When the franchising business model began to expand in Sweden during the 1970s, the trade unions expressed concern that employers could use it as a method to circumvent mandatory labour laws or existing collective agreements. This concern was raised in particular when an employer laid off its employees, but kept them working according to a franchise agreement, under which they continued to perform exactly the same tasks for the employer (now the franchisor) as they had performed as employees.
A 1987 government report(1) outlined that, according to court precedents, the dividing line between a self-employed independent businessperson and an employee should be determined by considering all circumstances of each individual case. The report stated that both the franchise contract and how the parties interact are relevant.
The report held that the individual in question is an employee if:
- he or she undertakes tasks personally;
- he or she is available to attend to new tasks when the present tasks have been executed;
- the contractual relationship is not short term;
- he or she cannot perform similar tasks for another party;
- he or she follows orders and instructions on how the tasks should be performed;
- he or she uses machinery, tools and raw materials provided by the other party to perform the tasks;
- he or she is reimbursed for expenses connected to his or her performance of the tasks; and
- he or she receives guaranteed consideration for his or her performance of the tasks in the form of a salary.
The report also held that the individual in question is a self-employed businessperson if:
- he or she is not obliged to perform the tasks personally;
- he or she can instruct another individual to undertake the tasks fully or partly;
- he or she performs certain tasks only;
- he or she has a short-term relationship with the other party;
- he or she is not hindered from performing similar tasks for other parties;
- he or she decides where, when and how the tasks should be performed;
- he or she uses his or her own machinery, tools and raw material to perform the tasks;
- he or she must pay himself or herself for all costs connected with the performance of the tasks;
- he or she is reimbursed for the tasks dependent on their outcome; and
- he or she is the licence holder, if a licence is legally required to perform the tasks in question.
In the early 1990s a trade union which organised employees in the insurance industry sued an insurer. The insurer had offered some of its employees the opportunity to form their own legal entities through which they could continue to sell insurance policies. Franchise agreements were signed. The union argued that this circumvented the collective agreement between the insurer and the trade union, and that the former employees were still covered by the collective agreement.
Having studied the franchise agreement between the insurer and the legal entity formed by three former employees, the court ruled that this was a relationship between franchisor and franchisee. The court(2) considered the following circumstances:
- The former employees formed a legal entity in which they conducted the insurance business.
- The legal entity was the party to the agreement, not the individual former employees.
- There were no indications that the legal entity was formed to circumvent the rules of mandatory labour laws or the existing collective agreement.
- The former employees had entered into the franchise agreement via the legal entity without any pressure from the other party.
- As owners of the legal entity, the former employees were not personally obliged to undertake the tasks.
- The other party's control over the business conducted by the former employees could not be compared with supervision by an employer.
- The former employees invested their own capital in the legal entity and its business.
- The former employees were exposed to business risks through their legal entity.
- The legal entity had an independent business administration.
- The legal entity had its own employees.
- The legal entity had its own assets necessary to perform the tasks.
- The legal entity was recorded under its own company name.
- The layout of business cards and stationery showed that the business was independent of the other party.
- The legal entity accounted for and paid for all costs accrued in the business.
- Reimbursement for all sales made by the legal entity was paid to the legal entity only.
- There was no guaranteed level of reimbursement.
- The franchising business model is accepted within the insurance industry.
The court stated that the franchising business model is a particular form of business collaboration between two parties that cannot be compared to employment, which finally settled this issue in Sweden. The fact that a franchisee receives a business concept, a market and know-how in exchange for certain limitations regarding how to operate its business compared with a non-franchised business, does not influence the fact that a franchisee is a self-employed business person.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.