Risks of requalification of franchisee as employee under German and Dutch law

1. Risks of requalification of franchisee as employee under German and Dutch law Katharina Wurm (PF&P Rechtsanwälte) and Tessa de Mönnink (De Grave De Mönnink Spliet Advocaten) IDI CONFERENCE, 15 June 2013

2. Overview: • Risk of requalification of franchisee as employee • Introduction & problem definition • Classification as an employee / independent entrepreneur • Criteria for employment / self-employment • Legal consequences for the franchisor • Dos & donts for structuring the franchise agreement

3. Introduction and problem definition Franchisees, especially in the event of a services franchise, so without physical locations, employees etc., could be qualified as an employee of franchisor if they do not have sufficient juridical and decisional independence. This is however the exception to the general rule! The following shall give an overview of criteria for deciding when a franchisee may be considered an employee and legal risks and consequences – from Dutch & German perspectives.

4. Classification of employee and independent entrepreneur Netherlands: Employee is one who: • Performs employment (arbeid) • Against a renumeration • Control by franchisor • During a certain period of time Independant entrepreneur is one who does not qualify as an employee. Germany: • Employee is one who, due to a private contract, provides dependent services for a third party against remuneration. • Independent entrepreneur is one who is essentially free to organise its working activities and in determining its working hours (analogous application of Section 84 para.1 s.2 German Commercial Code).

5. Criteria for employment Under German and Dutch law the criteria for employment are, e.g.: • Essential parts of activities only for one client • Franchisee is subject to instructions and comprehensive control measures of franchisor • Integration into work organisation of franchisor, e.g. no own premises, integration into franchisor‘s accounting and settlement system • No own economic risk • No freedom to decide working hours as well as questions related to personnel and business organisation • Prohibition of employment by franchisee of employees • Payment of the franchisee during illness

6. Criteria for employment In addition under Dutch law indications for employment are: • No obligation to charge VAT • A (very) strict non-compete clause during the relationship • A certain person has to perform the obligations

7. Criteria for self-employment (entrepreneur) Under German and Dutch laws the criteria for self-employment are, e.g.: • Activities for several customers / clients • Franchisee is not subject to instructions of franchisor • Freedom to determine (resale) prices • Own premises • Own entrepreneurial risks; investment of its own capital • Freedom to decide working hours • Control over personnel and business organisation matters • Right to employ employees • Freedom to decide on holidays

8. Conclusion employment / self-employment Both under German and Dutch laws: The qualification of franchisee as dependent employee or independent entrepreneur always depends on specific circumstances prevailing in individual cases, which is evaluated by taking account of overall context. The decisive factor in determination is the execution and implementation of the contract, not the exact wording of the franchise agreement. However usually the franchisee will not qualify as an employee, especially not when it is a franchise of goods, with a physical location, employees, etc. With the development of new franchise systems, focussing on services, without a physical location, the risk of qualification as an employee increases.

9. Legal risks and consequences for franchisor Netherlands: • Franchisee subject to payment of social premiums and taxes  franchisor will be obliged to pay those premiums and taxes and possibly to payments to pension scheme (depending on CAO‘s?) • Payment obligations possibly apply retroactively • Franchisee possibly entitled to claim adequate remuneration • Application of Dutch employment protection legislation Germany: • Franchisee subject to social insurance contributions  franchisor is obliged to make contributions to the statutory pension insurance scheme (payment obligations possibly apply retroactively (4 years)) • Payment of unemployment, health, accident and nursing insurance contributions (payment obligations possibly apply retroactively) • Franchisee possibly is entitled to claim adequate remuneration (even retroactively, but limited by general rules on limitation periods) • Application of employment protection legislation provided franchisor employs more than 10 employees

10. Legal risks and consequences for franchisor Under both German and Dutch laws, when employment protection legislation applies, this has the following consequences: • Strict rules during the employment • Termination protection • Severance payments upon termination of the relationship

11. Do‘s for structuring the franchise agreement Both under German and Dutch laws: • Stipulate that franchisee acts in its own name and on its own account • Stipulate that franchisee is legally and economically independent and bears its own entrepreneurial risk • Different external appearance (e.g. different company name on business cards, stationary etc.) • Franchisee prepares its own turnover and profit calculation or tax balance sheet • Make sure that, upon conclusion of the franchise agreement, franchisee calculates and estimates its own prospective turnover, profits etc.

12. Do‘s for structuring the franchise agreement Specific do‘s under Dutch law: • Contract with BV or legal entity (rechtspersoon) rather than with individual (at least for the employment law consequences) • Ask for a tax ruling from franchisee (the so-called VAR-verklaring) Specific do‘s under German law: • Franchise agreement and franchise manual shall not significantly influence the economically independence of franchisee • Right of the franchisee to influence on the selection of products and services • At least similar design of all franchise agreements for franchisees

13. Dont‘s for structuring franchise agreement Both under German and Dutch laws: • No restrictions on franchisee for taking holidays • No restrictions for franchisee for employment of its own employees • No attendance requirements • No remuneration of franchisee by franchisor Under German law: • No restrictions on opening hours, better formulate as a recommendation

14. Risks of requalification franchisee as employee under German and Dutch law Questions? Katharina Wurm wurm@pfp-legal.de and Tessa de Mönnink demonnink@gmsadvocaten.nl