Is there a Basis for Equating Franchisees with Employees in Priority Ranking on the Insolvency of Franchisors?

Abstract

This paper presents the current Australian courts’ definitions of employee and independent contractor. It highlights where the franchisee fits, being indistinguishable at times from an employee and at other times from an independent contractor. The paper examines the policy behind insolvency legislation in Australia and queries whether it would be appropriate to accord franchisees specific status in the franchisor’s insolvency; like that enjoyed by employees.

In most situations, the definition is relatively unimportant. The Franchise Agreement, ancillary contracts and the Trade Practices Act 1974 (Cth) regulate the franchisor/ franchisee relationship. If the franchisor becomes insolvent, the failure of the law to keep pace with the franchise business model is bought into sharp focus.

Whereas the employee and the independent contractor have clearly understood rights, enshrined in statute, the franchisee has no specific rights. Unless the franchisee is a creditor of the franchisor, it does not have a right to attend creditors meetings. At its most vulnerable, the franchisee is categorized as an asset or a liability in the insolvent estate.

The franchisor – franchisee relationship, however, has many features that make the franchisee more vulnerable than an employer whose employer becomes insolvent. If the franchisor becomes insolvent, the franchisee may loose the value of sunk investments, the right to occupy premises, and may not be able to free itself from onerous contracts that were only entered into because of its position as a franchisee.