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Could your franchisees have employment rights?

The thorny issue of employment status, which has beset the gig economy in recent years, has potential implications in the franchising world. Franchisors and Franchisees alike would be well advised to keep an eye on developing case law and its possible impact on their contractual arrangements. The issue was recently considered by the Employment Appeal Tribunal (EAT) in the case of Mr M Stojsavljevic, M Turner v DPD UK Limited (2021).

The issue before the EAT was whether the contract between the individual franchisees and DPD was one of personal service, an essential component of employment/worker status. The Franchise Agreement between DPD and the individual franchisees permitted substitution provided that franchisees obtained prior approval of any substitute driver by completing an application form and demonstrating that minimum criteria had been met, broadly that the driver was legally entitled to drive in the UK and was conversant with DPD’s practices.

The appealing franchisees contended that their substitution right was limited so that in practice they could only use a substitute driver who was already within DPD’s pool of approved drivers. It was argued that this was akin to shift-swapping or shift cover rather than substitution. It was asserted that the fetter to the right of substitution was such that it fell within the fifth principle established by the Court of Appeal in the Pimlico Plumbers case (Pimlico Plumbers Ltd v Smith [2017]) whereby a right to substitute only with the consent of another who has an absolute and unqualified right to withhold consent will be consistent with personal performance.

DPD on the other hand maintained that the right of substitution was not subject to its unqualified discretion but rather fettered only to the extent that a franchisee must demonstrate that a substitute driver met minimum criteria necessary to perform the service. DPD contended that the substitution right fell within the fourth principle established in the Pimlico Plumbers case, whereby a right of substitution limited only by the need to show that the substitute is as qualified as the contractor to do the work (whether or not that entails a particular procedure) will, subject to exceptional circumstances, be inconsistent with personal performance.

The EAT held in favour of DPD that the right of substitution fell within the fourth principle established in Pimlico Plumbers and thus there was no personal performance, without which there could be no worker/employee relationship. Although DPD’s approval was required before a particular substitute may be used, DPD had no absolute and unqualified discretion to withhold consent. The franchisee was obliged under the terms of the Franchise Agreement to provide a Driver, as defined in the agreement. DPD was not concerned with that driver’s identity, only that he/she met the definition of Driver contained within the Franchise Agreement. A franchisee could delegate their functions as a driver (or decline to drive at all) subject to DPD being satisfied that the minimum requirements necessary for the service to be delivered to customers had been met. The franchisees had the right to pass on an entire job and that was inconsistent with personal performance.

In reaching its decision, the EAT declined to interfere with the tribunal’s findings that the Franchise Agreement represented the true relationship between the parties and that DPD did not distinguish in its treatment between corporate and individual franchisees.

Although the EAT determined in this case that DPD’s franchisees were just that, the case turns on its facts. It is quite possible that different circumstances could lead to a different conclusion. It would therefore be advisable for all franchisors and franchisees to review the terms of their agreements carefully, particularly given the increase in stakes resulting from the recent Court of Appeal decision in Smith v Pimlico Plumbers Limited [2022].

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