How concerned should franchisors be about the recent trend of attempted claims against franchisors over misconduct by their franchisees, and which areas of law pose the greatest risk?
1 Why are claimants suing franchisors? Why not sue the franchisee?
The usual reason for targeting a franchisor rather than a franchisee is that, as a major corporate, the franchisor is likely to have deeper pockets - especially in cases where franchisees are significantly smaller businesses, with fewer resources at their disposal. In some cases, claimants may take the view that franchisors will have a stronger incentive to avoid bad publicity and therefore be more inclined to consider a settlement, even in cases where the legal merits of the claim are doubtful.
There is also some evidence of claimant law firms showing an increasing interest in group litigation claims against large corporates (often with the aim in mind of securing the backing of litigation funders). Alongside this, a number of campaign groups are pursuing a strategy of bringing legal claims, often with a relatively novel basis, with a view to holding large corporates to account over issues such as their environmental record; see for example the claim brought by Client Earth against directors of Shell plc in relation to climate change issues. Although Client Earth was ultimately refused permission to proceed with its claim (which was on a relatively novel basis), the litigation did attract significant publicity. This in turn has increased the profile of Client Earth and may have helped it to raise additional funds to continue its work in future.
Has anything changed legally to increase franchisors' exposure?
Yes and no. There continues to be surprisingly little English case law on the extent to which a franchisor can be held liable for misconduct of its franchisees. Various legal bases for franchisor liability have been suggested over the years, ranging from tort/negligence through to agency and vicarious liability – but it remains unclear how receptive the English courts will be to such arguments (and this briefing does not take any particular view on the merits of these legal bases).
What has changed, however, is that larger corporates – including franchisors - are increasingly obliged to publish statements about steps they are taking to address issues such as modern slavery or climate change (see below). This may create additional scope for claims that the franchisor owes a duty to third parties who may be adversely affected if it fails to live up to its public statements (and that even if no general duty is owed, the fact that the franchisor has made public commitments to take certain actions or to prevent certain types of harm may be cited as evidence that it has voluntarily assumed such a duty to the claimants). Again, we express no view on whether such claims are well-founded – our point is simply that, however speculative they may be, there is scope for them to be brought.
The remainder of this briefing highlights some of the areas of law where franchisors may be exposed to claims for misconduct by their franchisees.
2 Risks of claims from franchisees' staff
Whilst the franchisee will normally be liable for treatment of its own staff, there are several areas where staff could also look to pursue the franchisor.
Employment law claims
Employment law claims would ordinarily be brought against the franchisee as employer. However, claimants wishing to pursue the franchisor might allege that it has failed to set up and/or maintain a "safe" franchise infrastructure to protect franchisees' employees against harassment or discrimination. Also, regardless of whether any individual worker brings a claim, the Equality and Human Rights Commission (EHRC) may take action against a franchisor if it becomes aware of suspected breaches of discrimination or harassment laws across different franchises. This could take the form of a legally binding agreement with the EHRC under which the franchisor commits to take certain steps to reduce the risk of harassment in franchises. These steps could include enhancing policies, delivering training and continuous monitoring to ensure improvements.
Expansion of harassment liability
The Employment Rights Bill, which is currently progressing through Parliament, will introduce new employer liability for harassment of staff by third parties, such as customers (likely from 2026). This will cover harassment of any kind (not just sexual harassment, as this form of employer liability is already in force), such as harassment related to race or sexual orientation. Where staff are dealing directly with members of the public on a daily basis, such as in the hospitality sector, this will mean a greater likelihood of third party harassment claims, and the EHRC will be able to take action if it believes that a franchisor and/or its franchisees are not taking adequate steps to protect its staff. Franchisors will need to ensure that franchisees are prepared for the new third party harassment laws by having appropriate policies, training and complaints procedures in place. As discussed below, the more control that the franchisor seeks the more it is potentially exposed to liability, but this must be balanced against the risk of EHRC enforcement action for failing to take appropriate harassment prevention measures.
Modern slavery claims
Modern slavery may occur in a number of different ways that has the potential to create legal liabilities from a corporate (and therefore franchisor) perspective. For example, organised crime gangs engaged in people trafficking may force their victims to work for UK businesses and to hand over their salaries received from employment by such businesses to gang members. Sometimes the business may be genuinely unaware that the staff are victims of modern slavery – but the extent to which companies can "turn a blind eye" to slavery and human trafficking occurring in their business or supply chains continues to be considered, particularly in instances where important "red flags" may have been missed. Examples would include requests to pay several individuals' salaries into a single bank account or where gang members fraudulently assume the victims' identity for the purpose of a job interview.
How might a franchisor be held liable for modern slavery?
Victims of modern slavery could bring a civil action against a franchisor on the basis that the latter owed them a duty of care to ensure that its franchisees were taking reasonable steps to prevent modern slavery. The commitments in the franchisor's Modern Slavery Act statement or other ESG-related reports/marketing materials might be cited in support of the existence of such a duty of care (UK legislation requires organisations conducting business in the UK with a global revenue exceeding £36m to publish an annual statement outlining the steps they have taken to prevent modern slavery from occurring in their business or supply chains). Whether the courts would uphold such a claim remains to be seen, but claimants are already being quite creative in finding ways to take legal action in respect of modern slavery (see for example the recent World Uyghur Congress case). This is particularly so where they wish to pursue a larger corporate entity - for example, the claims against Dyson for alleged forced labour practices and similar human rights abuses at the facilities of one of their Malaysian suppliers, discussed in our most recent briefing.
3 Supply chain risks
Partly to maintain consistent quality and partly to maximise buying power, the franchisor will often require the franchisee to purchase from approved suppliers. Since the franchisor selects those suppliers, it is likely to be regarded as bearing more responsibility than the franchisee in cases where, for example, a supplier's product turns out to be defective or there are modern slavery practices in its supply chain. In particular, franchisors can expect to come under scrutiny if they have failed to spot obvious "red flags" or even turned a blind eye to potential problems.
ESG policies and reporting
The franchisor will also often require franchisees to adhere to policies that it has drawn up in a range of areas, from HR matters through to issues such as efforts to reduce the carbon footprint of the business. As is the case with suppliers, the fact that the franchisor exerts significant control over these areas may lead to it being viewed as a primary target in litigation (in preference to franchisees). In addition, the EU's Corporate Sustainability Due Diligence Directive (CS3D) seeks to oblige certain EU companies and non-EU companies doing business in the EU to identify, prevent, terminate and/or mitigate the actual and potential impacts of their activities on the environment and on human rights abuses. Failure to comply with this – and a growing body of similar national-level "value chain" legislation - could expose companies (including franchisors) to further civil liability and possible damages claims. For further information on the EU's proposals, see: Travers Smith's Sustainability Insights: All aboard the unstoppable omnibus.
4 What can franchisors do?
It is very difficult – and probably impractical and undesirable - for franchisors to exercise constant supervision over each franchisee's compliance with its obligations. Indeed, the more control that the franchisor exercises over its franchisees, the more it may open itself up to claims that it is voluntarily taking on liability. However, the risk of doing nothing to reduce the risk of inappropriate conduct by their franchisees on issues such as sexual harassment or modern slavery is quite high, especially given the potential for significant reputational damage. Given this, our view is that in many instances, franchisors may have to accept that doing nothing is worse than doing something.
What can franchisors do to reduce their exposure?
- Appointing larger professional franchisees may allow
franchisors to insulate themselves to a degree from these risks.
Larger corporate franchisees can be expected to require less
supervision and support and should have the resources and expertise
to carry out compliance checks and ongoing assessments.
Nevertheless, it is still the franchisor's brand that will
suffer damage if the professional franchisee does not behave
appropriately – and if the corporate franchisee uses large
numbers of smaller sub-franchisees, it will be important to ensure
that they are supervising them adequately;
- Reviewing the process for appointing potential franchisees (for
example, are due diligence procedures stringent enough to ensure
the franchisee can uphold the franchisor's corporate
values?);
- Reviewing contractual protections for the franchisor in its
agreements with both franchisees and suppliers;
- Reviewing policies and procedures designed to prevent or
respond to misconduct such as sexual harassment, paying particular
attention to complaints handling;
- Communicating to staff, particularly management of the
franchisee, the importance attached to these matters by the
franchisor;
- Providing appropriate training to staff at the
franchisee;
- Actively monitoring compliance by franchisees on a regular
basis, possibly in combination with more detailed checks carried
out periodically on a smaller cross-section of franchisees;
and
- Appointing a reputable auditor or other independent professional to conduct periodic assessments of franchisees' compliance with relevant policies, particularly on highly sensitive issues such as modern slavery or inappropriate treatment of staff.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
