Building a franchise network: safeguarding franchisees’ independence

Turning an existing business into a franchise network requires a new approach to management. Instructions you give your own employees cannot simply be applied unchanged to independent franchisees. They run their own businesses, bear commercial risks and need genuine scope to make decisions. This distinction should be clear in the contract, operations manual and day-to-day working relationship before the first franchisee joins.

1. Independence must be more than a contractual label

Germany has no specific franchise act. Franchise relationships are governed primarily by the general provisions of the German Civil Code (BGB), alongside commercial, competition and antitrust rules where applicable to the arrangement. Where there is doubt about whether a franchisee is genuinely self-employed, employment and social security law tests also come into play.

Section 611a BGB sets out the characteristics of an employment relationship. Key factors include personal dependence, being subject to instructions and having one’s work determined by another party. For social security purposes, Section 7 of Book IV of the German Social Code (SGB IV) identifies working under instructions and integration into the instructing party’s work organisation as indicators of employment. These two assessments should not simply be treated as equivalent.

Calling someone an ‘independent franchisee’ is therefore not conclusive. What matters is an overall assessment that also considers how the relationship operates in practice. Consistent branding and binding quality requirements do not automatically turn a franchise relationship into employment. Problems arise, however, where the arrangement leaves the franchisee with virtually no business decisions of their own.

The European Code of Ethics for Franchising is a self-regulatory instrument, not legislation. It replaces neither this assessment nor a legally sound contract. Before launching a tightly controlled model, seek specialist advice on its employment and social security law implications.

2. Reallocate decisions currently made within your own business

Start by listing the typical decisions you currently make in your own business. Then assign each one to one of three categories: a binding network standard, an independent franchisee decision, or a matter requiring consultation or approval for a justified reason.

Your list might look like this:

• Products, services and branding: Essential product characteristics, safety requirements and correct use of the brand may require binding standards.
• Staff management: Selecting, hiring, scheduling and managing employees are, in principle, the responsibility of each franchisee as their employer.
• Business operations: The franchisee organises delivery of the agreed products or services. Not every internal work process needs head office approval.
• Commercial management: Within lawful contractual constraints, franchisees need to make their own decisions about costs, resources and the development of their businesses.
• Matters requiring consultation or approval: Departures from agreed standards that affect the network’s shared customer promise may justify a clearly limited approval process.

Scrutinise any requirements carried over from your existing role as an employer. Requiring a business to provide service during specified hours is different from head office setting a personal work rota for the franchisee. Requiring head office approval for the franchisee’s holidays is also not readily compatible with running an independent business.

This list does not provide legal clearance. It does, however, reveal where a reasonable standard could become extensive control over an individual’s work.

3. Apply the same boundary in the contract and operations manual

The franchise agreement should specify which requirements are binding and which decisions remain with the franchisee. The operations manual then sets out the agreed procedures in detail. It should not introduce additional instructions that remove discretion expressly guaranteed by the contract.

Ask three questions about each requirement:

1. What specific outcome needs to be secured?
2. Why does this require a binding rule across the network?
3. Can the franchisee decide how to achieve the outcome?

For example, a service business may need to ensure that booked customer appointments are reliably covered. That does not automatically mean head office must decide which days the owner personally works. Start by describing the required outcome and necessary quality standards, rather than prematurely prescribing the owner’s personal working arrangements.

Arrangements for delegation and cover also deserve attention. Clarify whether a qualified business manager may be appointed and, if so, on what objective conditions. Any contractual requirement for the franchisee’s personal involvement should be specifically reviewed, particularly where it is combined with other tight restrictions.

Avoid blanket clauses allowing head office to issue any individual instruction at any time. Have a legal specialist draft the scope and limits of any rights to give instructions.

4. Use day-to-day working practices as the real test

Even a carefully drafted contract offers little protection if head office behaves like an employer in practice. Train everyone who supports franchisees. They should direct requirements to the franchisee’s business, rather than manage its employees as if they were their own staff.

Regularly review actual cases: Who draws up staff rotas? Who makes hiring decisions? Who approves absences? Are recommendations genuinely treated as optional? Does the franchisee need permission even for minor organisational decisions?

Models in which an individual works without employees while being closely integrated into head office processes warrant particular attention. This does not automatically mean the individual lacks self-employed status, but it does call for a careful case-by-case assessment. Where social security status is uncertain, a formal status determination procedure under Section 7a SGB IV through Deutsche Rentenversicherung Bund, the German Federal Pension Insurance institution, may be worth considering.

Practical next step: Before recruiting franchisees, prepare a decision list, check the contract and operations manual against it, and then review how the relationship works in practice. A sound franchise network needs both shared standards and genuinely independent business owners.