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To Control or Not to Control? Hidden Employment Liabilities for Franchisors

To Control or Not to Control? Hidden Employment Liabilities for Franchisors

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Posted October 16, 2020

The intersection of franchise and employment law in Ontario is worthy of comment. This intersection does not gain much attention and, if ignored, can lead to significant liability for franchisors. This liability primarily stems from two employee protections.

The first protection is the combined “related” and “common” employer doctrine. In Ontario, under both the Labour Relations Act, 1995 and the Employment Standards Act, 2000 (“ESA”), a franchisor can be found to be “related” to another employer. Therefore, said franchisor could be forced to share the liability for statutory employee protections such as vacation pay, termination and severance pay, and collective bargaining obligations. This means that franchisors can technically be found liable for the statutory entitlements of their franchisee’s employees. When determining whether a franchisor is liable in these circumstances, courts and tribunals undertake a complex assessment. However, a key principle is determining how much control a franchisor assumes over the franchisee’s business and its employees. Generally, the more control a franchisor takes over key aspects of a franchisee’s business, the more likely they will be found to be a related employer.

Additionally, at common law, a franchisor can be found to be a “common” employer. This is a concept similar to the “related” employer doctrine, but can lead to much higher liabilities for the franchisor. Where employment contracts do not validly limit employees’ entitlements to statutory minimums, said employees’ rights are determined by the common law. The common law is far more generous when compensating employees upon termination than provincial statutes. Therefore, if a franchisor is found to be a common employer under the common law, they could face hefty payouts upon the franchisee terminating the employment of any of their employees. The assessment to determine whether a franchisor is a common employer is governed by the “fundamental control test.” Under this test, a court would assess the indicia outlined in York Condominium Corp., [1977] OLRB Rep. Oct. 645 (“York“) and Downtown Eatery (1993) Ltd. v. Ontario, 2001 CanLII 8538 (ON CA), to see whether the franchisor ultimately controls the franchisee’s manner of performing work, remuneration of employees, imposition of discipline, and ability to hire and fire workers. Importantly, perception of who the employer is and the intention of parties to enter an employer-employee relationship are also important factors under this test.

It is crucial to note that application of the common employer doctrine to franchises is actively being litigated in British Columbia (“BC”), in relation to unionized employees. Most notably, the Canadian Franchise Association, as an intervenor, has requested a reconsideration of the BC Labour Relations Board decision, in Sobeys v. UFCWI, which found unionized employees of 7 franchised locations of Freshco to also be employees of Sobeys, the lead franchisor. Thus all of these employees were consolidated under one bargaining unit. The outcome of this potential reconsideration is important to look out for.

The second employee protection is the recent development of some franchisees actually being found to be employees of the franchisor, not independent contractors. This is a rare occurrence, but, as described last year in Modern Cleaning Concept v Comité Paritaire, 2019 SCC 28 (“Modern”), is a real possibility faced by franchisors who attempt to limit their liability through controlling the contracts given to their franchisees. If a franchisor takes complete control over the financial risks and gains involved in their franchise agreements, they run the risk of being identified as their franchisee’s employer. This would instantly require the franchisor to abide by statutory employee entitlements, and potentially common law protections – leading to significant liability.  Importantly, the decision in Modern rested upon an expansive definition of “employee” found within Quebec legislation. However, the ESA also has a very open definition of “employee” and is regularly interpreted liberally in favour of employees. Thus, it is likely that Modern could gain traction in Ontario.

The intricacies of how employment and franchise law coincide are important to understand, but they can get quite complex. If you feel that these areas may be affecting your situation, it is crucial to speak to qualified counsel who have knowledge of both franchise and employment law.

Thank you to Articling Student Filip Szadurski for writing this blog.  For more information, please contact Colleen Hoey, a Partner in the Employment team.  Colleen can be reached at 613-369-0366 or at Colleen.Hoey@mannlawyers.com.

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