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Franchisee...or employee?

View profile for Howard Robson
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A recent case involving a white goods supplier demonstrates the risks for franchisors and others who attempt to avoid the responsibilities of employers by offering contracts of self employment.  Howard Robson, Employment Partner, here reviews the case and advises on how employers can be prepared.

The potential risks associated with engaging individuals, particularly former employees, under a franchise arrangement have been thrown into sharp relief lately following the settlement of a claim against a UK white goods supplier.

A repair technician was invited to give up employed status, purchase a van and become ‘self employed’ under a franchise agreement. The promise of substantial profits seemed attractive…

The agreement sought to avoid the creation of employment status by not guaranteeing the supply of repair work and requiring the individual to undertake at least 20% of their time working directly for householders on their appliances. The purpose was to avoid employed status thus saving employers national insurance and redundancy costs should work decline.

The franchisor supplied parts and equipment to the franchisee who  ‘bought’ them at a discount then supplied them to the householder at a price always fixed by the franchisor, as were tariff based labour costs.  The franchisee was provided by the franchisors back office with his own VAT invoices to provide to householders.

HMRC accepted that he was self-employed and he was taxed on that basis. Their opinion on the matter however is irrelevant to the courts or employment tribunal.

In reality, the employee had no opportunity to build any sort of customer base despite the requirement to undertake 20% of his time working for others. The requirement was never enforced. The franchisee was working throughout the week solely for the franchisor, being directed on a day to day basis by a regional office. Every customer would have the impression that the service was provided by the white goods supplier itself; the franchisee had no opportunity to build his own customer base. Of course as a franchisee the individual did not receive any holiday or sick pay, and importantly (and unlike most franchise arrangements) the arrangement could be ended on three month’s notice. The franchisee made no financial payment to the franchisor at the outset. His principal outlay was the purchase of a van and obtaining insurance cover.

The franchise arrangement came to an end following a disagreement between the individual and his ‘line manager’ at the regional office.

The individual considered that in fact he was never in business in his own right but had continued his employed status but without it being recognised. The usual legal tests which are applied to ascertain whether an individual is an employee, a worker or genuinely self employed were carefully considered by the Warner Goodman Employment team. The degree of day to day control over the supply of work, absence of other ‘clients’, a minimal financial stake or risk of making a loss all demonstrated that despite a franchise contract the arrangement was really one of employment.  After a claim asserting employed status was issued, the manufacturer very quickly elected to settle the claim by payment.

A key issue to be aware of if involved in a franchise agreement or some other form of self employment arrangement is to ensure the provisions of the contract designed to prevent it being a contract of employment are actually adhered to in practice by the parties at all times; the law looks at reality not theory. A ‘one client’ arrangement whereby in practice there is an expectation that work will always be done when offered, with in reality no right to refuse, is highly likely to be interpreted by the courts or employment tribunals as an employment relationship.

If the arrangement feels like an employment relationship it may well be so.  In the age old adage…if it walks like a duck, quacks like a duck…it is a duck.

If you require contracts prepared which are likely to survive the employment test or  advice on whether an arrangement of “self employment” in the context of franchising or otherwise is or is not likely to be held to be employment don’t hesitate to contact one of our Employment Team based at our Southampton office on 023 80 717717,  email Howard Robson on howardrobson@warnergoodman.co.uk or you can visit their section of the website here.

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.