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Navigating the gig economy and the choppy channel across to franchising

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Businesses looking to expand may consider a franchise model as the solution to future growth without the demands of capital investment.  But getting franchising terms right is increasingly vital against the backdrop of the gig economy, with challenges as to whether individuals are truly self-employed contractors or could be classed as workers or employees and due to receive associated in-service benefits.  

Franchising is a long-standing business model, with well-known examples such as fast-food outlets McDonald’s, KFC or Subway, through hotels, estate agents and cleaning companies to fitness centres.  It allows the original business, as franchisor, to grant a franchisee the rights to replicate the business in new territory and to trade under a brand’s well-established name.   The franchisee generally pays a fee to buy the rights in the first place, with a continuing commitment of fees or commissions to the franchisor.

Buying the franchise rights and getting the territory off the ground may involve creating a team, setting up premises and finding your own customers through direct marketing, but in the case of courier delivery service DPD, their franchise model allows self-employed owner-driver franchisees (ODFs) to act as delivery agents by tapping into the existing customer base and operational infrastructure of the nationwide business.  

As part of the DPD franchise agreement, ODFs are required to have any substitute drivers approved by the company before handing over any responsibilities.  In the case of Stojsavljevic and another v DPD Group UK Ltd this process was challenged, with ODFs arguing that it undermined any self-employed status, making them workers or employees of DPD.  They said the reality of the franchise agreement was that they were contracted as individual drivers, solely responsible for undertaking the services.

But an employment tribunal ruled against the drivers, a decision later upheld by the Employment Appeal Tribunal (EAT), saying that a key element of worker status is that an individual personally undertakes to perform the work or services themselves.  In the case of DPD franchisees, there was no restriction on supplying a substitute driver, only that the company had to be satisfied that the substitutes met minimum requirements. 

The case reflects shifts in the broader economy towards so-called ‘gig’ work – short term work commitments or freelance contracts, typically paid on a per job basis – and the associated challenges around whether those fulfilling the jobs are self-employed or are workers or employees, with rights such as holiday and sickness pay.     

Notable cases in the UK include successful action by drivers seeking worker status and rights from Uber, Deliveroo and Addison Lee.  As a result, many such companies are reportedly considering franchise programmes as an alternative. 

“Franchising may be seen as a get-out of jail card for this sector, but any employment tribunal will take a detailed look at both the clauses that constitute the agreement and how the relationship operates in practice,” explained company law specialist Name, Title of Town-based solicitors Firm. 

“And it’s not just about substitution rights, as in the DPD case, as recent cases have focused on aspects such as the ability to determine pricing, the degree of integration into the franchisor business, and whether franchisees are subject to centralised policies or terms.”  

 

CONTACT US 

For any queries relating to establishing a franchise or if you are considering becoming a franchisee, please contact Adam Gilbert, Head of Corporate and Commercial. For any queries in relation to the employment issues surrounding franchise agreements, please contact Danielle Lister, Head of Employment.