Introduction
What are wage-fixing and no-poaching agreements?
Penalties: removal of maximum on fines
Application of new rule to franchising industry
What should franchisors and franchisees do?
Comment


Introduction

On 23 June 2022, amendments to Canada's Competition Act were introduced by Bill C-19 (the Budget Implementation Act 2022).(1) Most of these amendments went into effect immediately on the day it received royal assent but some, such as the new prohibition on wage-fixing and no-poaching agreements, will come into effect from 23 June 2023.

According to a survey conducted in the United States in 2017, 58% of major franchisors' contracts contained a "no-poaching of workers'" agreements.(2) Given that certain employment conditions and no-poaching covenants are often imposed by franchisors on their franchisees, the franchise industry in Canada will be undoubtedly affected by these amendments. This article discusses the scope of such amendments and their probable implications for common franchise structures.

What are wage-fixing and no-poaching agreements?

Amendment to section 45 of Act
Section 45 of the Act currently criminalises conspiracies, agreements or arrangements between competitors that fix prices, allocate markets or limit the supply of a product. The existing provisions only apply to agreements relating to the supply and not the purchase of a product. Wage-fixing and no-poaching agreements are considered buy-side agreements between competitors and thus are not covered by the existing provisions of section 45 of the Act. There is only a risk of civil action in respect of such agreements.

As of 23 June 2023, section 45 of the Act will be amended by the introduction of a new rule prohibiting unaffiliated employers from entering into or continuing:

  • agreements that fix, maintain, decrease or control salaries, wages or terms and conditions of employment (ie, wage-fixing agreements); and
  • agreements not to solicit or hire each other's employees (ie, no-poaching agreements).(3)

Both formal and informal agreements are targeted.

This new rule is intended to promote competition in the labour market, increase wages and benefits for employees, and prevent employers from unfairly limiting job opportunities for workers.

Clarifications provided by draft enforcement guidance
The new restriction pertaining to wage-fixing agreements is quite broad insofar as it is applicable not only to wage-fixing practices, but also to any agreements to fix, maintain or decrease "terms and conditions of employment" that could affect a person's decision to become or remain an employee. This would include the responsibilities associated with a position, the working hours, work location, and benefits and policies associated with employment, such as job descriptions, allowances and reimbursements, as well as other employment-related directives that may restrict an individual's job opportunities.(4)

The restriction against no-poaching agreements prohibits all forms of agreements between unaffiliated employers that limit opportunities for their respective employees to be hired by another employer, including restricting the communication of information related to job openings. Although it is true that this restriction does not apply if only one party to the agreement undertakes not to hire or solicit another party's employees, multiple unilateral agreements whose effect is to prohibit soliciting or hiring a third party's employees may be subject to this restriction, as is later discussed in respect of common franchising practices.

Major differences introduced by the new rule include that the existing price-fixing offence applies only to agreements between competitors in the same market, whereas the offence relating to wage-fixing agreements and no-poaching agreements applies to agreements between employers that are not affiliated with one another.

The wage-fixing agreements and no-poaching agreements rule will apply not only to new agreements entered into by employers on or after 23 June 2023, but also to conduct that reaffirms or implements agreements entered into prior to 23 June 2023, according to the draft enforcement guidance.

Penalties: removal of maximum on fines

The Competition Bureau of Canada has the authority to investigate and enforce the new rule. Currently, contravening section 45 of the Act may result in a conviction to imprisonment for a term not exceeding 14 years and/or a fine of a maximum of C$25 million per count – as of 23 June 2023, the foregoing maximum will no longer apply. A person breaching this prohibition against wage-fixing agreements or no-poaching agreements commits an offence liable to imprisonment for a term not exceeding 14 years and/or a discretionary fine. In addition, affected employees may also seek civil remedies for any losses suffered as a result of a prohibited agreement.(5)

Application of new rule to franchising industry

Franchising businesses are unique in that they operate as a system of independent operators who are all part of a larger network. As a result, many franchisors currently use covenants that may consist of or include wage-fixing agreements or no-poaching agreements in order to maintain consistency across the franchised network.

For example, a franchisor might set minimum wage requirements across all franchise locations to ensure that there is consistency in employee compensation, or impose other standards indirectly affecting employment terms and conditions (eg, working hours, employment allowances and reimbursements) in order to ensure consistency of operations throughout the franchised network. Franchisors will also often require franchisees not to solicit or hire employees of other franchisees in the franchised network in order to protect each franchisee's investment in training its employees and to promote collaborative marketing or facilitate other network initiatives.

Such covenants will be prohibited under the new rule for unaffiliated employers, such as franchisors and their franchisees, even if they are not competitors in the same market, which will affect multi brand franchisors perhaps more significantly. The draft enforcement guidance explicitly states that franchisors and franchisees are not considered affiliated parties and cannot rely on the affiliation exception. As a result, franchisees can no longer undertake not to solicit or hire individuals who are currently employed by the franchisor or other franchisees in the franchised network. Any post-term prohibitions related to employment that apply after the termination or expiration of the franchise agreement would also be prohibited.

A franchisor and its franchisees may only be exempted from this new rule if they can demonstrate to a court's satisfaction that any such covenant meets the general defence known as the ancillary restraints defence – namely that:

  • such a covenant is ancillary to a broader or separate agreement or arrangement that includes the same parties (ie, the franchise agreement itself);
  • such a covenant is directly linked to, and reasonably necessary for giving effect to the objective of that franchise agreement; and
  • the franchise agreement does not itself contravene section 45 of the Act.

However, it should be noted that this defence is not applicable if significantly less restrictive means are reasonably available to achieve the objective at the time of entering into the agreement.

What should franchisors and franchisees do?

Franchisors will need to carefully review their franchise agreements and internal policies, including human resource policies, to ensure that they do not contain any provisions that could likely violate the new rule.

Franchisors will also need to train their employees and franchisees with respect to the implications of the new rule so as to ensure that they do not engage in any conduct that could be interpreted as a wage-fixing agreement or a no-poaching agreement.

Unless franchisors are in a position to persuasively demonstrate that such covenants are reasonable and necessary to achieve the objectives of the broader franchise agreement (ie, for the benefit of the franchise system) and that significantly less restrictive means are not reasonably available to achieve these objectives, franchisors will need to develop alternative means by which to ensure that their franchisees are meeting standards that directly or indirectly include maintaining minimum (or otherwise consistent) employment standards or other operating standards that may affect employment terms and conditions. This may become a challenge for franchisees who are operating within thin profit margins.

Comment

There is little doubt that the new rule prohibiting wage-fixing agreements and no-poaching agreements represents an important change for the franchising industry in Canada. Although some changes may still be made with respect to the final enforcement guidance, its current draft version offers a realistic perspective as to the way this offence will be interpreted.

Franchisors and franchisees will need to find new ways to maintain consistency and prevent poaching without engaging in anti-competitive behaviour. While it may be challenging for franchising businesses, these challenges can be managed through careful review and implementation of policies and agreements that comply with the new rule.

For further information on this topic please contact Bruno Floriani, Marissa Carnevale or Roxana Crihan at Lapointe Rosenstein Marchand Melançon LLP by telephone (+1 514 925 6300) or email ([email protected], [email protected] or [email protected]).The Lapointe Rosenstein Marchand Melançon LLP website can be accessed at www.lrmm.com.

Endnotes

(1) Bill C-19.

(2) Alan B Krueger and Orley Ashenfelter. Theory and Evidence on Employer Collusion in the Franchise Sector, 28 September 2017, 614.

(3) Section 257 of Bill C-19.

(4) Canada Competition Bureau. Draft for public consultation of the "Enforcement guidance on wage-fixing and no poaching agreement", consultation between 18 January 2023 until 17 March 2023 (draft enforcement guidance).

(5) Section 90 1 of the Act.