franchisees in this outlined time frame are not being compliant with federal law. That said, there are exemptions to the FTC Rule that typically apply to either very small or very large franchise agreement transactions, which are outlined here.

State Law Compliance

In addition to franchises' obligation to follow their state's regulations for food, health, and wages, some states and cities have specific fees and laws that franchise businesses must follow. According to Franchise.law, states are classified as one of the following:

• Registration states, where franchisors must pay filing fees and register their franchise disclosure document – alongside other franchise information – on an annual basis. Registration states include California, Illinois, and New York.
• Business opportunity and filing states, where franchisors may have to file their franchise before selling it. These states include Florida, Georgia, and Texas.
• No-registration states, where there are no franchise-specific laws for filing. These states include Alabama, New Mexico, and West Virginia.

For the most up-to-date franchise regulations and filing requirements in your area, simply Google “[Your City/State] + [Franchise Laws]” for an accurate list of laws to adhere to and filings to complete.

Franchise Relationships Laws & Agreements

Franchise relationship laws enforce certain agreements between franchisor and franchisee, including cause for termination and transfer of ownership. Only a few states require a supplemental agreement between parties – and in states where these laws do exist, they can differ drastically. Consider reaching out to counsel or looking up your area's franchise relationship law requirements to see which ones apply to your business.

Any agreements made between parties before entering into a franchise relationship can act as a legally-enforceable contract. Before signing anything, both franchisors and franchisees should run the conditions by a legal expert to ensure they're not beholden to anything that could be seen as damaging or unfair.

Who Regulates Franchise Compliance Laws?

Regulation will be enforced depending on specific laws and jurisdiction.

Federally, franchise compliance is regulated by the Federal Trade Commission through its aforementioned FTC rule.

State-wise, the answer depends on the state in which your franchise operates. In California, for example, franchise law is regulated by the Department of Financial Protection and Innovation, while in Illinois, it's the Attorney General's Franchise Bureau. Simply Google “Who Regulates Franchise Compliance In [Your State/City]” to learn who's best to reach out to regarding compliance.

Recommended Reading: How to Develop a Successful Franchise Advisory Council (FAC)

Who Regulates Franchise Relationship Agreements?

For franchise relationships, any disagreements or violations would likely be filed in court as a contract dispute, where both parties would either need to settle/agree out of court or take their compliance disagreement to a judge. Because these (dis)agreements were a result of a dispute between two parties rather than a government-imposed rule, they would need to be arbitrated in a potentially lengthy and costly legal battle.

This is why it's crucial to thoroughly review commitments outlined in a franchise agreement and disclosure document before signing. The clearer each party's responsibilities and obligations are in these documents, the less likely they can be misinterpreted in court.

Restaurant Specifics to Help Establish Compliance

While every element of a franchise agreement or disclosure document is important, the following are among the most important ones to a long-term, mutually-beneficial, and compliant franchise operation.

Menu Consistency

A consistent menu ensures standard serving across locations. This rule helps franchisees stay compliant by requiring them to offer the items, prices, and specials approved by corporate and their franchisors.

Often cited as one of the biggest challenges to operating a franchise, however, the lack of control over menu offerings and their prices can potentially cause dissension from franchisees. This is why franchisors must outline to what extent franchisees may express agency in the menu – both for permanent menu items and limited-time specials.

That said, menu consistency helps keep food prep consistent with the same ingredients, supplies, and processes. This creates a consistent dining experience for all guests, regardless of which franchise location they visit.

Proper Team and Labor Management Tools

Multi-unit restaurant businesses are often the most likely to be subjected to fair workweek laws. For easy visibility into team management documents, some franchisors choose to specify which team management and scheduling software must be used by the restaurant. Otherwise, franchisors and franchisees could risk accidentally breaking compliance laws as a result of not seeing overtime alerts and other fair workweek violations.

Food & Staff Safety Measures

With dozens, hundreds, or even thousands of employees working under one franchisor, there's unfortunately a heightened risk of food safety concerns and employee injuries. Franchisors should outline what safety precautions franchisees are responsible for in these documents to avoid finger-pointing should an issue arise. Additionally, any cleaning and food storage requirements should also be clearly explained. Should a franchisor be able to prove their franchisee did not adhere to these rules, any litigation or dispute over compliance could dissipate.

In turn, franchisors should provide franchisees with safety resources and training materials to ensure the franchise's proven model for keeping restaurant sanitary and safe are followed.

How to Make Sure All Franchise Locations Are Compliant

Compliance is complicated, and it can take up much of a franchisor's time and energy when all they want to do is open more locations, hire more great leaders, and serve more guests. Here are some ways to make the franchise compliance process simpler and more effective so franchisors can focus elsewhere.

Dedicated Compliance Department

Between safety, staffing, government regulations, and everything else that comes with compliance, it can be too much for one franchisor to handle when trying to grow a franchise business.

With that in mind, it might be worth hiring a dedicated compliance worker to manage these issues, both proactively and as they come up. If the franchise group is large enough, it's not unwarranted to have an entire compliance department dedicated to ensuring dozens or hundreds of units stay compliant.

Compliance manager salaries can range from $70,000 - $90,000 on average, depending on experience, work load, and location – and a dedicated department would certainly cost north of that number. However, this department can turn the complications surrounding compliance into an ironed out process, helping grow the business faster and avoid potential fines and lawsuits.

Case in point: the FTC recently filed a lawsuit against a restaurant for more than $46,500 per violation against a group for allegedly misleading its potential franchisors. Avoiding both the bad publicity and the potential fines – in addition to the freed-up time to run and grow the business – could justify this team's existence for a franchisor.

Location Audits

A location audit offers franchisors the chance to go in-depth on a specific location to see where it's thriving or struggling when it comes to compliance. To conduct a good location audit, simply turn your disclosure document and franchise agreement into a checklist for each area of the agreement to see if franchisees are meeting their end of the agreement. Their best practices for staying compliant can then be passed on to franchisees of other locations.

On the other hand, locations that underperform in the audit can be given concrete action items for improving compliance, such as training resources or a timeline to turn things around.

To be considerate, it's recommended to give franchisees a brief heads up about the audit before formally conducting it. Everyone has off days, so a surprise inspection could cause tension in an otherwise compliant franchisee who just needed a couple days to get things in order.

Reward Compliance

Franchisees are busy too, which is why they may need a little extra incentive when it comes to compliance. If the promise of a smoother-running operation or the risk of fines and legal repercussions aren't enough to encourage compliance, perhaps a reward might.

Consider encouraging compliance with less-than-enjoyable aspects of the agreement – such as labor reporting and adhering to menu directions from corporate – with incentives. These incentives could take countless forms, such as cash prizes, admission to the franchise advisory board, or personal strategy sessions with the franchisor, corporate, or a restaurant consultant.

Although it's frustrating to invest even more into securing compliance when franchisees have agreed to meet their obligations, these small bonuses can make them more willing and enthusiastic to comply, thus strengthening the relationship and the likelihood of compliance.

Potential Consequences for Non-Compliance

Ultimately, franchisees who do not adhere to compliance laws are violating a contract, or even federal law.

Reinforcing the consequences franchisees agreed to when they signed the dotted line can turn things around for a location that isn't following the rules. Punitive measures like fines, repercussions from corporate, forfeiture of franchise ownership, or even alerting federal or state commissions about infractions could be the proper step depending on the severity of the infraction.

Recommended Reading: How To Manage Teams Across Multiple Restaurant Locations

Tools For Supporting Franchise Compliance

Ensuring franchise compliance is a monumental and high-pressure job. Luckily, there are tools and resources available, like multi-location scheduling software, that can make it easier.

State Labor Compliance Software

For franchises that operate in areas with additional compliance restrictions like fair workweek, the oversight of adherence is even more crucial. That's why restaurants with franchises in states like California and cities like New York benefit from labor compliance software. These tools contain automatic features like overtime alerts, electronic schedule publishing, break management, clopen warnings, and labor report generation, which remove much of the manual work needed to stay compliant while still ensuring franchises follow the rules.

7shifts scheduling dashboard with labor insights  

Communication Blasts

Consistent and timely communication helps to flag potential compliance issues to all franchisees in a unified way. For example, if a corporation has a new marketing campaign planned, franchisors can let all of their franchisees know with a communication blast, summarizing the details of the campaign, what franchisees are on the hook for, and how it's expected to impact day-to-day operations.

Franchisors can use a team communication tool to manage and send these updates to all franchisees using one tool.

7shifts mobile restaurant communication tool  

Standardize Task Management

As stressful and important as staying compliant is, it all comes down to adhering to a list of tasks – whether it's updating the menu accordingly or meeting a tax deadline. Franchisors can aid franchisees by making compliance to-do lists and sharing them with a task management tool. This way, franchisees can mark tasks as done so franchisors don't have to worry. However, if a task is left unchecked by its deadline, the franchisor can see and reach out to the franchisee to support them and hold them accountable.

7shifts mobile restaurant task management tool  

All of these tools - plus restaurant team management software in general – help to keep franchisees compliant and give franchisors the visibility they need to keep their units profitable.