19th February 2025 ❘

Franchisee Legal Insights: TUPE and employer obligations – Are you clued up?

TUPE and employer obligations

Franchisee Legal Insights: TUPE and employer obligations – Are you clued up?

Our Franchising team has put together a series of news pieces on the Franchising process and we’ll be sharing these over the coming months.  We continue the series with this feature on TUPE, written in collaboration with our Employment team…Are you clued up on TUPE and employer obligations?

If you are thinking of franchising, a key first step is creating a franchise agreement setting out the terms of the business relationship and the rights which will be granted. This will provide a centralised document which will give useful guidance to both parties in the event of a dispute. Whilst franchising can be advantageous for scaling up businesses, it can also come with employment law obligations which all prospective franchisors and franchisees should be aware of, such as those under TUPE…

What is TUPE? Does TUPE apply to franchise agreements?

The Transfer of Undertakings Regulations 2006 (TUPE) offers protection for employees where there is a “relevant transfer,” which means either or both: a business transfer or a service provision change.

A business transfer is where there is a transfer of a business, undertaking or part of a business where there is a transfer of an economic entity that retains its identity following the transfer. A service provision change is where a company or client engages a contractor to do work on their behalf and decides to reassign the contract elsewhere or bring the work in house. The effect of TUPE entitles employees to automatically transfer from one employer to another, with their terms of employment and continuity of service intact, meaning the new employer inherits the obligations of its predecessor and the employee remains on their existing terms of employment.

TUPE will apply where an existing franchise is taken over by a new franchise owner…

The case of LMC Drains Ltd v Waugh [1991] 3 CMLR 172, confirmed that TUPE applies to the assignment of franchises i.e. every time the licence is re-assigned to a new owner, the TUPE regulations apply. In this case, the Employment Appeal Tribunal held that an employee who had transferred between multiple franchises as a result of various re-assignments of the licence did have the requisite length of service to bring an unfair dismissal claim as he had retained his continuity of employment across each assignment by virtue of the automatic transfer principle under TUPE.

While this case was decided under the old TUPE Regulations, the principles still apply under the new regulations.

What is the effect of TUPE on my transfer?

As a hypothetical example, consider there are a number of hairdressers under the company ‘Haircareco.’ There are currently seven sites which are run as franchises and the business is looking to create another site. The business approaches another hairdresser, ‘Cuts co.’ and they agree to become another franchise.

When the franchise agreement is created, ‘Cuts co.’  adopt the business model and branding of ‘Haircareco.’ and both parties agree a plan for payment of royalties and support, which is inserted into the franchising agreement. At this point, the employees of ‘Cuts co.’ will remain their employees, as it is the franchisee, not the franchisor who is the employer.

If a new business, ‘HC co.’ then decided to buy ‘Cuts co.’ (now trading as ‘Haircareco’ under the franchise agreement), the franchise agreement will be re-assigned to ‘HC co.’ and TUPE would apply. The employee’s contracts of employment will automatically transfer and ‘HC co.’ would be the incoming employer, with ‘Cuts co.’ as the outgoing employer and both would have obligations to satisfy under TUPE during this process or could face litigation and financial liability.

What are my obligations under TUPE as a Franchisee?

The obligations on both incoming and outgoing employers to the franchise are set out under the TUPE regulations. Some of the key obligations are set out here:

There is a duty on both parties to inform and consult appropriate representatives of the affected employees. Employee representatives must be elected fairly and as set out under the TUPE regulations to represent the interests of the affected employees. The duty to consult is triggered where measures are proposed, these can be any changes the new employer intends to make when the affected employees transfer to them. Measures can only be made if the new employer can set out an economic, technical or organisational reason for the change, otherwise any change to the transferring employee’s terms and conditions of employment will be automatically void if the sole or principal reason for the change was the transfer itself. Failure to inform and consult can result in Employment Tribunal claims and each affected employee can be awarded compensation up to 13 weeks’ gross pay.

Further, the original employer must provide the new proposed employer with employee liability information to enable them to fulfil their new obligations. This must be provided within 28 days, or the new employer could take the outgoing employer to the Employment Tribunal where they could face compensatory awards of at least £500 for each employee they are missing information regarding.

Often franchise agreements will contain indemnities protecting the franchisor from any liabilities or losses arising out of or in connection with any of the franchisee’s employees following the transfer of the franchisee’s business/assignment of the licence. It is important that franchisees are aware of their obligations to their employees and the application of TUPE.

Further advice

Overall, when considering TUPE provisions in relation to franchising, all franchisees should ensure they follow their obligations by engaging in meaningful consultation with the current employees, whose obligations they will inherit.

For more information on how you can support your business on TUPE issues, please get in touch and we’ll be happy to advise you.