‘If the employee starts franchising…’. The employer’s duty of care as a franchisor

It will not be easy to assume that a ‘normal’ employee has given up his employment contract. However, what if the employee is negotiating with his employer to conclude a franchise agreement that will replace the employment contract? This article will attempt to formulate a guideline for such situations.

1. Introduction: franchising

What is franchising? Franchising involves close and continuous cooperation between two completely independent and independent parties, namely the franchisor, who manages and maintains the franchise formula, and the franchisee [1] . The latter wishes to make use of the name recognition, the quality of the formula, as well as the adequate support of the franchisor in order to be able to operate a profitable company under the name of the franchisor. However, the franchisee remains an independent entrepreneur at all times and therefore runs the full entrepreneurial risk for the success or failure of his business. To be allowed to participate in the franchise formula, the franchisee must pay a periodic fee to the franchisor, the so-called franchise fee. This completes the symbiosis between the two parties: the franchisor provides the franchisees with tools to operate a profitable business. The receipt of the periodic franchise fees in turn provides the franchisor with the financial means, so that it can continue to provide the aforementioned tools to its franchisees. This allows the franchise formula to be maintained and expanded.

Franchising is a phenomenon that simply cannot be ignored in today’s society. If you walk through an average shopping street in a Dutch city, you will find many examples of companies that make use of this unique form of cooperation. In fact, given the often high rents for business premises in popular locations, such as a shopping street, an entrepreneur (not affiliated with a formula) will not easily choose to operate his business there. A large part of the business offer in desirable locations is therefore dominated by the –  financially considerably stronger – franchise formulas. Think, for example, of fast food restaurants (McDonald’s), clothing stores (Set Point), supermarkets (Albert Heijn), pet shops (Pet’s Place) and even Dutch pride: Hema.

2. Franchise and salaried employment: inequality between parties

At this point it may be unclear to some readers what the relationship is between franchising and employment law. That relationship is, among other things, as follows. Although franchising is based on the premise that both the franchisor and the franchisee are fully equal parties, practice often shows that there can indeed be (sometimes major) inequality between the franchisor and the franchisee. An inequality that, in extreme cases, is no different from a normal employment relationship. For example, the franchisor can actually be superior to the franchisee in financial, legal, economic and professional terms. This applies even more if there is a large franchisor operating internationally. If the business premises, in which the franchisee conducts his business, is also (sub)rented from the franchisor, then in certain cases equivalence can also no longer be spoken of, because the franchisee is, in any case, dependent on the franchisor for the business space. In addition, the way in which the franchisee is obliged, for example on the basis of the franchise agreement, to operate his business can further enslave the franchisee. Think of such far-reaching instructions from the franchisor about rates, working methods and approaching customers. Sometimes these indications go so far that the court determines that the franchisee is totally subordinate and is therefore no longer an independent entrepreneur [2] . For the sake of brevity, reference is also made to the guidelines that the Tax and Customs Administration and UVW set for independent entrepreneurship.

3. Subordinated, but no employment contract

However, the determination that the franchisee is subordinate does not automatically mean that there is also an employment contract within the meaning of the law. A judge will usually not be able to make such a determination quickly[3], because there are often one (or more) elements that can be identified in the franchise agreement, or the way in which the parties actually execute the franchise agreement, which argue that the (franchise) agreement is not an employment contract within the meaning of the law. In such cases, a court will therefore not be able to apply the provisions of labor law, which are often mandatory, but will have to limit itself to the general rules of contract law. This lack of any legal protection for the franchisee can sometimes seem unreasonable. After all, in the case of agency, the law offers protective regulations. In the case of franchising, there is no such specific regulation, although a franchisee is often even more dependent on his franchisor than an agent is on his principal. Needless to say, other countries, such as Belgium, do have specific legislation on franchising.

4. Extra protection of the (potential) franchisee indicated

However, there are also situations conceivable in which there is indeed a reason to give the franchisee the full protection that employment law can specifically provide. This is the case, for example, if there is already an employment relationship between the (potential) franchisor and franchisor, which relationship will eventually lapse in favor of the franchise agreement. Consider, for example, the case where a supermarket manager (in salaried employment) is confronted with the change in the operation of ‘his’ supermarket to franchising. Now that there is no room in the new supermarket for both a supermarket manager and a franchisee – after all, both fulfill the same function – the supermarket manager must make the choice to either become a franchisee or have his employment terminated, voluntarily or not, due to redundancy. Also consider the case where an employee of a franchisor – say: an HRM employee – is expressly asked to become a franchisee. Coincidentally, a vacancy has just arisen in the formula and, according to the employer/franchisor, the employee in question would be ‘really perfect’ to continue his career as a franchisee.

In the former case, that of the supermarket manager, it is not difficult to see that there is actually no real choice to become a franchisee. His job is at stake and he will have to become a franchisee or settle for another employment. In the second case, that of the HRM employee, the danger of termination of employment is perhaps less immediate, but let’s also be honest; if an employer expressly appeals to an employee, considerable pressure will be felt by the average employee to seriously consider such an offer, regardless of one’s own wishes in that regard. This – of course – in the knowledge that the refusal could be unfavorable for a further career development with the employer. In such cases, there can at least be said to be a field of tension in which the employee/potential franchisee finds himself, in which his freedom to contract or not to contract with the franchisor can be considerably limited by the fear of reprisals on the part of the franchisor as an employer.

5. The consequences of entering into the franchise agreement for the employee

Entering into the franchise agreement will have consequences for the employment contract that previously bound the parties. After all, the existence of the franchise agreement will almost always exclude the existence of the employment contract. When entering into a franchise agreement, it should therefore be assumed that the employee/franchisee has renounced his employment contract, but this should certainly not be assumed too lightly. After all, on the basis of the applicable case law with regard to the termination of an employment contract, the employee must “unambiguously” agree to the termination of his employment contract [4] . It should not be too quickly assumed that an employee’s statement is aimed at voluntary termination of employment [5] . In recent literature, such an unequivocal expression of intent to terminate the employment contract has been further defined as “any free and fully informed expression of intent by which the employee specifically accepts, without any doubt whatsoever, what the employer has asked for consent” [6] . Every form of doubt must therefore be expressly removed and such an investigation must be carried out by the employer. This (more stringent) obligation to investigate, which rests on the employer, mainly serves to ensure that the employee is fully aware of the consequences of the termination of the employment contract. After all, the employee must be protected from the serious consequences that a voluntary termination of employment can have.

Such protection of the employee is also at issue when the parties are negotiating a franchise agreement. For example, on the basis of the stricter obligation to investigate, it should in any case not be possible for the franchisor/employer to adopt the position too quickly during the negotiations on the franchise agreement that the employment contract has been terminated.

In any case, whatever the employee may have said and done during such negotiations, in my view there could not be an unequivocal statement to terminate the employment contract if there is no final agreement on all facets of the franchise agreement and no full franchise agreement, agreed by both parties, is available that demonstrates this full agreement.

Such a requirement for the franchise agreement to be in writing could be a reasonable interpretation of the protection of the employee, because an average franchise agreement, in addition to the essentials such as term and size of the fee, will contain many general provisions (general terms and conditions), about which the parties usually do not expressly will have negotiated, but which may be extremely important for the (legal or financial) position of the franchisee. This could include a – whether or not reasonable – non-competition clause, as well as a buy-back or repurchase scheme upon termination of the franchise relationship. The franchisee will first have obtained the aforementioned “complete information” if he has taken note of the entire content of the franchise agreement. Only if he then signs the franchise agreement without reservation can the employer/franchisor’s obligation to investigate be fulfilled, whereby it is of course highly preferred that the parties also formally record the termination of the employment contract in writing. If such a strict standard were not applied, all kinds of unreasonable situations could easily arise, partly facilitated by the fact that the employer/franchisor wears ‘two hats’. The franchisor could – whether consciously or not – abuse the dependence of the employee and allow himself to be guided more by his own (financial) interests than the legitimate interests of the employee/potential franchisee. If it is assumed too quickly that the employment relationship has been terminated, without a final franchise agreement being agreed upon by both parties, the employee/potential franchisee will be completely empty-handed if no agreement is subsequently reached on the franchise agreement. This may be beneficial for the employer, but certainly not for the employee.

Even if there is already (very) advanced, but no written, consensus between the parties about the franchise agreement, the termination of the employment contract should not be accepted quickly. This is because an unreasonable advantage could arise for the franchisor if there were no employment contract (anymore), but also no fully sound franchise contract (yet) on which the employee could rely. As indicated above, general, but important, provisions may only become apparent in the last phase of the negotiations. Should the employment contract already be deemed to have been abandoned, for example due to negligence on the part of the employee/prospective franchisee, the employee/prospective franchisee will find himself in a vacuum where he can actually only agree to all the conditions that the franchisor wishes to make in an effort to limit the damage. There is then no real freedom of contract.

6. Recent case law

Although the aforementioned matter has regularly occurred in practice and occurs, especially in the supermarket sector, there is actually surprisingly little case law in this area. It is therefore interesting to discuss a recent judgment of the District Court of Zwolle [7] in the light of the foregoing. The case is – briefly summarized – as follows. Employer, also operating as a franchisor, has approached an employee to become a franchisee. A few discussions later, the parties apparently agreed on the commencement date of the franchise agreement, the location where the business will be operated and the amount of the franchise fee. During these negotiations, the employer/franchisor is already concluding various (rental) agreements with third parties with the idea that a franchise agreement will come about after all. However, the employee is not yet completely convinced, because he first wants to call in an advisor to have things assessed. Ultimately, the employee breaks off the negotiations because certain matters have not been arranged to his liking and which matters apparently could not be adjusted by the employer/franchisor. The employer/franchisor is not in favor of the employee stopping negotiations and is taking the employee to court. En passant, the employment contract of the employee is not (any longer) extended after the negotiations have been broken off.

The judgment again shows that it should not be too quickly assumed that there is agreement between the parties on a major transaction, as in the case of a franchise agreement, even if there is agreement between the parties on important principles [8] . In addition, the court took into account the difficult position in which the employee found himself. Although this matter has not therefore been discussed to what extent the employment contract has been terminated in favor of the franchise agreement, the court does note in a general sense that a franchisor, if he is the employer of a (potential) franchisee, must in any case ascertain whether the employee “actually and without reservation” wants to conclude the franchise agreement in order to make the transition from employee to self-employed person. In that sense, the franchisor/employer has an obligation to investigate and also the necessary caution [9] .

7. Recommendations

In short, if there is an employment relationship between a (potential) franchisee and a franchisor, it could be justified, partly on the basis of the foregoing, if the employment contract is terminated in favor of the franchise agreement first. if at least the following elements are met.

Firstly, the employee/potential franchisee must have been able to become acquainted with the entire content of the franchise agreement, for example in the form of a draft. After all, only then will he have obtained the aforementioned “complete information”. This also follows from Article 3.3 of the European Code of Honor on Franchising.

The employee must then be given reasonable freedom to make an inventory (or have it done) of whether the franchise agreement offers what the employee has in mind, without any imposed (time) pressure on the part of the franchisor/employer. For example, a clause could also be included in the franchise agreement giving the employee/franchisee the right to dissolve the franchise agreement free of charge within a few days of actually signing it.

Only when the franchise agreement is signed by the employee, without any reservations, can there be a statement of intent on the part of the employee to terminate his employment contract. However, given the stricter duty of investigation of the employer/franchisor, there should be no doubt at that time about wanting to terminate the employment contract. The employer will therefore do well to, in addition to signing the franchise agreement, also properly record in writing that the franchisee agrees with the termination of his employment contract in order to be able to exercise the necessary caution. Such a written record could, preferably, also include the consequences of the transition from employee to franchiseeship for the employee, so that there is no ambiguity about this for the employee.

On the basis of the foregoing, it should in any case be clear that open communication and due care are indispensable in such cases and that hasty decisions or assumptions should never be made when it comes to something as important as terminating an employment contract.

Mr JH Kolenbrander – Franchise lawyer

Ludwig & Van Dam Franchise attorneys, franchise legal advice Would you like to respond? Mail to coalbrander@ludwigvandam.nl

[1] This is the – paraphrased – definition given by the European Code of Honor on Franchising.

[2] See for example: Court of Assen dated December 13, 2006, LJN: AZ5003 (Home team). Other: Central Council for Appeal dated February 26, 1998, LJN: AA8795 (Indoor Training) and Court of Groningen dated July 16, 2008, LJN:BD7453.

[3] See for example: Central Council for Appeal dated February 26, 1998, LJN: AA8795 (Indoor Training) and Groningen Court dated July 16, 2008, LJN:BD7453.

[4] See for example: HR 28 May 1082, NJ 1983/2 (Coolwijk), HR 14 January 1983, NJ 1983/457 (Hazjiani), HR 15 April 1983, NJ 1983/458 (Hajjout), HR 12 September 1986, NJ 1987/267 (Westhoff), HR Apr 28, 1995, NJ 1995/651 (Spamix);

[5] HR 10 June 2005, JAR 2005/157 (Grillroom Ramses).

[6] See the article in ArbeidsRecht 2010-10 by Mr MA van Haelst, “ Well-consciously not unequivocally ”, pp. 11 – 15.

[7] Court of Zwolle dated 27 January 2011, LJN: BP0001 (Akwaak).

[8] See legal consideration 2.6 of the judgment.

[9] See also legal consideration 2.6 of the judgment.