Continuing with our series of articles focussed on issues for employers in the Hospitality and Leisure sector, we are today considering three issues related to franchising.
The term ‘franchising’ can be used to describe many different forms of business relationship, including licensing, distributor agreements and agency arrangements. According to the British Finance Association: “in its most familiar sense, the term ‘franchise’ has arisen from the development of what is called ‘business format franchising’. Business format franchising is the granting of a license by one person (the franchisor) to another (the franchisee), which entitles the franchisee to trade as their own businesses under the brand of the franchisor, following a proven business model.”
Franchising is extremely common in the hospitality and leisure sector, particularly in the hotel arena, where a franchisor will grant a franchise to a third-party franchisee and that franchisee will then trade and operate the hotel under the franchisor’s umbrella brand.
Employment status
It is typically the franchisee who will employ and engage its own employees/workers to work in the hotel, rather than the franchisor. The hotel however will often be operated under the name of the franchisor, meaning that the outside world is not necessarily aware that the franchisor is not also the employer of staff.
Whilst the franchisor may retain some involvement in the day to day running and management of the hotel, from a people perspective it will naturally want to retain a degree of separation to avoid any argument the staff of the hotel are workers/employees of the franchisor rather than the franchisee.
There are very few UK employment tribunal cases in this area and the legal position is often fact sensitive and nuanced. However, in our experience courts are generally reluctant to hold that there is an employment relationship between franchisors and employees of franchisees.
The concept of ‘co-employment’ is not typically possible under UK employment law. However, those in the sector with franchised business models have been closely watching developments regarding co-employment in the US with interest.
On 26 October 2023, the US National Labor Relations Board (NLRB) announced a new final rule (Rule), relaxing the joint employer standard and making it easier for employees of franchisees to establish joint employment. The test for joint employer status under the new Rule made it possible for an entity to be deemed an employer if it even has indirect or ‘reserved’ control over another company’s workers’ terms and conditions of employment. This clearly gave rise to a concern for franchisors.
However, on 8 March 2024, Judge Campbell Barker of the US District Court for the Eastern District of Texas entered a ruling that vacated the NLRB’s controversial new ‘joint employer’ regulation, which was stated to take effect on 11 March 2024. Judge Barker held that the NLRB’s proposed rule was unlawfully overbroad, noting that it “would treat virtually every entity that contracts for labor as a joint employer because virtually every contract for third-party labor has terms that impact, at least indirectly essential terms and conditions of employment.”
The NLRB indicated that it plans to appeal the ruling, which continues to be the subject of various legal actions both in support and in opposition to the rule. These include a Congressional Review Act action and a petition to review the rule in the US Circuit Court of Appeals for the DC Circuit brought by the SEIU Labor Union. The ruling has been a source of anxiety for employers who rely heavily on third-party service providers and outsourced labour.
While such employers are unaffected for now, the ultimate fate of the proposed regulation is still yet to be determined. Employers in the US are encouraged to exercise caution and continue to remain vigilant with respect to the manner in which they negotiate, contract for, and ‘manage’ outsourced labour functions.
DLA Piper’s Employment team is continuing to monitor these developments.
Flexibility of workforce
In the hospitality and leisure sector it is common for a franchisor to continue to play a role in the operation of the business via a management agreement with the franchisee. This may mean, for example, that it continues to provide central HR services to a group of hotels. The group may include employees/workers of various different franchisees.
Whilst one may think it should be relatively straightforward for that central HR function to support the various hotels in the group by moving employees/workers between hotels to help with short-term staffing issues, from a legal perspective this may give rise to a number of additional considerations.
By moving workers/employees between hotels it may be the case that the provisions of the Agency Workers Regulations 2010 and also the provisions in the Employment Agencies Act 1973 and the Conduct of Employment Agencies and Employment Businesses Regulations 2003 (Conduct Regulations) apply. If this is the case, there will be additional legal obligations on the franchisor, including providing a ‘key information document’ to workers before each shift at a hotel that is not their ‘home hotel’, given the requirements of Regulation 13A Conduct Regulations. The Agency Worker Regulations may also give rise to the need to uplift rates of pay, if there is a differential. There may also be a need for additional commercial agreements, between the different franchisees, setting out that division of liabilities should any employee/worker bring an employment tribunal claim.
DLA Piper can advise on this complex area further, as required.
Data Privacy
Personal data will typically be routinely collected by the franchisee, the franchisor or both, in relation to a range of individuals including customers, suppliers and employees. It is important to clarify at outset the respective roles of the franchisor and franchisee from a data protection perspective as this will determine the obligations that will apply to each party to ensure compliance with data laws and guidance. Under data protection law, parties will either be controllers – if they are “determining the purposes and means” of processing the personal data (i.e. deciding why and how the processing of personal data should occur) or processors – if they are processing personal data on behalf of a controller. Controllers have wider obligations, including to ensure: they provide privacy notices to data subjects; they have a lawful basis to collect and share personal data; they have technical and organisational measures to safeguard the data, etc. Processors, equally, have obligations to ensure the data they process is secure, but their wider obligations are more limited to ensuring that they process the data only on their controller’s instructions and not for their own independent purposes.
Both franchisee and franchisor could be controllers, perhaps if they need to share the relevant data for their own independent purposes, for example, a franchisee may need to collect employee details for standard employment purposes (e.g. payroll, onboarding etc), and a franchisor might need to receive such employee details for group-level accounting requirements. There is also the concept of joint controllers, which could arise if a franchisor and franchisee are jointly determining the purposes and means. With this concept comes a requirement to determine and describe in a transparent manner how the parties will manage the rights of data subjects and joint and several liability.
There is no agreed stance as to the designation of data protection roles in a franchising arrangement and it is largely a question of fact, depending on the nature of the relationship between the parties (for example, the level of autonomy afforded to the franchisee) and the flows of data between them. It is therefore paramount that each party’s role in a franchise arrangement is fully assessed on a case-by-case basis to ensure the roles are properly assigned and that the data protection obligations are managed accordingly.
Conclusion
The Employment and Data Privacy Groups at DLA Piper work with a huge range of businesses in this sector. If you have any questions on any of the issues raised in this article, please do not hesitate to contact us emphandl@dlapiper.com.
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