Keeping franchisees at arm’s length

In light of the recent ruling in the US that McDonald's is to be held jointly liable for the labour practices of its franchisees, how safe are UK franchises from similar reprisals?

Keeping franchisees at arm’s length

The last few months have seen the world of franchising rocked”by developments Stateside. In July, the National Labor Relations Board (NLRB) ruled that, contrary to legal distinctions that hold franchisors and franchisees as separate entities in terms of liability, McDonald’s could be classed as a ‘joint employer’ in 43 separate cases detailing unfair labour practices. Inevitably, this had created a veritable tempest of protestation from those who feel it could threaten”the very legal distinctions that allow franchising to function, last month culminating in a whole host of franchise owners descending on Washington DC to”show their dissatisfaction at the decision.

But what does this mean for franchises on this side”of the pond? Given the UK franchise industry isn’t subject to the anywhere near the same degree of”formal regulation as the US franchising system,”are Blighty’s franchises at more or less risk of being found legally culpable for the actions of their franchisees?”

According to Nicola Broadhurst, partner at law firm Stevens &”Bolton, it seems unlikely that the UK will see such an extreme decision. “The courts here are reluctant to do something like that,” she says. “What they will do is analyse the relationship and ask, ‘How much control does the franchisor actually have over the way in which the franchisee operates the business?'”

By their nature, franchise agreements are very clear about the legal separation between”a franchisor and its franchisees, meaning the onus is on the courts to demonstrate that there is clear evidence this separation has broken down. “The courts would really have to look into the relationship and prove that was the case,” Broadhurst says. “But there”wouldn’t“be very many cases where the franchisee is more than a franchisee.”

However, while it is a rare occurrence, it is not entirely unheard of. Broadhurst makes reference to an HMRC case where it held Weight Watchers programme leaders should be classified as employees rather than self-employed contractors, leaving the organisation to foot a large tax bill.

“The reason it gave was that the Weight Watchers’ leaders didn’t have autonomy in”the way in which they ran the business,” Broadhurst explains. Weight Watchers’ programme leaders were required to seek”head office approval when arranging meetings and the main company paid for these bookings, somewhat undermining their”legal independence. “In a typical franchise scenario, it would be so much more hands-off than that,” she says. “A franchisee would be responsible for its own contractual arrangements over venue hire.”

A situation where the main operation steps in to organise key accounts can also undermine the legal separation between franchisee and franchisor. Certain kinds of franchise – particularly auto-valet, windshield repair and disaster specialist repair franchises – tend to operate large national contracts with big organisations and subcontract the work out”to their franchisees. This is fine as far as it goes but it can mean that the legal responsibility”for that work becomes a little blurred.

“In that situation, that can be a bit of a dangerous relationship to have,” Broadhurst says. “Firstly, because the franchisee becomes dependent on the work being passed to them by the franchisor and, secondly, because the franchisee becomes little more than actually”a self-employed contractor for the franchisor.”

In certain cases, a franchisor might find itself open to claims of negligence and a failure in”its duty of care. One such case involved Kall Kwik, the printing franchise, when a third party was buying a franchisee’s business – while the sale was arranged by the franchisee, Kall Kwik provided some estimates of how much the refurbishment costs would tot up”to, which ultimately fell some way short of”the final figure.

“The purchaser was able to sue Kall Kwik”for negligence in that scenario,” says Broadhurst. “It was upheld because the courts said that the franchisor had got involved in”the sales process, had given information”and had established a duty of care between themselves and the purchaser.” This demonstrates just how important it is for”a franchisor to be careful about how much it involves itself in the business of its franchisees.

A significant blurring of the lines also arises from the fact that in many consumers’ minds there is rarely a clear separation between”a franchised brand and its franchisees. Sometimes this state of affairs is actively encouraged by franchisors. “There are some franchisors out there who say, ‘We don’t actually want our clients necessarily to”say that they’re dealing with a franchisee because they like to deal with head office’,” Broadhurst says. Obviously, if this same attitude prevents a franchise from making”it explicitly clear what they bear liability for,”this can potentially lead to problems.

This becomes most acute when a franchise fails to update its consumer-facing terms and conditions to reflect the fact that they aren’t legally liable for work conducted or services provided by a franchisee. “If a franchisor expands a business through franchising but fails to amend their terms and conditions,”they can then find themselves being liable for the customer because they haven’t told the customer they’re in fact contracting with the franchisee,” Broadhurst says.

Ultimately, this touches on the key point: simply writing a franchise agreement and assuming that this will cover you from any liability is going to result in trouble. “You”can’t just stop at the franchise agreement,” Broadhurst says. “You have to look at every aspect of your contractual documentation and see if it’s clear, particularly on the website.” Even beyond this, it’s vital for franchisors”to work through all of their processes and ensure that they aren’t crossing the line and interfering with franchisees’ independence.

While we’re unlikely to see anything approaching the NLRB in this country, a franchise agreement alone can’t guarantee”a franchisor has no liability for its franchisee’s actions. Keeping franchisees at arm’s length”is therefore the best way to keep yourself safe from legal reprisal.” style=

Josh Russell
Josh Russell