Case law from the highest German courts on franchise law matters is rare, which makes a recent Federal Court of Justice decision on the subject of bogus self-employment of franchisees – a perennial issue for franchise law practitioners – even more noteworthy.
The case concerned claims for payment under a licence agreement and the question of whether the licence agreement was void due to the franchisee's bogus self-employment.
The claimant was a freelance real estate agent who held a franchise licence from a company (R) for a particular area. She was also entitled to grant sub-licences to others who also acted as freelance agents, receiving support and management services from the claimant as a franchise holder of R.
The claimant (licensor) and the defendant (franchisee) entered into a franchise agreement under which the defendant was to work as a freelance real estate agent in accordance with the principles and policies of R's franchise system. The defendant was to perform his work as a freelance real estate agent in the claimant's shared offices (Clause 2 of the licence agreement). The claimant was to enter into and perform contracts with the defendant's clients in her own name but for the defendant's account (Clause 6.2 of the licence agreement). Only the claimant had the authority to receive and collect the defendant's commission fees and remuneration. The defendant had to pay a 20% share to R as commission for all of the transactions subject to commission that he completed.
The defendant started working as an agent in March 2014. In November 2014 the parties jointly agreed to cancel the licence agreement. The claimant then brought claims against the defendant in the legal action for payment based on accrued costs. The defendant objected to the claim, saying that the licence agreement was unethical ("contrary to public policy") because he could not act independently and was acting as a "bogus" freelance agent in dealings with third parties.
The Berlin Central Local Court partially allowed the payment claim. After the defendant lodged an appeal against this decision, the Berlin Regional Court, as the court of appeal, dismissed the payment claim in full.
The appeal court held that because of the defendant's bogus self-employment, the licence agreement was a void transaction whose purpose was to circumvent the law. As such, no claim existed under the contract.
The appeal court held that 'bogus self-employed' people are individuals who perform services or work for another person on a continuous basis and in so doing act, similar to an employee, by following instructions from or being economically dependent on the principal even though they did not expressly enter into an employment contract. The court held that bogus self-employment was used in an attempt to circumvent protective regulations under employment law, particularly with regard to:
- protection against dismissal;
- continued payment of wages in case of illness;
- social security contributions; and
- income tax.
The court maintained that in the present case, rather than an employment contract, a licence agreement had been entered into between the parties that was intended to give the impression that the licence holder acted independently as a real estate agent. The court pointed out that while the defendant had been free to organise his working time, had been able to determine whether an invoice was issued to his customers and had acquired customers independently, the licence agreement provisions characterising an employment relationship actually predominated.
Federal Court of Justice decision
The Federal Court of Justice overruled the appeal court's decision and referred it back to the Berlin Regional Court for a new hearing and decision (11 October 2018, VII ZR 298/17).
The Federal Court of Justice found that the licence agreement entered into by the parties had not been contrary to public policy and was therefore not ineffective. It maintained that merely circumventing protection regulations under employment law regarding unfair dismissal (Section 1 onwards of the Unfair Dismissal Act), continued payment of wages in case of illness (Section 3 of the Act on Continued Payment of Wages) and the duty to remit social security contributions and wage tax (Section 28e, Book IV of the Social Code and Section 41a of the Income Tax Act) did not render the contract void. It held that these provisions were applicable when entering into a private contract if their conditions were met, regardless of a possible intention of the parties to bypass the law.
The Federal Court of Justice held that whether there was a contract for working on a self-employed basis or an employment contract must be determined based on an overall assessment of all of the relevant circumstances in an individual case. It added that the objective content of the transaction was to be inferred from the agreements that had been expressly entered into by the parties on the one hand and the practical performance of the contract on the other, concluding that if the contract and its practical performance contradicted each other, the latter was decisive.
The Seventh Civil Panel of the Federal Court of Justice maintained that the licence agreement would have been contrary to public policy only if the rest of the agreement had to be assessed as contrary to public policy. It stated that this could be the case if the defendant was in fact deemed to be self-employed and that the parties' agreement of a collection authorisation in favour of the franchisor, by which client payments were diverted to the franchisor, could be an indication of unethical gagging of the franchisee. It added that additional indications could be contractual provisions which exceeded the typical franchise system restrictions placed on the franchisee's economic freedom. Therefore, the appeal court would have to make the necessary findings in this regard after hearing the parties.
The Federal Court of Justice has not reinvented the wheel with this judgment. The basic definitions of employment and self-employment remain well established. However, what is interesting and relevant for franchise law practitioners is the court's statements on the indications that may speak in favour of a franchise agreement being held to be contrary to public policy.
The high court's statements on a collection authorisation granted in the franchisor's name which indicated that a franchise agreement is contrary to public policy mean that even more caution will be required when drafting relevant contracts – the question being whether such a collection authorisation clause should be stipulated in future contracts at all.
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