The gig economy and its relevance to franchising

The so-called 'gig economy' is a labour market characterised by the prevalence of short-term contracts or freelance work, as opposed to permanent employment.

Depending on the point of view, it is either a working environment that offers flexibility and choice or a form of exploitation with little workplace protection.

The gig economy has undergone rapid growth in recent years – approximately 5 million people in the United Kingdom are employed in this type of capacity – and its growth is driven in part by the ongoing expansion of the online marketplace, including services such as Uber, Deliveroo and courier deliveries of online purchases.

There is a broad consensus from both sides of the debate that UK employment regulation needs to play catch up.

A number of businesses which franchise will interact with the gig economy, particularly those which operate with a low entry threshold, such as contract cleaning and other service-based franchises, including the hospitality and leisure sector, the care sector and providers of business-to-business services. Both franchisors and franchisees in these sectors may have individuals working for them in this capacity, so they must be aware of existing issues and the regulations that will likely be introduced.

Issues

Under English law, an individual's employment status is either that of an employee, a worker or a self-employed independent contractor.

The distinction between the three categories is significant; employees benefit from numerous statutory protections, whereas, at the opposite end of the spectrum, self-employed independent contractors have no meaningful employment rights other than those provided under health and safety and discrimination laws. In addition, the self-employed model has significant tax and cost advantages – self-employed contractors pay less tax and a company pays no national insurance contributions in respect of self-employed independent contractors. Workers fall in between these two extremes and are entitled to a number of the same protections as employees.

In response to these issues and the lack of certainty, the government commissioned an independent review in October 2016 to consider and advise on whether employment regulation and practices are keeping pace with the changing world of work. In June 2017 the much anticipated Taylor Review was published and contained a number of wide-ranging recommendations for legislative changes, including:

  • the introduction of a new category of 'dependent contractor' to provide those individuals with basic protections, including sick pay and holiday pay for casual workers;
  • the introduction of a higher rate of national minimum wage for hours that are not guaranteed as part of a contract; and
  • fewer tax advantages for self-employment.

Lessons for franchise businesses

Given the uncertainty, franchisors and franchisees may face challenges from individuals (or their unions) who are engaged to supply products and services to customers under the self-employed model. Further, it is conceivable that franchisees may also be able to claim worker or employee status in relation to their franchisor, although only in extreme cases.

If found to be on the wrong side of the law, it is likely that these businesses will need to factor in higher operational and support costs (eg, paying to top up the minimum wage for hours not guaranteed, making national insurance contributions and expanding their back office human resources (HR) support). Such costs may need to be passed on to the end customer.

There is also the risk of having to manage potentially negative public relations on the use or misuse of these models.

Conversely, for businesses which operate in the gig economy, but which do not use the franchise model, franchising can be deployed to reduce existing and future liability arising from the self-employed model and improve profitability, performance and brand recognition. Converting self-employed individuals or workers into genuine franchisees may result in greater professionalisation of the service and an opportunity to cultivate the entrepreneurial energy of franchising to drive new business opportunities and innovations in the operational systems.

Some practical recommendations include:

  • auditing delivery models and the supporting HR policies and contracts to ensure that they are consistent;
  • carrying out financial planning – where changes are required – to ensure that the franchise model is still economically viable for both parties or, for businesses which do not franchise, deploying the franchise model; and
  • introducing restrictions and indemnities in franchise agreements to prevent or discourage the use of self-employed models which are likely to fall foul of the law.

Comment

New technology is undoubtedly assuring the growth of the gig economy, but the status of those operating in the gig economy and the future of workers' rights in general remains uncertain. Franchise systems and companies operating in this sector should be looking carefully at their models and ensure that they have suitable contracts and policies in place and use a model which fits their business objectives.

For further information on this topic please contact Gordon Drakes or Nicholas Thorpe at Fieldfisher by telephone (+44 20 7861 4000) or email (gordon.drakes@fieldfisher.com or nicholas.thorpe@fieldfisher.com). The Fieldfisher website can be accessed at www.fieldfisher.com.