Employment Law Considerations for the Franchise

PRACTITIONER SESSIONS ON

FRANCHISE LAWFebruary 8, 2016

Cynthia C. IngramSenior Associate

Rudner MacDonald LLP

EMPLOYMENT LAW CONSIDERATIONS FOR THE

FRANCHISE

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DISCLAIMERThe user is authorized to use this presentation for the user’s own needs only, and is not authorized to make copies thereof for sale or for use by others.

The information provided in this presentation is in respect of the law of the Province of Ontario only and is intended as general legal information only. This presentation is not provided for the purpose of providing legal advice or a complete statement of the law on the particular topics.  Every situation is unique and involves specific legal issues. 

If you would like legal advice with respect to the topics discussed in this presentation, we would be pleased to assist you.

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YOUR BRAND Companies come in all shapes and sizes,

across various industries Brand is used to differentiate your company

from your competitors Brand includes carefully defining what your

business represents Brand also helps with delivering a consistent

experience every time A well and commonly known brand is what

attracts potential franchisees

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AWARDING FRANCHISES We do not SELL franchises We AWARD franchises! Franchisees are not buying anything except

the “physical store assets” Franchisees do not own ABC Franchise. They

are granted the privilege of utilizing the name and the BRAND (a.k.a. goodwill) of the Franchisor

Strong brand identity benefits both the Franchisor and the Franchisee, who gains a proven business strategy with a known and trusted name

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BRAND PROTECTION“The brand is the most valuable piece of your organization and without proper care and attention it could become damaged or disappear completely.” Maintaining the integrity of your brand is the

responsibility of both the Franchisor and the Franchisee

Brand is much more than your product and the customer experience

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BRAND PROTECITON If the only protection that a Franchisor relies

on is enforcement of the commercial aspects of its franchise agreement, it risks damage to its BRAND

Franchisors must also protect their “Employer Brand”

By protecting your “Employer Brand” and taking reasonable steps at the Franchisor level, you ensure that the Franchisee maintains the integrity of your corporate brand and image at the regional and community level

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IDENTIFYING THE RISK Franchisors seek to establish integrity and uniformity

in their brand and customer experience Poor employees can lead to poor service experiences

at the franchise location, which leads to the customer avoiding the company elsewhere

Happy employees = Superior service = Happy customers

Despite standard policies and procedures for business operations, Franchisors often have little control over the employees working for the Franchisee

Brand should be top of mind with Franchisees in every employment decision: hiring, evaluating performance, discipline and termination

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HARDWARE STORE vs. THE CARPENTER

Failing to meet workplace and employment responsibilities can have serious consequences for an employer

If that employer is part of a franchise, these consequences can be felt by the ENTIRE BRAND!

Your brand can be further impacted by litigation or administrative claims commenced by employees for alleged wrongful conduct by the employer

Franchisors can be named in lengthy litigation, which also exposes it to further negative publicity, as well as costs

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EMPLOYMENT TOOLS Franchisor employment tools are logical steps

to continually reinforce the brand to the Franchisee and maintain the brand within the franchise system

Address Franchisor-Franchisee relationship concerns that may negatively impact your brand and the goodwill of the brand

Franchisor is not micro-managing the Franchisee’s relationship with its employees

Challenge for Franchisors – Avoid activities which can be interpreted as having “fundamental control” of the employees and their working life

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FUNDAMENTAL CONTROL In determining whether a Franchisor has

become responsible as the employer of the employees working for the Franchisee the court or tribunal will look at the facts of each case

The control of the employment decisions of the Franchisee cannot be so onerous that the Franchisee and its employees are seen by the government or the courts to be “employees” of the Franchisor

The key is to understand your role as the Franchisor – NOT the Employer

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BUSINESS SYSTEMS vs. EMPLOYMENT

CONSIDERATIONS“Inevitably, there are some provisions of the franchise agreement according to which Coffee Time exercises control over the franchisee. Such provisions are regular and expected inclusions in a franchise agreement. Franchise agreements by nature “entail some degree of control by the franchisor, even though the franchisee is generally an independent business person operating the franchise”.

Toshi Enterprises Ltd. v. Coffee Time Donuts Inc.,

[2008] O.J. No. 5325

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Concerned with substance rather than form Any terms in the franchise agreement will not be

determinative – must look at the employment and working relationship itself“When it comes to a question of fundamental control there is little which is more important than the beginning of the relationship (hiring), regulating it (direction, control and supervision), and ending it (termination).”533670 Ontario Ltd. (c.o.b. Best Personnel Services), [1997] OLRB Rep. September/October 841

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CRITERIACriteria established by the Ontario Labour Relations Board in York Condominium Corp., [1977] OLRB Rep. Oct. 645a. The party exercising the direction and control

over the worker performing the work.b. The party bearing the burden of remuneration.c. The party imposing discipline.d. The party hiring the worker.e. The party with the authority to dismiss the

worker.f. The party who is perceived to be the employer

by the worker.g. The existence of an intention to create the

relationship of employer and employee.

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CANADA POST CORPORATION Application by the Canadian Union of Postal Workers

for representation of employees in Shoppers Drug Mart and Pharmaprix stores

Claimed Canada Post was the employer of the postal outlet employees

July 3, 2013-CIRB dismisses the application CIRB finds the real employer to be the stores, not

Canada Post Key was that each of the stores were responsible for

hiring, settling wage rates, making decisions on employee benefits, granting leave requests, establishing work schedules and hours of work, and maintaining all personnel and employment records

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CANADIAN vs. U.S. LEGAL ISSUES

U.S. = Browning-Ferris Industries of California• a joint employer simply needs to possess the

authority to control the terms and conditions of employment, regardless of whether that authority is exercised

Canadian law holds that the mere presence of control by a franchisor over a franchisee does not, of itself, determine that they are common employers – fact based approach

Why is this important?• Virtually all franchise agreements contain forms

of control that franchisors can exercise over franchisees

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McDONALD’S RESTAURANTS In 2014, McDonald’s Restaurants was involved in two

labour decisions we continue to watch – both preliminary rulings

July 2014 – General Counsel of the NLRB rules 43 wage and labour complaints can proceed against McDonald’s in the U.S.

March 2014 – McDonald’s Canada and a franchisee named as co-respondents in a HRTO discrimination complaint

HRTO refused to dismiss the complaint against McDonald’s at the preliminary stage

HRTO could not determine “at this early stage whether [the franchisor] was responsible for policies that the applicant alleged were discriminatory”

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COMMON EMPLOYER Dacosta v. 2383914 Ontario Inc. HRTO 2014 Dacosta claimed discrimination against his employer

(the franchisee) Dacosta subsequently sought to add the Franchisor,

Obsidian Group, as a party respondent HRTO denied Dacosta’s request

“There must be something the applicant can point to that would either suggest the franchisor was vicariously liable from a contractual perspective or had itself committed an act that was arguably discriminatory.” Exception– “national promotional event” that all

Franchisees were contractually obligated to participate in and applicant alleged violated his/her rights under the Code

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TAKE AWAY Including everything in the franchise

arrangement may sink the Franchisor in some cases.

Follow a hands-off approach when it comes to employees

Take practical steps to assist your Franchisees to meet their responsibilities and minimize the risk to your brand

Failing to meet workplace responsibilities can be felt by

the entire brand

THE ESSENTIALS OF EMPLOYMENT STANDARDS

REQUIREMENTS

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EMPLOYMENT REQUIREMENTS Although the Franchisee has a stake in brand

reputation, the stake is not as great as that of the Franchisor

A Franchisee may have an incentive to ride on the coat tails of the established brand, while cutting corners to improve its individual bottom line

Franchisors must protect their brand’s goodwill from Franchisees who cut corners and run poor operations

Franchisees need to know their rights and responsibilities under employment standards and laws

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SOURCE OF EMPLOYER OBLIGATIONS

LEGISLATION• Provincial Jurisdiction for Employment

• Employment Standards Act• Occupational Health and Safety Act• Accessibility for Ontarians with Disabilities Act• Workplace Safety and Insurance Act• Human Rights Code

• Quebec – The Civil Code• Federal Regulation for certain organizations

FRANCHISE AGREEMENTINDIVIDUAL AGREEMENTS• Offer Letter• Employment Contract• Employment Policies and Employee

Manual

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STATUTORY REQUIREMENTS Accessibility Policy, Training and Plan (AODA) Employment Standards (AODA) Harassment Prevention Policy and Training (OHSA) Health and Safety Policy and Training (OHSA) Violence Prevention Policy (OHSA) OHSA TrainingPosters “Health and Safety at Work” (OHSA) “What you Should Know about the Ontario Employment Standards Act” “In Case of Injury” (WSIB)

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PROVINCIAL EMPLOYMENT STANDARDS ACT

Provincial Employment Standards Acts create the floor by which minimum working conditions can be measured

General deterrence is important for business system efficacy

“EMPLOYER BRANDING” – recruit, hire and retain top candidates

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EMPLOYMENT STANDARDS

HOURS OF WORK MINIMUM WAGE AND OVERTIME

VACATION TIME AND PAY

PUBLIC HOLIDAYS

LEAVES OF ABSENCE

TERMINATION NOTICE AND

PAY

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WHAT EVERY FRANCHISE WORKPLACE SHOULD HAVE

1. All employees sign an employment contract2. All employment contracts include a termination

clause3. Franchisees have the right to demote, transfer or

suspend an employee as a form of discipline4. Franchisees have a computer use policy and a social

media policy5. Franchisees keep the records required under the

Employment Standards Act and OHSA6. Restrictive covenants regarding the business of the

Franchisee7. Written policies and procedures regarding the right to

manage their workforce – including AODA policies

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WHAT EVERY FRANCHISE WORKPLACE SHOULD HAVE

8. Written agreements/contracts with all consultants and contractors

9. Takes proactive steps to help terminated employees obtain new employment

10. A written health and safety policy11. A worker-elected health and safety

representative12. A joint health and safety committee13. Training and enforcement of

employee/employment policies and procedures14. Annual (regular) performance appraisals

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EMPLOYMENT CONTRACTS A well-drafted and up to date employment

contract limits exposure and can potentially save a company the costs of dismissal claims and termination pay

A termination clause can be the most important clause in an employment contract

A termination clause can limit termination pay obligations to the minimum notice periods set out in the Provincial employment standards legislation

Recommended that employment agreements provide notice to candidates of policies for accommodation of employees with disabilities

Workplace Violence and HarassmentUse of Internet and Technology

Leaves of AbsenceAccommodation for Employees with

DisabilitiesDiscipline

Termination

POLICIES EVERY FRANCHISE SHOULD HAVE

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ONLINE BRAND PRESENCE Remember that employees can be on-line

brand ambassadors, or executioners Customers sometimes see the employee as a

reflection of the company Employees can use the anonymity of the

internet to disparage your company and your brand, OR HELP IT

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SOCIAL MEDIA BRANDING Social media, including corporate blogs,

Facebook and Twitter, are an emerging force in branding efforts

It is important that your Franchisees include social media policies in their Employee Policies and Manuals

Avoiding litigation that can harm your brand

BEST PRACTICES FOR MANAGING LEAVES OF

ABSENCE

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IDENTIFYING THE RISK Mishandled leaves or absences may harm

Franchisor’s brand may result in wrongful dismissal action,

reprisal complaint, or human rights complaint

Understand leave requirements in each jurisdiction

Help educate Franchisees but don’t intervene directly in leave requests Policies and procedures for leaves and

absences

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STATUTORY LEAVES Entitlement varies by jurisdiction

Challenging to develop policies across the country

Common characteristics Unpaid Job-protected

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ESA Amendment Act, Passed and in effect as at October 29, 2014• Family caregiver Leave• Critically Ill Child Care Leave• Crime-Related Child Death and Disappearance Leave

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BEST PRACTICES FOR MANAGING LEAVES

Consider all leave requests in good faith Request/obtain additional information when

required Ensure compliance with applicable statutory

leave requirements Develop leave of absence and

accommodation policies Follow policy and/or terms of collective

agreement Document communications with employees Act reasonably and provide accommodation

where necessary

Restrictive CovenantsHow can they help protect your brand when employees leave?

TACTICS AND STRATEGIES FOR PROTECTING YOUR COMPETITIVE BUSINESS

INFORMATION

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IDENTIFYING THE RISK Employees can be your biggest brand

strength……or, they can be your biggest

vulnerability Restrictive covenants protect your business information and

systems can help your brand help you stay competitive

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IMPLIED vs. EXPRESS TERMS What the law “gives us”

– Implied Terms act honestly and faithfully during

employment; respect employer’s business interests;

and, not use confidential information or trade

secrets, acquired during employment, for profit against former employer

– Fiduciary Obligations (if applicable) act in best interest of employer

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IMPLIED vs. EXPRESS TERMS What survives the end of employment

Confidentiality Fiduciary obligations (if applicable)

Why require restrictive covenants? (Express contractual terms) Bridge gaps when

employees depart

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NON-COMPETITION and NON-SOLICITATION

Non-competition clauses seek to protect against departing employee– Directly or indirectly carrying on

competitive business Non-solicitation clauses seek to protect

against departing employee– Soliciting customers and clients– Soliciting employees– Maintaining contact with your key business

people

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LEGAL ISSUESRequirements for enforceable restrictive covenants: 1. Employer must have a proprietary interest2. Reasonable in scope (breadth of activity,

territory, duration)3. Specific enough for departing employee to

know what conduct is restricted limit territory, prohibited activity, and

customers to work performed by employee and known customer relationships

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LEGAL ISSUESWhen is a restrictive covenant not enforceable?1. Non-competition clause required when non-

solicitation sufficient2. Clause broader in scope and/or more

restrictive than necessary3. Clause is ambiguous 4. Scope cannot readily be determined at time

of departure

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BRAND ISSUES How can you help utilize restrictive covenants

to protect your brand?– Educate franchisees– Ensure restrictive covenants are used by

Franchisees where appropriate– Ensure Franchisees review/revise template

employment agreements– Draft with precision - court will strike rather

than revise

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AUDITS Most franchise agreements require the

Franchisee to comply with all federal, provincial and municipal laws with regard to the franchise business

To protect the integrity of your brand and the goodwill you have established, it is important to investigate and monitor Franchisee compliance with employment standards

Monitoring your Franchisee’s compliance with employment standards allows you to better identify and address issues before they become a problem

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AUDITS As a Franchisor you can monitor compliance by:

Conducting periodic audits of personnel and employment records to ensure Franchisees are meeting their record-keeping obligations

Providing Franchisees with information and tools to conduct “self audits” and report back their results

Keeping Franchisees updated about their obligations under workplace, labour and employment laws and statutes

Requiring Franchisees to notify the Franchisor of employee complaints, investigations and audits

Secret Shoppers

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EMPLOYMENT LAW CONSIDERATIONS FOR THE FRANCHISE

CYNTHIA C. INGRAMRUDNER MACDONALD LLPcingram@rudnermacdonald.com

416.640.6402

Web: www.rudnermacdonald.comTwitter: @CindyIngramLLB

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