The fictional employment relationship

Recently, both in the Netherlands and in  Belgium made some statements with regard to the establishment of a fictitious employment relationship in franchise relationships. A fictitious employment relationship can arise if the relationship between the franchisor and the franchisee becomes too much of an employment contract. For example, if the relationship becomes too directive or too many matters are managed centrally, an authority relationship arises to a certain extent, with the risk of a disguised employer/employee relationship, possibly resulting in a fictitious or even an ordinary employment relationship.

In these judgments, the following matters, among others, proved to be decisive in determining the fictitious employment relationship:

–  The franchisee was provided with a handbook containing far-reaching instructions and furthermore with options for the franchisor to take sanctioning action. This created an extremely limited possibility for the franchisee to operate independently, in conjunction with the strong economic dependence that already characterized the franchise relationship;

–  It turned out that the franchisee was not allowed to recruit staff. Furthermore, the franchisee was not allowed to determine his own holiday periods and the opening hours could not be deviated from;

–  The franchisee turned out to be largely obliged to report the volume of its sales directly to the franchisor, in accordance with the rules drawn up by the franchisor. The method of administration and the feedback of key financial figures to the franchisor also turned out to be largely prescribed by the franchisor in general. The method of payment by the franchisee’s customers also turned out to be determined by the franchisor and the income had to be passed on to the franchisor;

–  The franchisee also had far-reaching obligations with regard to the number and nature of cleanings at the franchisee’s location;

–  Monthly evaluation by an external party of the franchisee’s activities, unannounced visit, during which monitoring took place  based on a very extensive checklist with criteria, in which the franchisor reserved the possibility to change the criteria, then, in combination with the above, were decisive.

In themselves, the recent statements are not surprising. Based on the applicable criteria in franchise relationships that can result in a fictitious employment relationship, the risk zone was found in all cases. That the tax authorities, the UWV and/or the court will attach judgments to this at any time, could therefore be drawn. The fact that these matters are currently receiving less attention than in the past does not mean that the problem is less vicious, as it now appears again.

Franchisor and franchisee would be wise to set up their franchise construction in such a way that this risk cannot arise. For example, the franchisor and franchisee must take into account how they deal with matters such as financial targets, how any leads for the benefit of the franchisee reach the franchisee, that the franchisee’s income is completely uncertain and variable, in what way the franchisee may carry out advertising and promotion, et cetera. The system of obligations between franchisor and franchisee determines whether there is a bad chance of a fictitious employment relationship at any time.

Ludwig & Van Dam franchise attorneys, franchise legal advice