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Franchising and the gig economy – the risks and rewards

01/09/2017

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United Kingdom

A number of businesses which franchise will interact with the gig economy. Both franchisors and franchisees therefore need to know the risks and rewards of any regulation that is introduced.

1. What is the "gig economy" and how is it relevant 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 your point of view, it is either a working environment that offers flexibility and choice or it is a form of exploitation with very little workplace protection.

The gig economy has undergone rapid growth in recent years - approximately 5 million people in the UK are employed in this type of capacity - and the 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.

Whichever side of the debate you sit on, there is a broad consensus that current employment regulation in the UK needs to play catch up.

A number of businesses which franchise will interact with the gig economy, particularly those businesses which operate with a low entry threshold like contract cleaning and other service based franchises, including the hospitality and leisure sector, care sector and providers of B2B services. Both franchisors and franchisees in these sectors may have individuals working for them in this type of capacity, so they need to be aware of what the current issues are and the likely direction of travel of any regulation that is introduced to address them.

2. What are the legal issues with the gig economy?

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

The distinction between the three categories is significant; employees benefit from numerous statutory protections under English and EU law, and at the opposite end of the spectrum are self-employed independent contractors, who do not have any meaningful employment rights, other than under health and safety and discrimination laws.

In addition to the lack of statutory rights, the self-employed model also has significant tax/cost advantages – self-employed contractors pay less tax and a company does not have to pay any National Insurance (NI) contributions in respect of self-employed independent contractors. This means that the rise of the gig economy poses a threat to the Government's tax take.

"Workers" fall in between these two extremes, and they are entitled to a number of the same protections as an employee, such as national minimum wage, paid annual leave, rights to pension contributions, maximum working week and the right to join a trade union.

Companies like Uber suggest that they act purely as online intermediaries between consumers and those willing to provide services. It is Uber's view that individual drivers are independent contractors in business in their own right, choosing when and where to work.

In the UK, the GMB union, a general trade union in the UK with over 631,000 members, successfully challenged Uber's stance, finding agreement from the Employment Tribunal that Uber drivers should in fact be regarded as legally protected "workers", with rights to holiday and the minimum wage.

Similar judgements have followed in the last 12 months, and the GMB union has also launched legal action on behalf of couriers for delivery companies.

In response to these issues, the Government established 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 this year, the "Taylor Review" published its much anticipated report on modern working practices. 

3. What are the key recommendations of the Taylor Review?

The report is lengthy and its recommendations are too wide to cover in full in this article, but some of the key recommendations include:

Introduction of a 'new' category of "dependent contractor"

This headline grabbing recommendation intends to capture casual working relationships  - many of which are currently treated as self-employed - and to provide those individuals with basic protections including sick pay and holiday pay. In reality, it is nothing more than a rebranding exercise (rebranding 'worker' to 'dependent contractor') and the use of new terminology may only confuse individuals about what rights they actually have.

The report merely tweaks the current worker status tests – making the control exercised over an individual the dominant test and not that of personal service.  Arguably, there has been a missed opportunity here for a complete overhaul of the tests to ensure they reflect 21st century business models, for example, by introducing an entirely new category of gig economy worker.

Zero Hours Contracts

Of course, not all businesses in the gig economy operate on the basis of the 'self-employed' model.  But if an individual is not treated as self-employed, then very often they will be engaged as a bank or zero hour worker.

The report recognises the importance of flexibility, and accepts that businesses should still have the ability to offer zero hour contracts, but it concludes that the Government needs to do more in this area to ensure that flexibility is not at the unreasonable expense of workers and is genuinely a mutually beneficial arrangement.

A key recommendation is for the Low Pay Commission to consider introducing a higher rate of National Minimum Wage (NMW) for hours that are not guaranteed as part of a contract.  This is an interesting proposal and may prompt some businesses to review their current arrangements and offer workers guaranteed hour contracts.  But in many cases, the costs / benefit analysis is likely to support the continued use of zero hour contracts – i.e. the costs of offering workers guaranteed hour contracts will outweigh the costs of the enhanced NMW rate.

The much reported right to request a guaranteed hours contract also seems limited and, potentially, toothless.  It would only apply if a worker has been in post for 12 months.  It is also a right to request, not an automatic right to, guaranteed hours.

Tax Reform

For many individuals and businesses, the motivating factor for being self-employed is the associated tax advantages.  Although tax reform was formally outside the remit of the Taylor Review, the report does contain several suggestions in this area, some of which, if implemented, would be very radical indeed.

The report recommends that there should be fewer tax advantages for self-employment and, in principle, that all income should be taxed in much the same way, whether earned from employment or from self-employment.

Such a development would not affect employers directly but the report also floats the idea that companies which engage self-employed contractors, especially those who are classified as workers, should be obliged to pay employers' NI contributions.

This could prove to be expensive. Employers currently make no NI contributions at all for their workers, who are regarded as self-employed for tax purposes, but if they are required to pay the current NI rate of 13.8%, it would create an even larger financial burden than holiday pay. There would be opposition to this approach, and it will not happen overnight, but it does seem to be the direction of travel.

In summary

The real question is whether any of this is likely to end up on the statute books – given the current focus on Brexit negotiations, we would be surprised if the Government finds the time and resource to pass such new legislation. Indeed, as the worker status test derives from EU legislation, it would be difficult to make any changes to the test set out in UK legislation whilst the UK remains part of the European Union.

Following publication of the report, the Government has said that it will respond "later in the year" but there was a clear lack of commitment to turn any of the proposals made into legislation. That said, the report provides a clear indication of the way the Government views things and confirms the direction of travel.

4. What are the lessons for franchise businesses?

Franchisors and franchisees alike may face challenges from individuals (or their unions) who are engaged to supply products and services to customers under the self-employed model. In addition, it is conceivable that franchisees themselves may also be able to claim worker or employee status in relation to their franchisor, although this would only be 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 (such as paying to top-up on the minimum wage for hours not guaranteed, making NI contributions and expanding their back office 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 PR 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 current 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 professionalization 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:

  • Carrying out an audit of your delivery models and the supporting HR policies and contracts to ensure that they are consistent.
  • Where changes are required, carry out financial planning to ensure that the franchise model is still economically viable for both parties, or for businesses which do not franchise, consider deploying the franchise model.
  • Considering 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.

5. Conclusion

New technology is undoubtedly assuring the growth of the gig economy, but the future of workers' rights 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.

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