Is a franchisee an employee of the franchisor?

John Pratt writes:

It’s a fundamental principle of franchising that franchisees operate their own businesses.

Franchises are not a branch or subsidiary of the franchisor’s business, but a wholly independent business that operates subject to the restrictions and obligations contained in a franchise agreement and operations manual.

In a number of countries - notably the US - it has been found that franchisees and their employees are employees of the franchisor because of the strict controls imposed by franchisors on franchisees.

There have been no such cases in the UK and, in my view, it’s unlikely an English court would conclude that franchisees and their employees were employed either solely by the franchisor or in the case of franchisees’ employers, jointly by the franchisor and the franchisee.

Notwithstanding the above, there is one situation that requires great care.

When a business has employees and decides it wishes to offer those employees the opportunity of entering into a franchise rather than continuing to be employed, there’s a risk if the ex-employee (now a franchisee) performs precisely the same functions as when they were an employee that HMRC and others will argue they are employees.

Generally, those arguments can be defeated if there was substantial initial investment by the ex-employee into the franchised business and the risk of failure is taken by the ex-employee.

John Pratt is senior partner at specialist franchise firm Hamilton Pratt and has advised franchisors for over 25 years.