An ongoing case in the U.S. has garnered much media attention1 and caused much anxiety for U.S. franchisors. Canadian franchisors should be worried as well.

The U.S. Proceeding

The case, currently before a New York court, was brought by the U.S. National Labor Relations Board (NLRB) and will determine whether McDonald’s is a “joint employer” of its franchisees’ employees for the purposes of U.S. labour legislation. The case follows two important developments in U.S. law:

  • The 2014 recommendation by the NLRB’s Division of Advice that McDonald’s USA, LLC be named a joint employer in several complaints brought by McDonald’s employees;2 and
  • An NLRB decision in 2015 in the Browning Ferris case,3 in which a waste management company was found to be a joint employer of its subcontractor’s employees.

The Browning Ferris decision immediately prompted speculation that similar rulings might be made against franchisors in general, and fast food franchisors in particular. 4

The thrust of the NLRB’s argument in the McDonald’s case is that the franchisor controls the working conditions of franchise employees—setting out details ranging from restaurant cleaning procedures, to questions to be asked in the hiring of franchise employees, to minutiae of the food order-taking process—to such a minute degree that, in the words of the NLRB’s counsel, “it is responsible for what happens to workers subject to those conditions.”5

Could it Happen Here?

The picture in Canada is complicated but it would be fair to say that a principle similar to the argument advanced by the NLRB in the current U.S. case is already at work in certain areas of the law in some Canadian jurisdictions.

In Ontario, for example, the Labour Relations Act, 19956and itspredecessor(s)(the “LRA”) allows “associated or related activities or businesses” to be treated as a “one employer” where they are found to be “under common control or direction.”7 In such a scenario, the company related to the actual employer company is deemed to be a “related employer.” In 1993, Second Cup (a franchisor bound to a labour union by collective agreement) and its franchisee were found to be “one employer” in connection with grievances under the Act, but only with respect to instances in which the franchisee was performing obligations under franchisor’s collective agreement that it was required to perform with the franchisor (in this case, the identification of the two entities as one worked to the disadvantage of the franchisee rather than the franchisor).8

Labour relations is not the only area of law addressing the concept of “related employer” from a statutory perspective. In Ontario, the Employment Standards Act, 20009 (the “ESA”) will treat separate entities 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 in their doing so is or has been to directly or indirectly defeat the intention and purpose of the statute.10 The test would thus not be whether a franchisor exercises control over the franchise workplace, but whether the franchisor and franchisee had structured their relations in order to avoid liability for either under the ESA. Given that franchisees are standalone businesses, separate in law and in ownership from franchisors and with their own revenue streams and assets, it is nearly impossible to imagine a franchise scenario where the test would apply. A review of Ontario case law under the ESA reveals no instances in which a franchisor has been held liable for the actions of an franchisee; indeed, it reveals that franchisors are more likely to be found liable when they step out of their normally limited involvement in the businesses and directly assume the functions of the franchisee.11

Canadian common law also recognizes that business entities may be treated as a “common employer” for the purposes of liability for employee claims in civil actions where the businesses act as a “single, integrated unit,”12 typically where companies are aligned vertically or horizontally through ownership. A company may be found liable for employee claims where it exercises “effective control” over the employees, regardless of whether the employees contracted with a different, legally separate company in the corporate structure.13 The principle does not yet appear to have been applied in the context of a franchisor-franchisee scenario, where the relationship between companies is contractual rather than rooted in common ownership. While it might not greatly tax the imagination of an activist court to determine that a franchise agreement so extensively controls the franchise workplace as to bring the franchise employees under the franchisor’s “effective control,” the practical rationale for doing so is weak. Unlike the common scenario of an intentionally thinly capitalized company with employees, controlled by a parent company in which the assets of the business are hidden, the direct employer in the franchise context is typically a functioning business with its own assets and revenue stream capable of satisfying a civil judgment.

Finally, in Ontario at least, panels have expressed a willingness in principle to find franchisors liable in the human rights context, where the facts of the case warrant such a finding. Liability may attach to a franchisor where the terms of the franchise agreement, the operational support provided by a franchisor to a franchisee, or the exercise of a franchisee’s obligations under the franchise agreement are connected to discriminatory conduct.14 A more recent case states the franchisor will not be liable unless “the franchisor [is] vicariously liable from a contractual perspective or [has] itself committed an act that [is] arguably discriminatory.”15 Unlike the “related employer” test under the LRA or the connection-and-intent test under the ESA, the test in human rights cases appears to be one of causation rather than control over workplace conditions.

While the “related employer” and “common employer” concepts work separately in different areas of the law and there is no across-the-board correlation of control via the franchise agreement with liability for the franchisor, the common thread of a notion that there are circumstances where it is appropriate to treat franchisors and franchisees as one opens the door to possible future extensions of the principle.

Consequences of a Joint Employer Regime in Canada

Presuming the worst case scenario—the emergence of a generalized principle of joint responsibility for the actions of franchisees in Canadian law—a number of worrisome consequences come to mind.

Most obviously, franchisors would be forced to defend disputes between employees and franchisees, and face penalties and / or damages awards where employees’ complaints succeed. Franchisors would, in essence, be liable for working conditions over which they have indirect (via remedies against franchisees in their franchise agreements) but not direct control.

Such decisions would severely circumscribe a main advantage of the franchise model for franchisors, i.e. allowing them to limit their capital and labour costs. If franchisors are not permitted to use the franchise model to limit their risk, and instead may be put at risk by the behaviour of franchisees, franchisors may be safer owning and operating the businesses themselves. Otherwise, to limit their risk, franchisors would need to incur the cost of monitoring franchises very closely and exercising contractual remedies against misbehaving franchisees very aggressively. As noted by the response of the International Franchise Association (IFA) to the 2014 NLRB ruling against McDonald’s, such findings also upend years of jurisprudence upholding the franchise model of doing business, frustrate the intent of franchise legislation, and could have a chilling effect on a job growth (the IFA notes that, in the U.S. at least, new business and job growth in the franchise sector had outpaced the non-franchise sector for years16).

The far more practical alternative to abandoning the franchise model in the face of a joint employer regime would be for franchisors to relax the degree of control exercised over the franchisee’s operations in order to avoid rulings such as the one sought by the NLRB in the U.S. case. This, again, would seem to diminish the value of the franchise model. One great advantage of the franchise model is that it holds out to the consumer the promise of a uniform customer experience, regardless of who owns the restaurant or store. Eliminating the franchisor’s ability to maintain such uniformity through the franchise agreement also reduces the predictability that is part of the attraction for the consumer (a predictability that is especially important in the restaurant context, where cleanliness and food safety are at stake). The dangers in such a scenario are disappointed consumers and damage to the brand. Nonetheless, as we have recommended before,17 reducing the degree of control exercised in the franchise agreement to only the degree necessary to maintain the integrity of the brand is the best and probably only way of avoiding the consequences of a joint employer regime in Canada, should a more fulsome one emerge.