Franchise business model may constitute ETO reason for dismissal of employees

Posted by Sheilah Mackie on
In the recent joined cases of Meter U Limited v Ackroyd and Meter U Limited v Hardy, the Employment Appeals Tribunal (EAT) considered whether changing the method of providing services from an employed workforce to a franchise model could amount to a legitimate reason for dismissing individuals following a TUPE transfer.

The facts

Meter U Limited (Meter U) provided meter reading services by means of franchisees; it did not directly employ any meter reading staff. The franchisees were usually limited companies (typically owned by individual meter readers).

Following the submission of successful tenders by one of Meter U's main customers, Siemens, to Scottish Power, Siemens sub-contracted the meter reading work it had won from Scottish Power to Meter U. In December 2009, service provision changes under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE Regulations) occurred and the claimants' employment transferred from their respective employers to Meter U.

The claimants' employers were companies who had previously supplied meter reading services to Scottish Power before losing the work to Siemens - G4S Utility Services (UK) Limited and N Power Yorkshire Limited employed the claimants in the Hardy and Ackroyd appeals respectively.

During the consultations carried out as required under the TUPE Regulations, Meter U explained its business model to the transferring employees, offering them the option to establish franchises in order to continue providing meter reading services. Only one employee chose to do so and Meter U terminated the employment of all other transferring employees on grounds of redundancy.

Tribunal decision and grounds of appeal

The employment tribunals dealing with each set of cases initially found that the claimants had been dismissed for a reason relating to the TUPE transfer. Both tribunals held that Meter U had not established "an economic, technical or organisational [ETO] reason entailing changes to the workforce", as required by regulation 7(2) of the TUPE regulations (although their reasons for doing so differed), and the dismissals were therefore "automatically unfair".

In the Hardy case the tribunal found that there had been no reduction in the number of meter readers required, therefore there had been no change to the workforce and consequently no ETO reason that would have allowed redundancies to be made by Meter U.

The tribunal held that the meaning of the word "workforce" in regulation 7(2) must have been intended to encompass everyone working for Meter U, whether as employees, franchisees or otherwise.

In the Ackroyd case, the tribunal took the approach that the TUPE Regulations could not have been intended to have the effect that employment rights would be lost in the circumstances where only a franchise model was on offer after the transfer.

Meter U appealed both decisions. The central issue of the appeal was whether the tribunals' interpretation of the word "workforce" was correct.

EAT decision

The EAT allowed the appeals, finding that Meter U's corporate franchisees should not be included in Meter U's "workforce" and that the dismissals were for an ETO reason entailing changes to the workforce and were for redundancy.

The term "workforce" is not defined in either the TUPE regulations or the European legislation from which it is derived, although it was decided that on a common sense reading of the relevant provisions it should not include limited companies.

The EAT stated that employees of corporate franchises are part of their employer's workforce and not their franchisor's workforce. The franchisees and their employees should not have been included in Meter U's "workforce" when working out whether or not there was a changed requirement for meter reading staff following the transfer, as the franchisees were constituted as limited companies which are separate legal entities and not employees.

A Court of Appeal decision in 1985 established that a change in the identity of the individuals making up a workforce does not constitute a change in the workforce itself, provided that the overall number and function of the employees as a whole remain unchanged.

Applying that decision in the present cases, the EAT found that a change from using individual employees to using corporate franchises to provide meter reading services had led to a reduction in the workforce and that (unless the franchise model was a sham) the claimants' dismissals had been for reason of redundancy.

Since an ETO reason under the TUPE Regulations had been established, the dismissal by Meter U of transferred employees who opted not to become franchisees was not automatically unfair, but was potentially fair by reason of redundancy.

The Ackroyd case has been remitted to its tribunal to determine whether the claimants' dismissals were "fair" within the meaning of the Employment Rights Act 1996 and the Hardy case remitted to determine whether or not the franchise model was as sham and, if not, whether the dismissals were "fair".

It is worth noting that neither tribunal originally found the model to be a sham; the chairman in the Ackroyd said it was "clear that the franchise business model has been in operation for many years and documentation…gives a clear indication that [the] real position is what it says it is."

However, it will be interesting to see if the tribunal does find Meter U's franchise model to be a sham.

Comment

The argument was put forward in the Hardy case that excluding franchisees from the definition of "workforce" would pave the way for "unscrupulous transferees" to implement a bogus franchise model to enable the dismissal of unwanted employees following a transfer.

It is, however, well established that an individual's employment status will be determined by reference to their duties and the relationship with their "employer", rather than by reference to their title or any other label which is given to that relationship. Simply calling an employee a "franchisee" will therefore not be a means of subverting the requirements of the TUPE Regulations.

On the other hand, businesses which do operate a genuine franchise model may find themselves able to dismiss employees legitimately following a TUPE transfer, since it is now confirmed that a change in employment status from employee to corporate franchisee can amount to an ETO reason – the transferred employees being surplus to requirement and so able to be made redundant.

In both cases, the service provision changes arose as a result of successful bidding in competitive tenders. It is possible that the potential risks, costs and complexities associated with TUPE transfers mean that, in certain circumstances, franchised businesses can gain a competitive advantage in outsourcing exercises over those which employ staff directly.

The decision may also assist franchised businesses acquiring another entity whose staff perform the same or similar services to its franchisees. Franchisors who insist that their franchisees operate through limited companies are likely to find it easier, following the acquisition, to reduce staff overheads without breaching the requirements of the TUPE Regulations.

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Sheilah gives her clients practical commercial advice on a range of issues including IP/IT, franchising, data protection and FOI.

Sheilah Mackie
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