What is the weak link in the chain and who is the boss?

What is the weak link in the chain and who is the boss?

Written by

Osnat Nitay
September 14, 2023

A nationwide chain operates most of its branches through franchisees, where the franchisee is a separate company that is not related to the chain - can any of the employees of a particular franchisee claim to be an employee of the chain and not just the franchisee?

While in the past it was completely clear who employs each employee, in the modern world of employment, sophisticated forms of employment have been created in which the relationship between the business owner and the employee is not always clear. Thus, for example, a situation where an employee is employed by a manpower contractor and then there are two sets of agreements - one between the manpower contractor and the business owner and the other between the manpower contractor and the employee. This method of employment was sometimes used to violate the basic rights of employees and the Labor Courts determined that it is not possible to evade the employer's obligations by using an intermediary as a manpower contractor. Thus, for example, in a particular case discussed at the National Labor Court in August, 2015, the question arose as to whether the employees of a manpower contractor hired by a municipality are employees of the municipality and are entitled to the terms provided to municipal employees, as it is not possible for two employees working side by side to receive different terms because one of them will be deemed a municipal employee and the other an employee of the manpower contractor. The Court examined for each and every employee the tests that examine whether a person is considered an employee of an employer, and found that some of the employees are employees of the municipality despite being employed through a manpower contractor.

An even more interesting issue arises when a chain does not operate stores on its own, but operates in the manner of granting franchisees to open branches that are conducted uniformly as it dictates - there is no dispute that the franchisee is a legal entity separate from the chain and the relationship between it and the chain is contractual, when it manages its business (including the employment of its employees) independently and only subject to the set of agreements with the chain, which seeks to ensure the quality of the services and that its reputation will not be damaged due to the activity of a particular franchisee. Thus, while the franchisee is a separate company that manages the particular branch and also employs the employees directly, the chain's procedures require that the employees look and behave as employees of the chain even though they are not employees of the chain. In a case discussed at the National Labor Court in August, 2023, employees of a franchisee sought to join as a unified trade union against the chain itself in order to improve their employment conditions. The National Labor Court found that it will be possible to compel the chain to conduct collective bargaining on the conditions of the franchisee's employees insofar as the chain has a significant influence on the employment terms of the franchisee's employees. The more joint decisions are made by the chain and the franchisee together on the terms of employment of the employees of the franchisee and the more the chain influences the terms of employment of the employees in practice through the agreements between the chain and the franchisee, which dictate the terms of employment, the more the chain can be deemed a type of employer of the employees. However, in order for such a situation to arise, the level of influence must be significant in such a manner that in practice, the employee's negotiation with the franchisee, who is the direct employer, will actually be fruitless and pointless, as the economic control is de facto with the chain.

In that case, the Court found that the chain is not required to negotiate with the employees of the franchisees in order to create a collective bargaining agreement that applies to them jointly, but this case shows the great importance of using lawyers with experience in the field when drafting the contractual relationship between a chain and its franchisees in order, inter alia , to prevent a situation in which the chain finds itself responsible for the franchisee's obligations, including towards employees, which it had no intention of taking on.