Franchisor's liabilities towards franchisees' employees

Defining franchisor's employees
Direct claims against franchisor
Comment

According to case law, the circumstances in which a franchisor incurs liability towards the employees of its franchisees fall into two categories:

• A franchisee or its employees may be held to be an employee of the franchisor; or

• The employees of a franchisee (itself a corporate entity) may have direct claims (eg, for wages or indemnities) against the franchisor.

Defining franchisor's employees

In order to benefit from employment law, the franchisee must demonstrate that it works under the ongoing supervision of the franchisor, which has the power to:

• give orders and instructions;
• control the enforcement of such orders and instructions; and
• impose sanctions on the franchisee.

In many court decisions the franchise agreement has been requalified as an employment agreement due to the existence of a legal subordinate relationship between the franchisee and the franchisor, which is the essential feature of an employment relationship. Similarly, if an employee has signed an employment agreement with the franchisee but, in the course of employment, the franchisor has directly issued orders and instructions to the employee or imposed penalties on the employee (eg a reprimand, temporary lay-off or dismissal), the franchisor is deemed to be the real employer because there is a direct subordination of the employee to the franchisor.

Another approach, which does not require the employee's subordination to the employer to be established, is to fulfil the conditions set out in Article L7321-2 of the Labour Code:

• The franchisee sells products that are supplied exclusively or quasi-exclusively by the same company;
• It conducts its activity in premises that are procured or approved by that company; and
• The products are sold at prices and under conditions imposed by that company.

Direct claims against franchisor

The assumption is that the franchisee is an autonomous legal entity and that there is no direct subordination to the franchisor. Two interesting decisions illustrate how the French courts treat cases where the franchisor takes certain action which may have an impact on the franchisee's employees and the consequences for the franchisor in terms of liability.

De facto management
The first decision dealt with the key factors which may lead to a finding of de facto management in the context of a franchising relationship.(1) The franchisor was the owner of a supermarket brand.

The court noted that:

• the franchisor held all the accounting, corporate and banking documents required for the operation of the franchisee;
• the franchisor had bank signing authority;
• the franchisor prepared all administrative and payment documents which were then signed by the franchisee;
• the franchisor drew up all tax and social filings and controlled recruitment; and
• a police report showed that the franchisor had participated in the pursuit of the franchisee's loss- making business, although it was aware of the cash situation of the franchisee through the holding of accounting documents.

The Supreme Court concluded that the court of appeal had rightly held that the interference of the franchisor in the management of the franchisee had gone beyond the franchisor's obligations arising from the franchising agreement. Consequently, the franchisor was held to be the de facto manager of the franchisee and to have committed serious wrongdoing, causing the franchisee's insolvency. Therefore, the franchisor was ordered to cover the liabilities of the bankrupt franchisee.

Co-employment
Another recent case relates to the concept of co-employment between a franchisor and a franchisee which are part of the same group. The franchisor, Intermarché, used to own clothing brand Veti and subsequently bought another brand, Kiabi. Shortly after the acquisition, Intermarché decided to stop carrying the Veti brand. The shares of three Veti franchisees, which were not involved in the operation of the new brand, were acquired by Intermarché. This led the three franchisees to cease business and their employees were made redundant. The employees challenged their dismissal and sued Intermarché as co-employer.

The court of appeal found Intermarché liable as co-employer. In reaching its decision, the court noted that:

• the three companies which had become subsidiaries of Intermarché were forced to comply with Intermarché's decision to discontinue the Veti brand;
• there was a unique management team for the three companies; and
• they took simultaneous decisions to make their employees redundant.

The court concluded that following the acquisition of the shares, Intermarché had dictated the subsidiaries' strategic choices and managed their staff through the lay-off procedures.

The Supreme Court(2) overruled the appeal court's decision, adopting a more restrictive approach towards co-employment. It held that the establishment of an identical management team between the parent company and the subsidiaries, and the fact that the parent company had taken decisions affecting the future of the subsidiaries as part of its group policy and provided the necessary means for the implementation of the redundancies, were insufficient to demonstrate a situation of co-employment.

This decision confirms the Supreme Court's restrictive approach towards co-employment, which has so far been applied in exceptional circumstances and only in groups of companies.

Comment

The French courts generally allow a franchisor to issue instructions with a direct impact on the working conditions of franchisees' employees, provided that this is necessary to maintain the reputation and the uniformity of the franchise network. This may include, for instance, conditions regarding opening hours and days. In contrast, if the franchisor issues direct and nominative instructions to franchisees' employees or gets involved in hiring or firing, a line may be crossed and its liability may be at risk. The use of IT software and solutions made available by the franchisor to the franchisee is also an area of caution as such instruments should not allow the franchisor to interfere in the conduct of franchisees' affairs and the management of their staff.

For further information on this topic please contact Raphael Mellerio at Aramis Law Firm by telephone (+33 1 53 30 7700) or email (mellerio@aramis-law.com). The Aramis Law Firm website can be accessed at www.aramis-law.com.

Endnotes