Sale of a franchise: What happens to the employees?

You have found the perfect franchise to start (or expand) your business, you have the security of an established brand and the opportunity to grow it in the way you want, and the price is right. But what about the employees?

Sale of a franchise: What happens to the employees?

As the purchaser of a franchise business, it is essential to understand exactly what it is that you are buying and, in particular, the position regarding staff. If you are selling, you need to know your pre- and post-sale obligations, both generally and in respect of the employees working in the business.

Here are some key points for buyers and sellers to bear in mind.

Establish what is being bought and sold

The first step in the sale of any franchise is to understand whether you are buying or selling the assets of the business, or just the shares in the company. 

You might ask why this is important; well, when it comes to the employees it is crucial to distinguish between a share and an asset purchase.  This is because if you are buying the assets of a business, then, by virtue of TUPE, the employees are part and parcel of that purchase.

What is TUPE?

TUPE (or to use its full title, the Transfer of Undertakings (Protection of Employment) Regulations 2006) is a piece of legislation which operates to protect the employment of employees when there is a business transfer or service provision change affecting their employer.  When TUPE applies, as it would when there is a sale of the assets of a franchise business:

  • The contracts of employment of those employees employed by the seller (or transferor) and “assigned to the organised grouping of resources or employees that is subject to the relevant transfer” automatically transfer to the buyer (or transferee) on their existing terms; and
  • The transferee effectively steps into the transferor’s shoes with regard to the transferring employees. All of the transferor’s rights, powers, duties and liabilities under or in connection with the transferring employees’ contracts pass to the transferee and any acts or omissions of the transferor before the transfer are treated as having been done by the transferee.

Employees who object to the transfer do not have to become employees of the transferee. Instead, their contracts of employment terminate by operation of law on the transfer date.

As such, the employees of the seller of a franchise business will have their employment automatically transferred to the buyer on the date the sale completes, unless they object to the transfer.

How do you comply with TUPE?

TUPE operates to automatically transfer the employment of employees from the seller to the buyer, but this doesn’t mean that the parties can just leave TUPE to work its magic when it comes to the employees.  Both the buyer and the seller have some very important obligations under TUPE, namely:

  • That the seller has to provide the buyer with certain information about the transferring employees (known as the employee liability information or “ELI” for those who like to keep things short) not less than 28 days before the transfer takes place.
  • That both the seller and the buyer must inform and (if appropriate) consult with either the employees direct (depending on how many there are) or with recognised trade unions or elected employee representatives (if there is no recognised union) in relation to any employees who may be affected by the transfer, the transfer itself and any measures taken in connection with it.

Failing to comply with these obligations can leave both the buyer and the seller at risk of claims in the Employment Tribunal from disgruntled employees, including:

  • A claim by the buyer against the seller for failure to provide ELI (compensation for which is assessed regarding the losses suffered by the buyer, with a minimum award of £550 per employee).
  • Claims for failure to inform and consult (for which each affected employee may be awarded up to 13 weeks’ gross uncapped pay).
  • Claims for automatic unfair dismissal if the reason or principal reason for dismissal is the transfer (compensation for which can be up to a year’s pay, capped at £105,707).

What if TUPE doesn’t apply?

The essence of many businesses is its people.  Good employees increase value, are key to goodwill and drive success.  As such, whether TUPE applies or not, both buyers and sellers would be well advised to pay close attention to the handling of the employees during any sale process by:

  • Deciding from the outset a timeframe for relaying the fact of the sale to the employees.
  • Anticipating early how to deal with rumours, concerns and the risk of “jumping ship”.
  • Designing a structure and messaging for meetings with the employees.
  • Reaching agreement regarding any buyer meetings with the employees.

What if some employees need to be dismissed?

If TUPE applies, employees enjoy enhanced protection against unfair dismissal on a TUPE transfer; if the reason or principal reason for dismissal is the transfer, the dismissal will be automatically unfair.

In practice, and even if an employer believes that a dismissal is not transfer-related, the ability to dismiss employees fairly when there is a TUPE transfer is rather limited.  Both sellers and buyers should be extremely cautious if dismissing any employees around the time of a TUPE transfer.

If TUPE does not apply, then the normal rules surrounding the fair dismissal of employees would still apply.  However, sellers will certainly find that buyers will seek full disclosure of recent dismissals and any potential or actual employment-related claims during the due diligence process and that:

  • Actual or potential employment-related claims often cause deals to fail.
  • Poor HR practices may affect the sale price and force parties back to the negotiating table.
  • Buyers are likely to seek weighty indemnities to cover the risk of costly claims.

Do your homework

Due diligence is therefore absolutely key.

As the seller you need to:

  • Provide accurate information regarding the employees to the buyer.
  • Remember the timescales for ELI under TUPE.
  • Keep the lines of communication with the buyer open.

As the buyer you should:

  • Carefully read and analyse the information about the employees provided by the seller.
  • Ask questions if there is anything you don’t understand or that doesn’t look “right”.
  • Seek advice on your responsibilities towards to the employees, post-completion.

Write it down

Finally, it is essential for the seller and the buyer to agree appropriate warranties and indemnities from the outset in respect of the employees and all claims and liabilities arising before and after completion.  This will be a matter of negotiation between the parties and their representatives but must ultimately be recorded in the sale agreement so that the buyer and the seller know where they stand in relation to the employees.

Lucy Flynn
Lucy Flynn