United States: Moving Forward, Franchisors Should Take A Step Back: How To Avoid The Risk Of Being Labelled A Joint Employer

Last Updated: March 7 2017
Article by Andrae J. Marrocco

Franchisors in the United States are experiencing increased risk of being classified as a joint employer. While there has been extensive discussion about the dangers for franchisors, Canada’s laws appear to be moving toward a similar approach, causing Canadian franchisors to be rightfully nervous about the prospect of assuming the employment-related obligations of their franchisees.

Law

United States

Traditionally, in the United States, if a franchisor exercised “direct and immediate” control over matters essential to the employment terms and conditions of a franchisee’s employees, such as daily tasks, working conditions, hiring and firing, the franchisor was at risk of being considered a joint employer. In more recent decisions of the National Labor Relations Board (“NLRB”), the NLRB has refined its standard of control to include “indirect control” and franchisors that reserve the right to exert control, extending liability to franchisors that may be far removed from their franchisees’ final decision-making.

In evaluating whether a franchisor possesses sufficient control over franchisee employees to qualify as a joint employer, the NLRB will consider whether an employer has exercised control over the terms and conditions of employment indirectly through a franchisee, or whether the franchisor has reserved the right to do so. The NLRB has noted that franchisors may even be found liable as a joint employer if their franchise agreement was drafted to imply control over employment, even if actual control is not exercised.

Canada

Under Canadian common law, where a franchisor and franchisee act “as a single, integrated unit” and a franchisor has effective control over the employees of its franchisee, they may be designated a common employer for the purposes of employment liability. In Ontario, associated or related businesses found to be under common control or direction are considered to be one employer under the Labour Relations Act, 1995 (“LRA”). Similarly, a franchisor may be treated as an employer of its franchisees’ employees under Ontario’s Employment Standards Act, 2000 (“ESA”) if activities are carried on between the franchisor and franchisee with the intent or effect to directly or indirectly avoid liability. In cases involving employee claims under the ESA, Canadian courts and tribunals may look beyond corporate structures and use a “common sense” approach to assess whether the franchise relationship has been structured so as to avoid liability under the ESA.

In March 2016, the Ontario Ministry of Labour (“MOL”) announced a review of the LRA and the ESA that could result in a new joint employer regime potentially similar to the NLRB’s recent approach in the US. In an interim report published on July 26, 2016, the Special Advisors to the MOL presented a range of options for addressing joint employer status that include: (i) expressly excluding franchise relationships from the LRA, (ii) establishing clear statutory criteria for a related employer designation, particularly in a franchise context, or (iii) maintaining the status quo. The MOL has stressed that these options are preliminary and that no conclusions have yet been reached. Further input from stakeholders was sought on the interim report and we expect a final report to be delivered by the Special Advisors to the MOL in February, 2017.

Implications

While franchisors typically reserve the right to exert control over various decision-making aspects of their franchisees’ business, such control may, even as the law currently stands, put Canadian franchisors at risk of being classified as joint employers. A finding of joint employer status can leave franchisors exposed to claims by franchisee employees for unpaid wages, overtime, vacation pay, benefits, termination notice, pay in lieu of notice, severance pay, wrongful and constructive dismissal claims, human rights claims and payroll taxes, as well as increased risk of employee unionization across franchisee lines We will wait and see whether the MOL will introduce shortly further changes to the joint employer model to increase these risks. To the extent changes are made, we expect provinces outside Ontario will take a keen interest and may follow Ontario’s lead.

As the law evolves, one thing is certain - franchisors across Canada must exercise caution in their approach to the franchise relationship and to avoid reserving or exerting control over their franchisees’ business in ways that may trigger the “joint employer” classification. Below is a list of common practices that franchisors should avoid in order to limit their exposure to Canada’s joint employer regime:

Employment terms:

  • Participating in the hiring and firing of its franchisees’ employees or contractors (including requiring franchisor approval prior to the hiring or firing of employees or contractors).
  • Advertising franchisee employment opportunities.
  • Setting compensation programs for franchisee employees.

Conduct with employees:

  • Setting the schedules of franchisee employees.
  • Conducting training programs for franchisee employees.
  • Providing feedback directly to franchisee employees.
  • Limiting the scope of options for franchise uniforms.
  • Participating in essential employment decisions.

Business decisions:

  • Dictating pricing schemes for franchisees.
  • Entering into a co-insured relationship with franchisees.
  • Setting requirements for franchisees to make non-essential repairs or upgrades.

Daily operations:

  • Requiring franchisees to use certain employment software.
  • Setting forth significant operating manuals or practice guides that contain non-essential brand propositions.
  • Creating employee handbooks (if employee handbooks are used, they should be limited in scope).

To limit the risk of being classified as a joint employer, franchisors should reduce the degree of control that they reserve or exercise over their franchisees’ business operations. Dickinson Wright can assist in preparing and reviewing new or existing franchise packages to ensure that they address this risk. Dickinson Wright’s team of franchise lawyers can also provide training to your team regarding techniques to limit your risk.

A delicate balance exists for franchisors between providing sufficient guidance to fulfill their obligations to protect and enhance their brand, while also ensuring this direction does not leave a franchisor liable to a joint employer finding. While ultimately the decision regarding how much control that a franchisor wishes to exert over its franchisees is a business decision, franchisors in Canada should be aware of the implications for failing to take a step back, as Canada’s labour and employment laws move forward under a joint employer regime.

ALBERTA GOVERNMENT TO EXTEND MATURE FRANCHISOR EXEMPTION

Under the Alberta Franchises Act Exemption Regulation, a franchisor is exempt from including financial statements in a disclosure document given to a prospective franchisee if the franchisor meets certain criteria of established size and net worth (the “Mature Franchisor Exemption”). The Alberta government considered removing the Mature Franchisor Exemption but has recently decided to extend it until its next review in 2021. In making such extension, the Alberta government has kept its legislation consistent with other provincial franchise legislation.

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.

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Andrae J. Marrocco
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