Following the recent increase in Ontario’s minimum wage from $11.60 to $14.00, the decision by a Tim Horton’s franchisee to reduce employee benefits to compensate for such increase caused an international uproar.
While no such increase has been made in Quebec thus far, the debate remains current and has the potential to impact any franchise employing workers who would be affected by such a measure.
In 2015, the Quebec Court of Appeal rendered an important decision in Dunkin’ Brands Canada Ltd. v. Bertico1 (the “Dunkin Case”) on the duties of franchisors towards their franchisees.
In light of the recent public outings among franchisors, franchisees, the government and small business owners in Ontario over the responsibility of each in the 21% increase in labour costs, we offer to revisit the Dunkin Case, in order to determine how the Court of Appeal’s findings in that matter could affect franchisees in Quebec in the event of an increase in this province’s minimum wage.
The Dunkin Case began with a lawsuit brought in the late 1990s by Dunkin Donuts franchisees in Quebec against their franchisor. The franchisees alleged that the franchisor had not taken sufficient steps to enhance the image of the Dunkin brand in response to inroads by competitor Tim Horton’s, which had captured a significant share of the market.
The Dunkin Case highlighted the fact that while there is no specific legal regime governing franchise contracts in Quebec, there are implicit obligations that are binding onto the parties in addition to those stipulated in the contract.
For their part, franchisees must respect the standards and rules of the banner under which they operate and contribute to protecting and preserving its reputation. As for franchisors, their duties extend not only to each of the franchisees, but to the entire network of their franchises. Among those duties are those of protecting and enhancing the reputation of the brand, the duty to assist and support franchisees as the market evolves, and the obligation to maintain a robust and vigorous network.
Duty towards franchisees
It is of the essence of a franchise contract that the franchisee is bound to operate its business in accordance with the contract’s provisions, despite market fluctuations. It is however possible, in certain circumstances, that the nature of those fluctuations will trigger the franchisor’s duty to assist, which requires franchisors to take concrete action to assist a franchisee who might be finding it difficult to adapt to a changing market.
Moreover, the franchisor has the obligation to maintain the relevance of the franchise contract throughout its term. In practice, this means that the franchisor must ensure that the franchisee’s contract adapts as times change, such that the contract continues to be relevant as the market in which the franchisee operates evolves.
Thus, the franchisor must provide support to franchisees in adapting to new market conditions. For their part, the franchisees must cooperate with the franchisor in developing solutions, operate their businesses in compliance with any legislative changes, and continue to respect the standards imposed by the owner of the brand.
These correlative obligations remain applicable following any minimum wage increase that significantly impacts the labour costs required for the efficient and effective operation of the franchise. This is all the more so where the franchisee’s responses to such a change in market conditions could have a negative effect on the entire network.
Duties towards the network
In this regard, the Dunkin Case affirms the premise that a franchisor has duties and obligations not only towards each of its franchisees, but to the entire network of franchises as well, which the Court characterizes as collective duties and obligations. In practice, these include the franchisor’s obligation to ensure that no “bad apple” emerges within its network. The Court also stressed the franchisor’s obligation, the very keystone of a franchise contract, to preserve the reputation, image and value of the brand in the eye of the public.
Given that the franchisees have the obligation to adapt to market changes, the nature of the decisions they make could affect the uniformity of the brand and the franchisor’s network of stores. For example, a franchisee who decides, in response to a minimum wage increase, to make changes to its franchise that are detrimental to the brand image could thereby taint the entire network and harm the image of the other franchisees, for which the franchisor could well be found liable.
In short, a franchisor must remain alert and proactive in order to ensure that the standards of its brand are being respected by all its franchisees, including following an increase in the minimum wage. For their part, the franchisees must be prudent and diligent in the way they react to such changes, without losing sight of their responsibilities towards the chain they are part of.
The decisions and changes that are made in response to an increase in the minimum wage are important considerations to be borne in mind when construing the implicit obligations of a franchisor, recognized by Quebec courts, to maintain the relevance of the franchise contract and to ensure that the franchisee’s response respects the brand’s image.