The Joint-Employer Problem for Franchising - A Report from the Front Lines

Larry Weinberg, Cassels Brock & Blackwell LLP

Larry Weinberg at Cassels Brock & Blackwell discusses different approaches to the franchise business model around the world as well as recent developments in the Canadian franchise market.

Larry Weinberg

For those who follow the franchise industry around the world, the news is mixed. The business of franchising continues to thrive in many if not most Western countries as an established way for a brand owner to grow their business by licensing, to others (ie, the franchisee), the right to use that brand over a period of time, for a fee. Franchising also continues to succeed as a method by which brands can be introduced to new countries, and even as a way of fostering economic development in less advantaged countries. That is because franchising at its core allows know-how to be transferred across borders so that it does not need to be reinvented in a new market. And this success continues, notwithstanding the proliferation of franchise-specific laws that regulate the offering of franchises, and often impose cumbersome pre-sale disclosure requirements on franchisors.

But in various countries around the world, the franchise business model is said to be under legal attack by well-intentioned but ill-informed zealots who want to help franchised businesses’ employees – regardless of whether it hurts the franchise business model, franchisors and the franchisees who create the businesses that employ these people.

This “attack” is being led by pro-labour union groups who characterise franchising as a strategy employed by successful franchisors to intentionally shield themselves from being responsible for paying their franchisees’ employees a fair living wage. Under legal principles that are relatively consistent in common law countries, there has been a long-standing test to determine when someone is directly controlling someone else so as to be seen as the employer of that person. By creating a franchise structure, the franchisor is said to take advantage of that test by structuring the relationship such that the franchisee is the only employer of the franchisee’s employees, and the only person responsible for them. And this franchise structure means that unionisation is more difficult if not impossible to achieve because of the many different employers.

What these advocates for joint-employers appear to not realise is that franchising has, in the post-World War Two era, led to tens of thousands of entrepreneurs being able to build a business for themselves when that would not otherwise have been possible. It has led to the growth of strong recognisable local and worldwide brands, and perhaps millions of employment opportunities. But if they succeed, then the franchise business model may cease to be attractive to the franchisors and the business people who invest in franchising, which will inevitably result in fewer business and employment opportunities. 

In countries such as the United States, Australia and Canada, pro-labour politicians, unions and their allies are advocating for a reassessment of the legal nature of the franchise and other  relationships they view as similarly motivated, including outsourcing and temporary help agencies. 

Yet this attack on the franchise business model appears to be going in different directions, depending on the country. 

In Australia, the Federal Parliament has now passed the Fair Work Amendment (Protection of Vulnerable Workers) Act, which seeks to protect employees by extending potential liability to franchisors for employment law breaches by franchisees. The government suggests that liability is not automatic, but will arise where the franchisor “knew or could reasonably be expected to have known that the contravention by the franchisee entity would occur, or a contravention of the same or similar character was likely to occur”, subject to a defence that the responsible franchisor employed reasonable steps to prevent the breach. The franchise industry’s attempts in Australia to temper this law have so far been unsuccessful, as arguably it will apply to most if not all franchisors because of the usual level of control that a franchisor exerts over their franchisees to protect the use of the brand.

In the United States, both at the federal level and in many states, there is ongoing political and judicial conflict on this issue. A number of years ago, the Federal National Labor Relations Board introduced new policies to change the legal test for finding someone a joint-employer, swayed by pro-labour groups that this was the best way to protect employees and better their situation. To counter these administrative moves, advocates for franchising have intervened in court cases, lobbied their local lawmakers, and introduced Federal legislation, including a Bill called the Save Local Business Act, intended as a legislative correction by enshrining in law the longstanding legal test for joint-employer. Similar battle lines are being drawn in various US states as well. It is too early to tell exactly how this will resolve itself. 

In Canada, however, the battle over joint-employer between business and labour groups has for the time being resolved itself in favour of the franchise business model and small business owners. This all took place in the context of the Ontario Ministry of Labour’s Changing Workplaces Review, a review of both employment and labour relations laws in Ontario, Canada’s most populated province. This review was conducted over a period of two years. So success was not overnight, and it was long in doubt.

In 2016, and after receiving a host of submissions from pro-labour and business groups, a panel of special advisers to the Changing Workplaces Review released an interim report discussing policy options on how to possibly amend the province’s Labour Relations Act 1995 (LRA) and the Employment Standards Act 2000 (ESA), both of which would have had significant implications for franchisors and franchisees if passed into law.

For the purposes of understanding the nature and scope of the interim report, it should be recalled that the terms of reference given to the special advisers included the following:

The Changing Workplaces Review will consider the broader issues affecting the workplace … In particular, the Special Advisors will seek to determine what changes, if any, should be made… in light of the changing nature of the workforce, the workplace, and the economy itself, particularly in light of relevant trends and factors operating on our society, including, globalization, trade liberalization, technological change, the growth of the service sector, and changes in the prevalence and characteristics of standard employment relationships.

The interim report was created so that the special advisers could table certain policy options that were submitted to them over the course of their deliberations. Throughout the interim report they discussed ways in which the LRA and ESA may be amended in many areas, including on the issue of joint-employer. 

Most of the areas covered were of interest to any business in Ontario. However, a number of policy options outlined were of special concern to both franchisors and franchisees, because if enacted, they would have the effect of fundamentally and detrimentally altering the relationship between franchisors, franchisees, and the employees of franchisees.

While the special advisers did mention the status quo as one option, the balance of the discussion suggested the special advisers’ viewed that the close relationship between franchisors and franchisees warranted classifying both parties as joint-employers of the franchisees’ employees. For this reason, the interim report suggested that franchisors may warrant being forced to collectively bargain on behalf of all of its franchisees’ employees for labour relations purposes. Additionally, the interim report suggested that franchisors should perhaps be jointly liable for their franchisees’ employment violations under the ESA, which would likely include for instance, liability for such things as unpaid overtime. 

The impact of the release of the interim report served as a “wake up” call to the franchise business community, and other business groups, as if enacted into law, it was understood that the impact on franchising would be immense. 

For instance, passage of what the special advisers were advocating would ultimately cause franchisors to provide less support to franchisees in order to minimise the risk of being considered “joint-employers” or part of a multi-location bargaining model. Or they would have forced franchisors to forgo franchising altogether, in light of the responsibility they would have had to assume for franchisee employees. Additionally, it would also remove the franchisees’ ability to act independently from the franchisor, which is one of the primary benefits of the franchise business model. 

In the consultation period that followed the interim report’s release, the Canadian Franchise Association (CFA, the main trade association in Canada) enlisted member franchisors and lawyers (including the author) to advocate on behalf of the franchise business model. The CFA and member franchisors were even able to motivate franchisees to speak up, as this was an issue that unified both franchisors and franchisees. The consultation period involved many meetings between the CFA, other industry groups, and the special advisers, as well as significant lobbying efforts of the Ontario government by the CFA and large franchisor companies who warned that business in Ontario would suffer if these changes became law.

The anticipated Changing Workplaces Review final report was released in May 2017. The final report delivered a combination of good and bad news for franchisors and franchisees.

While the final report explicitly rejected the implementation of a new joint-employer status for franchisors, it strongly promoted the need for more regimented unionisation and collective bargaining for employees of Ontario franchisees operating under the same brand.

The final report did not propose any legislative amendment to automatically qualify franchisors as joint-employers. While the special advisers considered the appeal of adopting a new legal test, they ultimately concluded that a new legislative test would be controversial and unclear in its application. The special advisers suggested that the issue should, as is the case today, be determined on a factual basis using the existing and long-standing test. In some cases, and as was always the case, franchisors could be found on the existing law to be related employers with a franchisee. However most franchisors need not worry as they now structure their franchise systems to avoid such a finding.

While the joint-employer issue was a victory for franchisors, the special advisers noted concerns with structural weaknesses in labour relations legislation as it pertained to collective bargaining. This applies to franchisors and franchisees because employees in a franchise operation are now restricted to bargaining in each franchise location separately.

Within weeks of the final report, and reflecting the political reality of upsetting large, sometimes-multinational, franchisors,and franchised small business owners throughout the province, the Ontario government announced those legislative changes it was prepared to act on. While the number of changes are many, the government chose not to single out franchising for separate treatment.

So, in keeping with the final report, Ontario will not be moving forward with deemed joint or common employer status for franchisors. And contrary to the recommendations in the final report, the Ontario government will not be going forward with the recommendation that independent unrelated franchisees of one brand in a geographical area can be required to collectively bargain with employees of those multiple franchisees towards one union contract.

However, the government did announce that they plan to make it easier for multiple businesses owned by one employer to be certified as one bargaining unit, which will likely make it easier for those businesses to become unionised. This can certainly affect multi-unit franchisees with locations that are geographically close.

This package of news also included some items problematic to certain businesses that are commonly franchised. For instance, the government plans to make union certification easier in certain targeted industries, namely temporary agency workers, home and community care workers, and building services workers. Additionally, the government announced plans for enhanced enforcement of the current law on misclassification of employees as independent contractors.

So, at least for the time being, the problem of joint-employer in franchising appears to be solved in Canada, and for the betterment of the franchise business model. While there is no doubt that globalisation, technology and other worldwide changes have made the workplace a more precarious place for employees the answer to helping franchisee employees should not involve destroying the very successful franchise business model.

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