Franchise businesses come with their own unique blend of benefits and challenges, but a rarely discussed area is the intersection of franchise law with employment law. In Ontario, franchisors can find themselves facing unexpected employment liabilities if they are not aware of two key employee protections. These protections relate to the concepts of “related” and “common” employer doctrines, and the potential for franchisees to be deemed employees. For franchisors, ignoring these risks could lead to serious financial consequences.
The “Related” and “Common” Employer Doctrine
Ontario’s Labour Relations Act, 1995 and the Employment Standards Act, 2000 (“ESA”) allow for a franchisor to be considered a “related” employer to a franchisee. This relationship means that franchisors could be held liable for certain employee protections and statutory entitlements owed to the franchisee’s employees—such as vacation pay, termination and severance pay, and collective bargaining obligations.
When determining a franchisor’s liability, courts and tribunals conduct a nuanced analysis, focusing primarily on the level of control a franchisor has over the franchisee’s operations and its employees. Generally, if a franchisor exercises significant control over a franchisee’s business operations, the chances of being deemed a related employer increase.
Additionally, under common law, a franchisor can be identified as a “common” employer. This concept is similar to the related employer doctrine but can come with even higher financial obligations. When employment contracts for franchisee employees do not adequately limit entitlements to statutory minimums, these employees may be entitled to common law remedies. Compensation under common law can be significantly higher than what’s mandated by Ontario statutes. A “fundamental control test” is used here, where factors such as control over work performance, pay, disciplinary actions, and hiring and firing decisions are considered. Courts will also weigh the perception of the employment relationship and the intentions of both parties, referencing landmark decisions like York Condominium Corp. and Downtown Eatery (1993) Ltd. v. Ontario.
Franchisees as Employees: A Growing Risk
A more recent development is the possibility of franchisees being classified as employees of the franchisor, rather than as independent contractors. This scenario is rare but real, as illustrated in Modern Cleaning Concept v Comité Paritaire, 2019 SCC 28 (“Modern”). In Modern, the Supreme Court of Canada recognized that, under certain conditions, a franchisee could be viewed as an employee of the franchisor—especially if the franchisor exercises extensive control over financial risks and business operations. If classified as an employer, the franchisor would then be responsible for providing statutory and possibly common law employee entitlements.
While the Modern decision was based on Quebec’s broad definition of “employee,” Ontario’s ESA similarly has a liberal interpretation of “employee,” and the case has been argued outside of the Quebec context, since 2019. This could mean Ontario franchisors face a higher risk of being deemed employers of their franchisees.
Final Thoughts
Understanding the intersection of franchise and employment law is essential for Ontario franchisors. The potential for unexpected liabilities is high, and without proper management, these issues could lead to costly legal obligations. If you suspect these risks may apply to your business, consult a lawyer experienced in both franchise and employment law. This is one area where proactive legal advice can make a significant difference. Give us a Shout!
