Employment Law Update for Franchise Systems

This webinar features a discussion between Alex Watson (Partner in the Employment Team) and Gordon Drakes and Sara Stewart (Partner and Senior Associate in the Franchising Team) on the key changes, such as:

• protection from harassment;
• trade union rights;
• shift cancellations; and
• the creation of a Fair Work Agency.

The discussion also considers some real-life issues which arise in the franchising context, and provides practical tips for franchisors to navigate these changes and mitigate risks.  You can watch the webinar here: 

We have also prepared the following article which summarises the topics discussed in the session and the key takeaways:

1. Key Topics from the ERB: Implications for Franchisors

The ERB proposes several significant changes to the employment law landscape. The ERB proposals are ambitious and wide-ranging, impacting various business sectors, types, and models. Below is a non-exhaustive list of key changes which are most relevant to franchise systems:

(i) Protection from Harassment: the ERB proposes changes to discrimination law, requiring employers to take "all reasonable steps" to prevent harassment, including harassment by third parties. This new duty applies to all forms of harassment related to protected characteristics such as age, sex, and race.

(ii) Trade Union Rights: the ERB introduces new rights for trade unions, including the right to access workplaces (physical and online) and canvas for membership.

(iii) Shift Cancellations and Zero-Hour Contracts: the ERB proposes changes to zero and minimum-hour contracts, including guaranteed hours provisions and requirements for reasonable notice of shift changes or cancellations. These changes aim to protect workers with unpredictable working patterns but may present administrative burdens for smaller businesses.

(iv) Fair Work Agency: the ERB proposes the creation of a new enforcement body, the Fair Work Agency, to strengthen the enforcement of workplace rights. This new body will consolidate existing state enforcement functions and potentially cover holiday pay and discrimination in the workplace.

These changes will have a big impact on businesses which require a substantial work force, are consumer facing, and/or which rely on flexible working arrangements. Given the prevalence of franchising in sectors such as food and beverage, hospitality, retail and domestic and domiciliary services, franchisors need to think carefully, not just about their responsibility (and potential liability) towards their own employees, but to how that might extend into the franchise network and supply chain.

2. How should Franchisors approach these issues with Franchisees?

Most well-drafted English law franchise agreements address employment law related issues in the following areas:

(i) The franchisee must ensure that its employment contracts with its employees comply with applicable laws and protect the franchisor’s IP and confidential information.

(ii) The franchisee’s employees must complete the franchisor's initial and ongoing training programs. Their employment is conditional upon completing this.

(iii) The franchisee must nominate a key person, who is approved by the franchisor. This is usually director and/or shareholder. Their replacement must also be approved by the franchisor. The key person (and potentially other categories of management) is often required to sign an undertaking of confidentiality and non-competition.

(iv) The franchisee must ensure that its employees conduct themselves appropriately and notify the franchisor of any legal issues involving employees and maintain staffing levels to protect the brand's reputation.

(v) The franchise agreement may specify certain employee roles and wage bands.

Franchising is not a "one size fits all" model, and franchisors take different approaches depending upon their appetite for risk, the amount they are willing to invest into managing the network, and their overall awareness of evolving legal risks. Broadly speaking, franchisors tend to fall into one of the following categories:

The Hands-off Franchisor

The franchisee is an independent business, so any employee issues are to be resolved by the franchisee with little or no input or oversight from the franchisor. This is low risk in terms of the franchisor keeping a clear boundary between its business and that of a franchisee, but this does not leverage off the benefits of being part of a network, where members can share best practice, and procure advice/services at a group level and at competitive rates. The risk of divergent practices within a network may increase the likelihood of damage to the reputation of the brand.

The Helpful Franchisor

The franchisor shares their policies/contracts/ details of HR provider. The franchisee can use them, but there is no obligation to do so. Given the ERB proposal to require an employer to take all reasonable steps to prevent harassment, it is not a huge leap to see how a regulator might expect this to include a proactive duty on a franchisor to assist its network on compliance matters. This approach therefore seems well-aligned with the general direction of travel under the ERB.

The Controlling Franchisor

In the new environment being created under the ERB, a franchisor may wish to be more prescriptive with its franchisees, in terms of ensuring that there is a consistency of approach throughout the network on contracts, polices, procedures, enforcement, use of third-party services and engagement with the authorities. Franchisors may also feel compelled to strengthen their audit and reporting rights in this area. However, a high degree of control could create inadvertent risks, such as liability if those prescribed terms are defective, or having knowledge of franchisees non-compliance but taking no action or even being deemed to be a joint employer. 

Of the three approaches above, being a Helpful Franchisor could be the best approach to deal with the compliance regime that will emerge from the ERB.

3. Key Takeaways

• Joint employer liability (where a franchisor is found to be jointly liable as the employer of a franchisee's employee) poses a significant threat to franchising in key jurisdictions such as the US, Canada, and Australia. This risk typically manifests around the degree of franchisor control over the decision-making process for hiring and firing franchisee's employees. Fortunately, the UK has not followed suit, although it is arguable that the ERB is moving the UK towards a compliance environment where disgruntled employees of franchisees could advance this type of argument either through a tribunal or trade union dispute.
• On the subject of trade unions (again, in the US trade unions representing franchisee's employees have been a thorn in the side for large franchisors), we are likely to see an increase in trade union activity in the franchise sector, as a result of the ERB. Franchisors should consider the benefits of proactively engaging with their preferred trade union.
• In Australia, franchisors have been held liable for workplace law breaches by its franchisees. The Fair Work Act ("FWA") essentially imposes an obligation of franchisors to be vigilant of the practices of their franchisees, with a positive duty to act if they know or ought to know about breaches of the FWA. Again, the UK is in a good position here, as there is nothing analogous which is proposed by the ERB, but the duty to take all reasonable steps in respect of workplace harassment suggests that a passive approach to franchisee employment practices is no longer viable.
• Indeed, reputational risks associated with these enhanced duties were exemplified by the recent spectacle of McDonald's senior management being interrogated by a UK parliamentary committee after reports of widespread harassment and discrimination in the workplace (franchised and corporately owned restaurants). It is therefore imperative that franchisors consider reviewing their provision of training and support to franchisees and consider providing regular updates on the ERB changes to their franchisees.
• The Fair Work Agency is self-funded, so expect to see an increase in prosecutions and fines. Naming and shaming could pose a reputational risk to franchised brands, so it is important to consider introducing additional reporting obligations into franchise agreements or via the manual.
• Whilst mandating that franchisees uses the franchisor's own employment contracts, policies and procedures carries inherent risks if those materials are not compliant, franchisors should consider providing an actively-maintained resource bank of materials and training to their network, with the caveat that it is for guidance only, and they should take their own HR advice. On that subject, franchisors should also consider requiring that franchisees use a nominated supplier(s) for HR services, to ensure there is broad consistency across the network.
• There will be an inevitable increase in Employment Tribunals in the coming years, so franchisors should consider using a consistent dispute resolution platform for dealing with Employment Tribunals across the franchise network.
• Franchisors should review their franchise agreements to assess where they currently sit on the "hands off, helpful and controlling" spectrum, and update their franchise agreements accordingly.
• Franchisors should review their standard franchisee financial model to account for the increased costs which will apply to franchisees as a result in changes under the ERB and increases employment related taxes. Not taking account of this might result in more franchisees in financial distress.
• The ERB is itself light on detail, and consultation processes are underway, but franchisors should expect to see waves of legislative changes over the next couple of years, so it is important to stay up to date on these changes and take informed, proactive steps to mitigate and manage these risks and maintain operational efficiency.

For more information on this topic, please contact Alex Watson or Gordon Drakes.