When is a franchisee not really a franchisee?

15-06-2022


What is a franchisor and franchisee

Franchising is a tried and tested business model that can provide significant benefits both to franchisors (who may be able to expand their brand more cost effectively through a franchise network) and to a franchisee (who can own and develop their own business using an established name and a proven system).

However, sometimes what is described as being a ‘franchise relationship’ might not, in fact, be a genuine franchise relationship.  It is therefore vitally important that the terms of any proposed Franchise Agreement clearly and accurately establish a legitimate franchise arrangement.  If they do not, then parties are far more likely to see legal challenges over whether or not the so-called ‘franchisees’ are genuinely self-employed, as opposed to being workers or employees who could be entitled to receive the legal rights and benefits associated with that status.

The rise of the ‘gig’ economy

In recent years, there has unquestionably been a shift in the broader economy towards so-called ‘gig’ work, which is a term normally used to mean short-term work or freelance contracts that are typically paid on a per-job basis.  As a result, there has also been a corresponding rise in associated legal challenges over whether those fulfilling such jobs are genuinely self-employed, or whether they are workers or employees who have additional legal rights, such as a right to holiday and sickness pay.

In the UK, we’ve seen several notable cases on these issues in recent years, including successful claims brought by drivers working for Uber, Deliveroo and Addison Lee, who were successful in seeking recognition of their worker status and rights.

As a result, many companies have reportedly been considering using franchise models as an alternative to their earlier arrangements.  However, a recent case has served as a timely reminder that it is the substance of the relationship that is important, not the label it has been given.

A rose by any other name…

In the case of Stojsavljevic & another –v- DPD Group UK Ltd, the well-known courier delivery service DPD operated a franchise model that purported to allow self-employed ‘owner-driver franchisees’ (known as ‘ODFs’) to act as delivery agents for DPD by using the existing customer base and operational infrastructure of DPD’s nationwide business.

Under the terms of DPD’s Franchise Agreements, the ODFs were required to have any substitute drivers approved by DPD before the ODFs handed over any responsibilities to them.  However, in the Stojsavljevic case, the ODFs argued that these requirements effectively undermined any alleged self-employed status, meaning that the ODFs were actually workers or employees of DPD.  They therefore argued that the reality of their positions under the Franchise Agreements was that they were contracted as individual drivers, solely responsible for undertaking the services, rather than genuinely being independent and self-employed franchisees.

If the cap fits…

However, the franchisees were unsuccessful in their claim, because the Employment Appeal Tribunal confirmed that a key element of ‘worker’ status is that an individual personally undertakes to perform the work or services themselves.  In this case, the Employment Appeal Tribunal held that there was no real restriction on the ODFs supplying a substitute driver (i.e. the franchisees did not have to personally perform the work themselves), only that DPD had to be satisfied that the proposed substitute met DPD’s minimum requirements.  This was not sufficient to invalidate the franchise relationship, as it did not mean that the ODFs were effectively workers or employees of DPD.

Look at the substance, not the label

The franchise model is a distinct legal relationship, and genuine franchisees are neither workers nor employees.  It is therefore important to ensure when setting up a franchise that the relationship created between the parties by the terms of a Franchise Agreement is genuinely a franchise relationship, and not just given that label by the parties.

The Stojsavljevic case is a reminder that if a party wishes to challenge whether or not a franchisee is, in fact, really a franchisee, then the Courts will examine both the clauses in the Franchise Agreement and how the relationship actually operates in practice, in order to determine the true nature of the relationship.

In the Stojsavljevic case, the arguments may have focused on the franchisees’ rights to provide substitute drivers, but other key issues in the relationship could include the ability to determine pricing, the degree of integration into the franchisor’s business, and whether franchisees are subject to centralised policies or terms.

Fundamentally, however, it has long been the case that if a franchise dispute arises, the Courts will examine the substance of the relationship between the parties, and not just the label that has been given to it.  In other words, simply calling someone a ‘franchisee’, doesn’t necessarily mean that they are one.

Conclusions for a franchisor and franchisee

If you are a potential franchisor thinking about setting up a franchise network, we can help you to ensure that you start off on the right foot with properly drafted Franchise Agreements.  Alternatively, if you find yourself involved in a dispute over the validity or interpretation of a Franchise Agreement, our Franchise Disputes team will be happy to help you consider your options.

For more information on this or any other issue relating to franchisor or franchisee disputes, please contact Michael Axe by emailing Michael or by calling him on +44 (0)1628 502448.

This article is provided for information purposes only and does not constitute legal advice for a franchisor or franchisee. Professional legal advice should be obtained before taking or refraining from taking any action as a result of the contents of this article.


Michael Axe

Senior Associate
Commercial Disputes

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