Terminating a franchise agreement: beware of employment issues
4/08/2010

It often happens that a franchised business is operated at a specific location under licence from the franchisor. When the agreement is terminated or its duration expires, the franchisor might appoint a new franchisee to conduct the same franchised business at the same location.

When the existing franchise agreement is terminated, the incumbent franchisee might wish to retrench its employees based on the fact that its business is closing down. However, the Labour Court recently handed down a decision which has significant implications in such circumstances.

The matter in question is Adams Sanders v Cell C Provider Company (Pty) Limited, Johannes Smith / P E Rack 4100C, Advance Worx 119 (Pty) Limited and G-Worx 12 (Pty) Limited. The franchisor, Cell C, terminated existing franchise agreements in respect of franchised stores in the Eastern Cape. The stores were operated by Advance Worx 119 (Pty) Limited and G-Worx 12 (“the existing franchisees”). A new party, Smith / PE Racks 4100 C (“the new franchisee”), was granted the rights to operate the franchised business at the specific locations in the future.

Mr Sanders, who was the general manager of the two franchised businesses, approached the Labour Court for an order directing that the new franchisee’s takeover of the existing franchisees’ businesses was a transfer of businesses as going concerns in terms of Section 197 of the Labour Relations Act, 1995. The Court agreed with Mr Sanders and ordered that Mr Sanders’ employment was automatically transferred from the existing franchisees to the new franchisee, on the same terms and conditions of employment.

On a literal interpretation, it does not seem that there was a transfer of business, since the franchise agreement with the existing franchisees was merely terminated and a fresh franchise agreement was concluded with the new franchisee. There was no sale of business transaction between the existing franchisees and the new franchisee. However, the Court reasoned that the protection afforded to employees by the Labour Relations Act would be jettisoned if a literal interpretation of the circumstances is followed. It is also interesting to note that the Court interpreted the franchisor’s franchise operations as a means of outsourcing its business to franchisees who conduct business on its behalf.

In view of this judgment, parties to a franchise agreement should be careful when terminating the agreement if a new franchisee will be appointed to conduct the same business. Depending on the facts, the new franchisee might be obliged to take over the existing franchisee’s employees. However, the circumstances of each matter are different. It would thus be best to obtain professional advice in order to determine whether the provisions of the Labour Relations Act might apply in a particular situation.
Danie Strachan
Senior Associate
danie-s@adamsadams.co.za