United States: Franchise & Distribution News, Number 2 - April 2016


by Kathy Le

Ontario restaurants, bars and other businesses with employees who receive some of their pay through tips and gratuities will face new laws governing how these tips are collected and distributed to employees beginning this summer. The regulations have yet to be developed, but the new laws will take effect on June 10, 2016.

Under Bill 12, An Act to Amend the Employment Standards Act, 2000 With Respect to Tips and Other Gratuities (Bill 12) (passed in December 2015) an employer will be prohibited from withholding, deducting, or collecting tips or other gratuities from an employee unless authorized to do so under the Employment Standards Act, 2000 (ESA). Bill 12 defines "tip or other gratuity" as:

  1. a payment voluntarily made to or left for an employee by a customer such that a reasonable person would likely infer that the customer intended that the payment would be kept by the employee or employees;
  2. a payment voluntarily made to an employer by a customer such that a reasonable person would likely infer that the customer intended that the payment would be redistributed to an employee or employees;
  3. a service charge or similar charge imposed by an employer such that a reasonable person would likely infer that the customer intended that the payment would be redistributed to an employee or employees; and
  4. such other payments as may be prescribed.

In other words, if a customer makes a voluntary payment that a reasonable person would likely infer was intended for employees, then the payment will constitute a "tip or other gratuity" under Ontario law, regardless of whether payment is made by the customer to the employee, to the employer, or as part of a service charge levied by the employer.

The method of payment also does not impact whether a payment constitutes a "tip or other gratuity." A voluntary payment made by credit card will constitute a "tip or other gratuity" if a reasonable person would likely infer that the payment was intended for employees. The exemption for charges relating to the method of payment will likely apply only to credit card service charges, and only if such charges are prescribed by regulation.

One exception or authorization is "pooling", under which an employer may withhold, deduct, or collect tips or other gratuities if it redistributes such tips or other gratuities to some or all of its employees. Even this exception, however, has limitations on the employees that can share pooled tips and other gratuities. For instance, an employer, or a director or shareholder of an employer, is prohibited from sharing in tips or other gratuities unless such person regularly performs, to a substantial degree, the same work performed by the employees who share in the redistribution, or employees of a different employer in the same industry who commonly receive or share in tips or other gratuities. In addition, for an employer to share in the pooled tips and gratuities, the employer must also be a sole proprietor or a partner in a partnership.

Other exceptions include authorization through Ontario or federal legislation or by a court order.


If an employer violates any of the prohibitions, the amount withheld, deducted or collected becomes a debt owing to the employee and is enforceable under the ESA as if it were wages owing to the employee.

Collective Agreements

If an employer is party to a collective agreement that is in effect as of June 10, 2016 and includes provisions addressing the treatment of employee tips or other gratuities that conflicts with Bill 12, the provisions of the collective agreement prevail until a new or renewed collective agreement comes into effect. If the collective agreement is made or renewed on or after June 10, 2016, Bill 12 will prevail over the provisions of the collective agreement.

Going Forward

As we continue to monitor this development, employers should review their existing tips and gratuities policies, including any applicable collective agreement provisions.


by Kimberly Asnani

In Ontario, statutory employment standards are established by the Employment Standards Act, 2000 (ESA) and enforced by the Ministry of Labour (Ministry) through its Employment Standards Program. The Ministry also:

  1. provides information and education to employers and employees to aid in compliance;
  2. investigates possible violations; and
  3. resolves complaints.

Most employees and employers in Ontario are governed by the ESA, with certain exceptions including, among other things, employees and employers in sectors that fall under federal jurisdiction (e.g. airlines, banks, radio etc.). The Ministry has a Special Rule Tool that can be used to determine if a particular industry is governed by the ESA. If an employer's industry is governed by the ESA, then it is important to ensure that such employer is in compliance with the ESA, as the consequences of failing to do so may be harsh.

In some cases, Employment Standard Officers may require an employer, on notice, to conduct a self-audit of their records, practices, or both, to determine whether they are in compliance with the ESA and its regulations. An employer is required to report all self-audit findings to such Employment Standard Officer. A self-audit puts an employer in the position of being an inspector and may ultimately result in the employer having to disclose incriminating evidence to the government.

Franchise clients interested in learning more about the ESA's self-audit provisions should download "The Ontario Employment Standards Act Self-Audit Manual" (Manual), prepared by employment lawyers from Dickinson Wright's Toronto office. The Manual serves as guide to the self-audit process for both Canadian and American employers. The Manual also provides clear information about how to best ensure that an employer company is in compliance with its employer obligations under the ESA and avoid any surprises during the self-audit. For example, the Manual provides practice tips for employers with respect to keeping employee records and summarizes the rules relating to wages, deductions from wages, workable hours, eating periods and breaks, vacation, overtime, minimum wage, and termination.

To receive an electronic copy of the Manual, please contact us.


by Ned Levitt

The Quebec Court of Appeal's April 15, 2015 decision is now the last word in a landmark case brought by 21 Dunkin' Donuts Quebec franchisees against their franchisor, Dunkin' Brands Canada Ltd. On March 17, 2016, the Supreme Court of Canada dismissed, without reasons, the franchisor's application for leave to appeal the Quebec Court of Appeal decision. The Court of Appeal had affirmed the lower court's decision, which found for the franchisees and allowed them to terminate their leases and franchise agreements, annulled their releases and awarded them a total of $16,407,143 in damages. The Court of Appeal did, however, allow the franchisor's cross claims for $899,528 and $249,316 and reduced the global damages against the franchisor to $10,908,513.

While it can be argued that this case was decided on some atypical wording in the Dunkin' Donuts franchise agreements, the Court's extremely strong language regarding the implied obligations of franchisors in how they manage their systems, fend off competitors and deal with their franchisees, stands. Such language will no doubt be brought up in future Quebec franchise cases and may, one day, become part of the test regarding franchisor conduct. If that happens in Quebec, or even if it does not happen there, it may happen in the common law provinces in Canada based upon the Quebec Court's analysis.

For more on this case, please refer to our earlier article Dunkin' Donut.


by Andrae Marrocco

The answer is that it depends. The Ontario Superior Court of Justice considered the matter in 2313103 Ontario Inc. et al v JM Food Services Ltd. et al. in the context of whether the shareholders of the corporate franchisee can invoke the statutory rights afforded to franchisees under the Arthur Wishart Act (Franchise Disclosure), 2000 (Ontario) ("Act").

The Court ruled that unless the shareholders of the corporate franchisee can produce evidence to justify that they were treated as one entity for the purposes of franchise obligations, or that the franchise was "granted" to them, then they have no direct rights and remedies, and are restricted to those found in corporate legislation (ie as shareholders of a corporate entity).

The brief facts of the case are as follows: Three individuals (the aggrieved parties) incorporated 2313103 Ontario Inc. (together the "Plaintiffs"). The corporate Plaintiff and JM Food Services Ltd. ("Defendant" and franchisor), as shareholders, equally invested in F.S. Food Services Ontario Inc. ("FS") to act as master franchisee of the Defendant and to operate the Defendant's pizza stores in Ontario.

The Defendant's pizza stores did not fare well, and FS shortly thereafter was unable to continue. The three individuals abandoned their operational roles with FS and the Plaintiffs sought, among other things, rescission of the master franchise agreement between FS and the Defendant. The Defendant argued the Plaintiffs lacked standing on the basis that none of the Plaintiffs were "franchisees" (within the meaning of the Act) under the master franchise agreement and that FS was the franchisee.

The Court refused to recognize the Plaintiffs' claim based on a number of findings:

  1. the master franchise (the agreement and other documents) was clearly granted to FS as the franchisee;
  2. there was no evidence proffered showing that the Plaintiffs had taken on any obligations under the master franchise agreement (ie such as guaranteeing any of the ongoing obligations of FS); and
  3. the Plaintiffs failed to demonstrate that the franchise was granted to any one of them in the sense of a sale or disposition, and there was no basis to argue multiple instances of such grant.

Ultimately, the Court found that the Plaintiffs were not "franchisees" within the meaning of the Act. Any claim by the Plaintiffs ought to have been brought as a derivative action under corporate legislation. It was inappropriate to characterize the Plaintiffs as "franchisees" under the Act by virtue of their equity ownership in FS. Such characterization would be akin to creating a new class of "franchisee's associate" under the Act.

Although decided on the circumstances, the above case demonstrates the need to draft a franchise agreement in a manner that makes it clear whether the shareholders of a corporate franchisee are intended to be "franchisees" (and thereby have recourse to the rights under franchise legislation). Additionally, it appears from the reasoning of the case, that if shareholders (of a corporate franchisee) are taking on responsibility and obligations under the agreement, then this will militate in favour of such shareholders potentially being franchisees for the purposes of the Act. Clear drafting can go a long way to protecting franchisors from that presumption.


by Paul Fransway

Joint Employer Liability

One of the recent concerns for both franchisors and franchisees in the US has been the uncertainty created by regulatory efforts to have franchisors held liable as a "joint employer" of the employees of their franchisees. Most prominent of these efforts has been the National Labor Relations Board's ("NLRB") actions asserting that McDonald's is a joint employer of its franchisees' employees. This concern has arisen because of the change in the 40-year old standard applied by the NLRB for determining when a joint employer relationship exists, including the possibility that a finding of joint employer status can occur even if there is "indirect" control by the franchisor, and even if this possible indirect control is not exercised. Considering that a standardized consumer experience is the primary goal of franchised systems, and that indirect controls are common in franchise operations, the risks to the franchise model are obvious.

The Michigan Legislature Steps In

Michigan has taken steps to limit franchisor exposure by amending its statutes to provide that a franchisee is the sole employer of the workers paid by the franchisee or to whom a franchisee provides a benefit plan unless the franchise agreement provides to the contrary. The amendments to the Michigan Franchise Investment Law (MFIL) were part of six bills passed and signed into law to clarify the status of franchise employees. The bills also modified the definition of the term "employer" in the Michigan Employment Security Act, the Workforce Opportunity Wage Act, the Michigan Occupational Safety & Health Act, and the Payment of Wages and Fringe Benefits Act. These amendments include a provision in the Michigan Worker's Disability Compensation Act excluding joint employer status unless "(t)he franchisee and franchisor share in the determination of or codetermine the matters governing the essential terms and conditions of the employee's employment" and ". . . both directly and immediately control matters relating to the employment relationship, such as hiring, firing, discipline, supervision, and direction." The amendments to the MFIL and the Worker's Compensation Act were effective on March 22, 2016. The effective date for the other statutory changes is May 23, 2016.

Things to do now:

  1. Michigan franchisors should consider amending their franchise agreements to clearly provide that the franchisee is the sole employer of the workers that the franchisee pays or to whom they provide benefits to the maximum extent permitted under Michigan law.
  2. All franchisors should review their franchise agreements and consider removing any provisions that are unnecessary or that may result in a finding of indirect control over franchisee employees. This is particularly important with respect to the employment relationship or the day to day activities of the franchise employees.
  3. Franchisors should also review their operations manuals and documents that they provide to franchisees to remove any "mandatory" compliance language for issues that are not essential to the business model. Franchisors should also avoid directing franchisees or franchise employees or engaging in any course of dealing that could support a finding that the franchisor has "indirect" control over the franchisee's employees.
  4. Franchisors should consult legal counsel familiar with the intersection of employment law and franchise operations to assist with document review and protective measures in order to limit liability.


by Andrae Marrocco

Most franchise agreements include a non-competition covenant preventing a franchisee from competing with the franchisor during the term, and in many cases after the term of the agreement. Ontario courts have generally enforced non-competition covenants, acknowledging the potential harm to a franchisor's goodwill, and the integrity of the franchisor's system, in circumstances where non-competition covenants that are reasonable in scope and time are not enforced.

Interestingly, the case of MEDIchair LP v DME Medequip Inc. provides an example of circumstances under which an Ontario court will not enforce a non-competition covenant. The Ontario Court of Appeal refused to enforce the non-competition covenant on the grounds that the franchisor had no intention of opening another franchise store in the protected geographic area. The court cautioned that non-competition covenants can serve only to protect "the legitimate interest of the franchisor" and cannot extend beyond that. The typical approach and considerations were not warranted in circumstances where the franchisor did not intend to operate in the relevant region post-termination – and thereby essentially concluding that the franchisor has no legitimate interest to protect.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions