Legal Articles

EPF not applicable on franchisee business with less than 20 employees

Franchise means a permission granted by the manufacturer to the distributor(s) or retailer(s) to sell its product within a specified territory. It is a kind of contract whereby the owner of the business grants permission to another person to carry on a particular business using the granter’s know-how, trade-mark as the grantee’s own business within the overall control of the granter by granting all possible supports to increase the sale of his product or business. Grantor is called, “Franchiser” and the grantee is called, “Franchisee”. However, he franchisee may carry on his other business simultaneously with the business of the franchiser. The franchiser expands his business and the franchisee expects to receive a good turnover with lesser risk of loss. A report reveals that the Indian Franchising Industry is growing at 30 to 35 per cent every year. Though over 50 percent of the franchising is in the retail sector, other areas that are using evolved franchising practices now are education, health, beauty, food, beverages and real estate. Etc. however, there are franchising opportunities in business services such as HR practices, house – keeping services and documentation services.

A question arises as to whether a franchisee employing less than 20 employees. A latest judgment of the Division Bench of Kerala High court has set this controversy at rest after 15 years when a franchisee has employed only seven employed but was sought to be covered under the Employees’ Provident Funds & MP Act since the granter of the Franchise to the Franchisee was covered.

The factual matter revealed that the appellant i.e Professional Couriers with its registered office at Mumbai contracts with a person in Kerala to let him operate as its franchisee in one District. That franchise, in turn, appoints agents in that district so that the courier have a network of people to effectively carry out the courier business. Those agents engage their workforce to assist them. The relationship between the franchisee and the agents, on the one hand, and that between the franchisee and the workmen engaged by the agents, on the other, fall for consideration in this case. In terms of the Employees’ Provision Act, 1952, should we treat the agents as the franchisee’s branches or units?

On 07.11.2002, the Assistant Provident Fund Commissioner, the second respondent, directed the franchisee to produce records of its establishment, including “all braches”. Though the franchisee sought time to produce the documents asked for, the Assistant Commissioner, besides refusing to grant time, passed an order on 2nd January, 2003, holding that the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (the EPF Act) will apply to the franchisee’s establishment. The Assistant Commissioner found that the franchisee had employed fewer than 20 persons (to be precise seven). He allotted a code number to the franchisee treating the agents as the branches.

In an appeal, the EPF Appellate Tribunal upheld the order of the APFO. The writ petition as filed by the appellant has also been dismissed hence writ appeal has been filed before the Kerala High Court.

While allowing the appeal in Professional Courier vs. EPF Appellate Tribunal & Another, the Division Bench on 23rd May, 2017 has held that franchising is a relatively new business phenomenon still statutorily unoccupied, at least, in India. Indeed, gone are the days of conventional business. Time and technology have given new impetus to commerce: it is borderless, amorphous, and protean. Business is as much real as it is virtual. Any given business may have various stages, and each stage may involve specialization. Producing, say, an automobile under one roof, homogenously, by one business enterprise, is almost passé. Accordingly, the arrangement did not amount to unity of owner, management and control are functional integrality therefore, the order of the APFC and the order of the EPF Appellate Tribunal and judgment of learned Single Judge cannot be sustained. The Court observed that it is a basic principle that the term ‘functional integrality’ means it must be functional interdependence that one unit cannot exist conveniently and reasonably without the other. Also two entities, one selling the product of other, cannot be clubbed together, if they remain independent and so long as one does not act as façade to conceal or camouflage its interdependence on the other. In order to find out the true relation between the parts, branches, units, etc. unity of ownership, unity of management & control, unity of finance, unity of employment and unity of functional integrality are, perhaps, the factors to be determined with conclusion that an industry may spawn many tertiary industries, which supply to the principal industry and sustain themselves thus. Once the principal industry ceases, the tertiary ones will perish or may diversify. It is not inter-dependence; at best, a unilateral dependence – the latter cannot survive without the former, but the converse cannot be true. This arrangement does not amount to unity of ownership, management and control; unity of employment and conditions of service; functional integrality; general unity of purpose. None whatsoever. From the above discussion, we hold that the franchisee’s workforce has not crossed 20; its agents cannot be treated as its branches or units.

Source: Business Manager

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