Are there any employment or labour law considerations that are relevant to the franchise relationship? Is there a risk that the staff of the franchisee could be deemed to be the employees of the franchisor? What steps can be taken to mitigate this risk?

Franchise & Licensing

Angola Small Flag Angola

Franchise agreements are usually not considered employment contracts under Angolan law and the risk for the staff of the franchisee to be deemed as employees of the franchisor is relatively low; in order to prevent such risk, we usually advise that proper wording should be inserted in the agreement and the franchisor should have no direct contact with the staff of the franchisee; basically, every instructions given to the employees and remuneration paid should always come from the franchisee, in the capacity of the employer, and not from the franchisor to avoid having the employees claiming an employment relationship with the latter.

Canada Small Flag Canada

Similar to the United States, one of the most serious considerations to Canadian franchisors is the risk of being deemed the employer of its franchisee or a “joint employer” of its franchisee’s employees.

Canadian franchisors have generally been able to avoid liability as employers of their franchisees, and as joint employers (with their franchisees) of their franchisees’ employees, by limiting the level of control and direction they exercise over such persons. Maintaining a hands-off posture opposite the franchisees’ employees, both contractually and in practice, is a must. Canadian federal and provincial governments have not, to date, expressly assigned joint employment liability to franchisors; although the Ontario provincial government did recently consider amending its employment standards legislation to make franchisors jointly liable for their franchisees’ breaches of such standards, and amending its labour relations statute to make it easier for franchisees’ employees to unionise. However, neither such initiative has been implemented and each appears to have been abandoned, at least for the foreseeable future. Provincial human rights codes may, however, pose risks to franchisors in respect of the control they may assert over the employment practices of their franchisees, given the broad definitions of who may be held liable for breaches of the codes.

Chile Small Flag Chile

Usually, Chilean courts will not regard a franchisee as an employee of the franchisor. However, local courts have been called to decide on whether the franchisor can be regarded as a co-employer (along with the franchisee) of the franchisee's employees, or be at least secondarily liable to the franchisee's employees for the franchisee's failure to meet its labour and social security obligations, all of which constitutes a risk to the franchisor. Court decisions on this issue have been confusing, as the Supreme Court has issued contradictory decisions. Please note that court precedents decisions are not binding in Chile.

To reduce the risk of being held as a co-employee or as secondarily liable, the franchisor should abstain from entering into a continuous, day-to-day direct relationship with the franchisee's employees involving a permanent and direct oversight and control of the means and ways in which these employees perform. In other words, if the franchisee's employees cannot evidence that the franchisor exerted permanent and continuous authority and control on them, the risk of the franchisor being held by a court as co-employer of, or secondarily liable to, the franchisee's employees will be reduced. Additionally, the franchise agreement can require the franchisee to submit to the franchisor, on a monthly basis, a certificate of the employer's labour and social security good standing issued by the Chilean Labour Directorate to have an assurance that the franchisee is complying with its labour and social security obligations.

Denmark Small Flag Denmark

According to Danish law, a franchisee is generally considered a separate and independent business partner to the franchisor. However, depending on the intensity of the parties’ cooperation and provided that the franchisee is a natural person, the franchise relationship may be qualified as a camouflaged employment relationship governed by general principles of employment law, whereby the franchisee (and therefore also the staff of the franchisee) is considered similar to an employee, as the weaker party in need of protection. There is also a risk that mandatory rules such as the Salaried Employees Act will apply, as well as statutory tax law relating to employment relationships.

Whether the franchise relationship is to be considered a camouflaged employment relationship depends on an overall assessment of the circumstances of the case, including the wording of the franchise agreement and the parties’ execution thereof. Among the factors to be considered is the extent to which the franchisee may manage its own hours, the extent to which the franchisee is taking on a financial risk by paying for the business premises and any employees, whether the remuneration to the franchisee is determined by the franchisee’s performance or the time spent, etc.

Azerbaijan Small Flag Azerbaijan

There are no employment or labour law considerations which are relevant to the franchise relationship in the Republic of Azerbaijan.

Egypt Small Flag Egypt

There are no employment or labour law considerations that are relevant to the franchise relationship as the relationship between the franchisor and franchisee are not considered as employment relationship, However, the employment considerations should be taken into account with respect to the Egyptian franchisee, being an employer, vis-à-vis its relation with its employees and the same applies on the franchisor if the latter is Egyptian.

If the staff are engaged in employment contracts with the franchisee, they cannot be deemed to be employed at the franchisor.

France Small Flag France

A franchise agreement is by principle an independent undertaking. However, it may be reclassified as an employment agreement if the franchisee is not actually independent of the franchisor, i.e. a subordinate relationship between the franchisor and the franchisee is demonstrated. However, given the difficulty of establishing such subordination, reclassification is quite rare. There is a lack of significant precedent in this area.

If the courts requalify a franchisee as an employee, certain labour protections may come into effect. Nonetheless, even in the absence of such requalification, a franchisee could potentially benefit from the protective provisions applicable to managers of subsidiaries or branches pursuant to sections L.7321-1 and L.7321-2 of the Labour and Employment Code.

Therefore, in order to avoid such requalification, it is crucial that the franchisee be treated as an independent contractor and act as such. The franchisee must manage the business and employees independently. The franchisor must never act as the employer of the franchisee or its employees, and must refrain from any action that could suggest that the franchise network is a single economic entity.

Greece Small Flag Greece

As a general rule there would be no risk for the franchisee’s employees to be regarded as the franchisor’s employees.

Mexico Small Flag Mexico

There are no applicable Mexican laws which contain provisions related to the consideration of the existence of labour relationships between a franchisor and a franchisee or between the employees thereof.

Notwithstanding the above, when entering into a franchise agreement, it is important to bear in mind that, under Mexican law, agreements are not governed by how an agreement is named but rather by what its contents include, which is why if a franchisor incorporates or accepts provisions that could be interpreted as constitutive of labour relations, the Mexican labour courts would be able to determine labour obligations between the parties, being authorized to penalize the franchisor for non-compliance with such obligations.

The most significative element which may be used to consider the existence of a labour relationship is the subordination between the parties, but additional elements would also have to be present, such as (i) periodic payments to be made by the franchisor to the franchisee; (ii) material evidence of the ‘instructions’ periodically provided by the franchisor to its franchisee; (iii) the franchisee must be an individual and not an entity; and (iv) the franchisee needs to have material evidence of its subordinated relationship with the franchisor and its being part of the same company of the franchisor, such as credentials and memoranda.

In order to reduce the risk of the franchisor being considered an employer of the franchisee, it is recommended to require that the franchisee creates a Mexican company to enter into the relevant franchise agreement, and to include a provision titled “absence of labour relations and non-representation” within the franchise agreement, whereby both parties state that they enter into such agreement as independent contractors and establish their independence and distinction from one another and their respective employees.

Lebanon Small Flag Lebanon

In principle, there are no employment or labour law considerations that are relevant to the franchise relationship. The franchisor retains his legal, financial and administrative independence and bears the risks and consequences of his activity.

The staff of the franchisee are not normally considered to be the franchisor’s employees. The staff of the franchisee could, however, be deemed to be the employees of the franchisor if, inter alia, the employees were undertaking the work under the direction and supervision of the franchisor, and the employee’s remuneration is settled by the franchisor rather than the franchisee.

China Small Flag China

No. The franchisor and franchisee are two separate entity. Legally speaking, unless otherwise arranged, the employees of the franchisee are not the employees of the franchisor, and vice versa.

Peru Small Flag Peru

According to Supreme Decree N°003-97, two elements must exist for an employment relationship to be formed, namely, subordination and remuneration as defined by Peruvian Labour Legislation. Under the franchising business model, neither of these two requirements exists and therefore, a franchisee cannot be regarded as an employee of the franchisor. It is common to include provisions in the agreements stating that franchisor and franchisee are not economically related. In addition, franchise agreements include an indemnity provision under which the franchisee agrees to hold the franchisor harmless against all claims arising from such claims.

Philippines Small Flag Philippines

Under Philippine law, the following factors are considered in determining whether there is an employer-employee relationship:

a. The power to select the employee;
b. The payment of wages;
c. The power of dismissal; and
d. The power to control the employee and the means and methods used to accomplish the work.

The power to control the work of the employee as to the results to be achieved and the means by which such results are reached is considered as the most significant determinant of the existence of an employer-employee relationship. To minimize this risk, the franchisor must ensure that it does not exercise control over the work of the employee, both as to the result of the work and the means and methods in achieving the same.

Russia Small Flag Russia

Franchisor and franchisee are separate business entities operating under the franchise agreement. Each has their own labour and employment obligations in relation to their respective employees, but not in relation to each other. The terms and conditions of the franchise agreement are primarily governed by the Russian Civil Code, while labour and employment relations are regulated by the Russian Labour Code. Under the Russian Labour Code, employment relations between the employer and the employee may arise only under a labour agreement. Article 15 of the Russian Labour Code stipulates that the conclusion of civil law agreements, which de facto govern the relationship between the employer and the employee, are not allowed. Therefore, the franchisee or even the franchisee’s staff cannot be treated as employees of the franchisor.

New Zealand Small Flag New Zealand

There are specific employment laws which are relevant in franchising. In particular, the Employment Relations Act 2000 and the Health and Safety at Work Act 2015 must be complied with. There is no risk that the staff of the franchisee could be deemed to be employees of the franchisor but a well drafted franchise agreement should contain an independent proprietorship clause.

United States Small Flag United States

Franchisor as Joint Employers of their Franchisees’ Employees

In 1984 The National Labor Relations Board (“NLRB”) promulgated its standard for who could be characterized as “joint employers” - - that is, two or more distinct entities nevertheless legally charged as co-employers of the same employee. Under that standard, if an entity exercised actual control over another entity’s employees (as opposed to merely possessing a reserved but unexercised right to exert control), then that entity could be deemed those employees’ “joint employer” (sometimes referred to as a “co-employer”) and, as a result, accrue legal responsibility for employee compensation, taxes, labour law violations and the other legal mandates and restrictions imposed on employers.

Mindful of this standard, franchisors often take great care to ensure that the level of control they exercise over their franchisees is limited to only the amount necessary to protect their trademarks and brand standards, whilst not crossing the line to oversee or control their franchisees’ day-to-day operations (if a franchisor otherwise were to, by way of example, participate in its franchisees’ hiring, firing, scheduling or payment of employees, it would likely be deemed the “joint employer” of its franchisees’ employees). As such, pursuant to the historic NLRB standard, virtually every franchisee is contractually deemed, and operates as, an independent contractor of its franchisor.

During President Obama’s administration, franchisors began confronting a concerted effort by the U.S. Department of Labor, the NLRB and certain state attorneys general to thrust direct liability upon them – as putative “joint employers” – for their franchisees’ wage-and-hour and labour law obligations and violations. Although the focus of these attacks has softened somewhat, given the change in the political landscape, franchisors should note that, as of the date of this writing, there is no clear and definite joint employer standard on which it may safely rely.

The thrust began in December, 2014 when the NLRB General Counsel issued complaints against McDonald’s Corporation (“McDonald’s”) and certain McDonald’s franchisees, alleging that those franchisees violated the rights of their employees and asserting that, as a “joint employer,” McDonald’s was equally liable for any violations of the National Labor Relations Act (“NLRA”) that may have transpired. Then, in the 2015 case of Browning-Ferris Industries (362 NLRB 186 (2015)), the NLRB announced a new “joint employer” standard, holding that a franchisor need only exert indirect control or even just reserve the right to control the terms and conditions of employment in order to qualify as a joint employer—even if the control was never actually exercised. The Browning-Ferris decision completely overturned years of precedent and sent shock waves through the franchise industry.

Notwithstanding the dramatic shift in the joint employer liability standard invoked by the NLRB beginning in 2014, there is evidence that the tide may again be turning. On September 14, 2018, the NLRB published a Notice of Proposed Rulemaking governing joint employer determinations. Under its proposed rule, “an employer may be found to be a joint employer of another employer’s employees only if it possesses and exercises substantial, direct and immediate control over the essential terms and conditions of employment and has done so in a manner that is not limited and routine. Indirect influence and contractual reservations of authority would no longer be sufficient to establish a joint employer relationship.” The NLRB’s consideration of its new joint employer standard is pending as of this writing (September, 2019).

Following the NLRB’s footsteps, on April 1, 2019, the U.S. Department of Labor released a Notice of Proposed Rulemaking which would furnish a definition of “joint employment” under the Fair Labor Standards Act. The Department of Labor proposal, if adopted, would be remarkably beneficial to franchisors in that it specifically states that a franchise relationship does not have any bearing on whether or not there is a joint employment relationship.

Steps that Can be Taken to Mitigate the Joint Employer Risk

As described above, the standard for determining joint employer liability has been a moving target for the last 5 years, and as of the date of this writing, there is no definite test upon which franchisors may take significant comfort relying. However, as a general best practice guide, it is prudent for franchisors to limit their control over their franchisees’ businesses to the greatest extent possible, instead focusing their control efforts on the standards believed most likely to affect their brand name and the goodwill associated therewith. In particular, the following steps are recommended:

  1. A franchisor should prohibit its franchisees from including the brand name in their business entity (corporation, LLC or other) names.
  2. A franchisor should require its franchisees to place a conspicuous notice of independent ownership on the premises of their franchised businesses, as well as on all of the following: employment applications, employee manuals, employment contracts, checks, etc. (which documents should specifically identify the franchisees’ business entity name, rather than the franchisor’s name or the brand name).
  3. A franchisor should distance itself from the hiring, firing, payment, scheduling and other involvement in its franchisees’ employment activities.
  4. A franchisor should distance itself from the training of its franchisees’ employees as much as possible, implementing (by way of example) train-the-trainer programs and/or management training programs (as opposed to direct employee training programs).
  5. If a franchisor is mandating particular point of sale or other software programs that include scheduling and/or other applications to manage labour force activities, such applications should be disabled so that the franchisor has no visibility or involvement in such programs.

Franchisor as the Employer of its Franchisees

On September 18, 2019, California Governor Gavin Newsom signed into law ‘California Assembly Bill 5’ or ‘AB-5,’ which takes effect on January 1, 2020 and which codifies the so-called ABC test for determining those types of relationships that are properly classified as an independent contractor relationship versus those types that should really be classified as employee-employer.

Under the ABC test, a worker is properly considered an independent contractor to whom a wage order (or other labour laws) does not apply only if the hiring entity establishes: (A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact; (B) that the worker performs work that is outside the usual course of the hiring entity’s business; and, (C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

The distinction between an ‘employee’ versus an ‘independent contractor’ is an essential distinction in the franchise model. Virtually every franchisee is contractually deemed, and operates as, an independent contractor of its franchisor. Notwithstanding the importance of this distinction, since the vast majority of franchisors own and operate businesses identical to those of their franchisees, it is likely that most will fail part ‘B’ of the ABC test (i.e., that the worker performs work that is outside the usual course of the hiring entity’s business). Indeed, it is almost always the case that a franchisee does not perform work that is outside the usual course of its franchisor’s business.

If, pursuant to AB-5, a franchisee is now deemed to be an employee of its franchisor, the franchisor will not only become responsible for employment liabilities (i.e., franchisee wages; FICA contributions; unemployment insurance premiums; workers’ compensation premiums; Affordable Care Act mandates; wage-and-hour compliance; and, all of the other duties, requirements and prohibitions imposed by federal and state law upon employers), but also for all acts, errors and omissions of its franchisees under the doctrine of respondeat superior.

While AB-5 was not intended to target the franchise industry specifically, its language is broad and it has the power to dramatically shift the liability exposure for franchised businesses located in California and/or for franchisors whose franchise agreements are governed by California law.

Norway Small Flag Norway

These are particularly important matters to consider, as there are driving forces in Norway lobbying to extend the responsibility of employers towards their employees, also to include franchisors in relation to franchisees' employees. Please review the response to item 31 below for more information on this particular subject.

The matter of clearly identifying employees as opposed to independent contractors, consultants, agents or franchisees is of great importance for the entities which may end up being considered as employers for such individuals. If the agreement between the franchisor and franchisee (as an individual person) constitutes an employment relationship this could have a variety of consequences for the franchisor, such as obligation to pay payroll tax, withhold salary tax, contribution to mandatory pension plans, etc.

The key to mitigating such risk is object to the franchise agreement, and in understanding what constitutes an employer-employee relationship and actively attempt to avoid including such elements in the franchise agreement.

Further, in order to mitigate such risks it is important to maintain the formal and financial separation between the franchisor's and franchisee's organisations while trying to avoid any elements which could lead to arguments that an employee-employer relation has been established with the franchisor as the employer, or that there is a joint responsibility or liability between the franchisor and franchisee towards the employees of the franchisee.

This includes clearly addressing facts in the franchise agreement, such as the fact that franchisee (if that is an individual) or the owner/operator of a franchisee (if it is a company) is operating a business at its/his/her own expense and risk, including payment of taxes and VAT, and that the franchisee or the franchisee's employees are not employed by the franchisor or franchisor's organisation.

All employment agreements between the franchisee and its employees should clearly state that the franchisee is the employer.

Other elements in the franchise agreement which should be carefully considered is requirements for – and level and intensity of personal involvement of an individual on the franchisee's side, such as the owner/manager, requirements for the franchisee or franchisee's employees to subordinate to instructions and control from the franchisor. Which entity provides business premises, materials or equipment used in the business should also be considered. Also consider how the franchisee's compensation is described. Terms which may imply that there is a form of salary from the franchisor should be avoided.

Even wording and layout of advertisements for open positions in the franchisee, should be carefully considered to mitigate risk that franchisor is considered as employer or have joint responsibility for franchisee's employees.

Italy Small Flag Italy

In general, the existence of a franchise agreement does not affect the allocation of liabilities between the franchisor and the franchisee in respect of the labor relationships with their respective employees.

In fact one of the conditions for the existence of a true franchise relationship is the reciprocal independence of the parties. This means that franchisor and franchisee each maintains the exclusive employer’s managerial power over their respective employees.

This does not exclude that, under certain circumstances, the franchisee’s staff could be deemed to be the employees of the franchisor. To mitigate the risk, it remains important that franchisor does not interfere with the franchisee’s employment decisions, such as hiring, firing, setting wages and establishing work hours and so on. In fact, while a certain degree of control by the franchisor over the franchisee is intrinsic to the nature of a franchise agreement, if such a control exceeds the purposes of a genuine franchise relationship it may be regarded as symptomatic of the existence of a joint employment status.

United Kingdom Small Flag United Kingdom

Like any other employer, franchisors and franchisees must comply with UK employment law in relation to their own employees, including provisions relating to discrimination and equality. All employees who are foreign nationals from outside the EU will need a visa and a certificate of sponsorship from a UK-registered business.

It is unlikely that an employer/employee relationship will exist between franchisor and franchisee. This is especially true where the franchise agreement includes express statements confirming the independence of the parties and excludes any partnership or employment relationship. It is also unlikely that a franchisor will be considered to be the employer or joint employer of the franchisee's employees. However, a franchisor should be careful when drafting (and operating) the franchise agreement to ensure that the franchisor does not exert an undue level of control over the franchisee.

Updated: October 15, 2019