Is a franchisee an employee of the franchisor?

It is a fundamental principle of franchising that franchisees operate their own business. Franchisees 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 detailed 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 very strict and detailed controls imposed by franchisors on franchisees. There have been no such cases in the UK and, in our view, it is extremely unlikely that 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 that it wishes to offer those employees the opportunity of entering into a franchise, rather than continuing to be employed, then there is a risk if the ex-employee (now a franchisee) performs precisely the same functions as when he or she was an employee that HMRC and others will seek to argue that 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.