U.S. JOINT EMPLOYER

Developments emerging this summer from the United States National Labor Relations Board (“NLRB”) have caused some to express concern for the franchise model in the U.S. The NLRB’s August 27, 2015 decision in Browning-Ferris Industries of California 362 NLRB No. 186 (“Browning-Ferris”) revised the standard for determining joint employer status. Under the old standard, the NLRB examined whether the alleged joint employer possessed and actually exercised authority to control terms and conditions of employment. Under the new standard, it is sufficient to simply possess such control, regardless of whether it is exercised.

Because virtually all franchise agreements contain numerous forms of control that franchisors may exercise over franchisees (control is the sine qua non of trademark law, a pillar in all franchise relationships), some allege that the new joint employer standard will make franchisors liable for a new gamut of employment-related issues, involving a dramatic extension of liability not contemplated by anyone in the legal or business arrangements.

First and foremost, Browning-Ferris did not involve a franchised relationship. The majority opinion of the NLRB clearly disclaimed expressing any views on the issue. The specific facts of each case are critical. At times, the Browning-Ferris dispute seems more political than legal: the three majority decision-makers deciding in favour of an expanded test were Democrat appointees; the two dissenters were Republicans.

While Browning-Ferris is the latest word on the joint employer issue from the NLRB, other recent NLRB decisions involving a franchisor-franchisee relationship have reached different results. The NLRB ruled in favour of the franchisor in one case (Freshii), holding there was no joint employer relationship despite the existence of extensive control. By contrast, the NLRB ruled against McDonald’s in another case involving a labour dispute.

Put simply, more cases need to be decided under the new U.S. principles to determine whether there has indeed been a true expansion of franchisor liability.

CANADIAN JOINT EMPLOYER LAW

What is the risk that similar joint employer principles might be applicable to franchisors in Canada?

Canada also undoubtedly has common law and statutory joint employer principles that may result in an extension of franchisor liability in labour union matters, employment law, workplace injury, human and civil rights and other areas. However, unlike the U.S., the law in Canada has been long settled. As a result, there are helpful guidelines to provide drafting assistance to limit potential liability, and precedent to guide litigation decisions.

CANADIAN COMMON LAW: THE COMMON EMPLOYER DOCTRINE

In Canada, the common law principle is known as the common employer doctrine. The issue is whether two companies function “as a single, integrated unit.” Canadian courts will look beyond even complex corporate structures and relationships to assess the “legitimate entitlements” of wrongfully dismissed employees, “as long as there exists a sufficient degree of relationship between the different legal entities who apparently compete for the role of employer.” See Downtown Eatery (1993) Ltd. v. Ontario, 54 OR (3d) 161.

The common law common employer doctrine is most frequently cited in scenarios involving dismissed employees who allege they were employed by a family of companies, rather than one particular corporate entity. In circumstances involving closely-held corporate organizations using complex corporate structures, Canadian courts will not hesitate to make a finding of common employment in a wrongful dismissal scenario.

A typical franchised relationship would be a far cry from traditional situations of common employer liability in a wrongful dismissal case.

However, a number of Ontario Labour Relations Board (“OLRB”) decisions provide insight on how joint employer principles might apply to franchised relationships. The OLRB is Ontario’s equivalent to the NLRB.

CANADIAN STATUTORY LAW

In Ontario and many other provinces, there is a statutory test under labour law statutes to determine whether a company is a “related employer” to another. The test is most frequently applied in union disputes involving successive employers or responsibility for collective bargaining. Under the statutory test, the OLRB considers whether “related activities” are carried on “under common control or direction” to determine if there is a related employer relationship.

Although the language of the test provides no bright line guidance, a 2001 OLRB decision gives some insight on how these principles would apply in a franchised relationship.

In The United Food and Commercial Workers’ International Union, Local 175 v. Sobeys Ontario Division of Sobeys Capital Inc., 2001 CanLII 10338 (“Sobeys”) the OLRB declined to make a related employer finding, despite finding the franchisor had the means to exercise extensive control over the franchisee. The OLRB noted that there was a “high degree of control” by the franchisor over the life of the franchisee, including requirements to be present for at least 60% of normal operating hours and limits on vacation time. The franchisor provided a payroll service used by franchisees. However, unlike the situation in the U.S., which now simply considers the existence of control, regardless of whether it is exercised, the OLRB’s approach to the issue was closer to the old U.S. NLRB test that considered whether such control was in fact exercised, as opposed to whether exercising control was hypothetically possible. For example, the OLRB in Sobeys noted that while the grocery franchise contractual arrangements prohibited a franchisee from increasing its payroll costs without the franchisor’s approval, the franchisor’s evidence was that the franchisee actually had full authority to negotiate terms and conditions of employment with the union. Other evidence of franchisor assistance with union issues was characterized as “an isolated occurrence which does not detract from the fact that collective bargaining is the responsibility of the franchisee.” While the franchisor in Sobeys did scrutinize a franchisee’s payroll and profit margins, and exercised “considerable influence over the finances of each franchisee’s business,” the OLRB ultimately concluded this influence was “no different than a bank would have over a debtor business to which it had extended a considerable overdraft facility.” The OLRB equally recognized that many of the union’s arguments over control existed in virtually all franchise relationships, noting that “corporate pricing of merchandise, common advertising, a common range of product available to customers are intrinsic to any franchise operation.” Ultimately, for the OLRB in Sobeys, it was significant that there was no evidence of mischief in terms of an “ulterior labour relations motive” by the franchisor.

Companies may also be treated as one employer under provincial employment standards legislation. For example, under the Employment Standards Act, 2000, SO 2000 c. 41 (the “ESA”), persons may be treated as one employer if “associated or related activities or businesses are or were carried on by or through an employer and one or more other persons” and the “intent or effect of their doing so is or has been to indirectly or directly defeat the intent or purpose” of the ESA.

CANADIAN GUIDANCE FOR LIMITING POTENTIAL FRANCHISOR LIABILITY

In Canada, the joint employer situation is clearer than in the United States. Tests in Canada for joint employer status have remained unchanged for many years. Still, the tests are couched in broad language that makes each inquiry very fact-specific. All the tests ultimately ask questions about the nature and extent of control exercised by one company over another.

While Canadian courts and tribunals have so far taken a common-sense approach to distinguishing typical joint employer liability scenarios from traditional franchised relationships, it is important to engage Canadian counsel to regularly review franchise agreements and operations manuals to limit potential joint employer liabilities. The delicate balance is between providing sufficient guidance to franchisees on sensitive issues like employment and payroll issues in order to permissibly assist the franchisee to achieve targets and to protect the brand, while also ensuring that such assistance does not trigger a joint employment finding.