Among the most fundamental benefits of the franchise model are the benefits that are leveraged by the separation between franchisors and franchisees. Franchisors can expand their brand and system without having to take the expense and liability of capital investments and operations, while franchisees can be independent business owners and leverage the benefits of the system without having to develop a model and brand on their own. To date in Canada, franchisors have enjoyed of the key benefit of limited liability for their franchisees’ operations – including by not being liable as the joint employer of the persons working for their franchisees.
Vicarious liability for the acts and omissions of franchisees, and the related question of whether a franchisor should be deemed a “joint employer” with its franchisees, are therefore crucial issues for franchisors. If franchisors are considered per se joint employers, this threatens and strikes at the very heart of the benefits and viability of franchising for franchisors.
Recent debate and proposed changes to laws in the U.S. are generating significant debate and may influence policy makers here in Canada.
Current changes expanding the scope of joint employers in the United States recently challenged
In the United States, the National Labor Relations Act[i], or NLRA, is a federal statute that governs private sector employers and employees. The National Labor Relations Board (the Board) has jurisdiction when it comes to enforcing and supervising the NLRA. The Board describes the NLRA as legislation that “protects workplace democracy by providing employees at private-sector workplaces the fundamental right to seek better working conditions and designation of representation without fear of retaliation.”[ii]
The NLRA does not include a definition of “Joint Employer”, but the term became judicially defined through the courts and NLRB decisions. The term “joint employer” was understood to mean that, “Two employers are a joint employer if they share or codetermine those matters governing the employees' essential terms and conditions of employment.”[iii] As previously developed, the relevant legal test required evidence of direct control; indirect control, or the potential option to exercise control, was insufficient.
Following a history of debate, discussed below, recent changes to the NLRA’s rules by the Board that were set to come into effect March 11, 2024 fundamentally shifted the prior law and joint-employer rule. The new rule provides, “For all purposes under the Act, two or more employers of the same particular employees are joint employers of those employees if the employers share or codetermine those matters governing employees' essential terms and conditions of employment.” The new rule provides that “possessing the authority to control” is sufficient to satisfy the definition of joint employer, “regardless of whether control is exercised”, and indirect power to control is similarly sufficient, even if that control is exercised through an intermediary. The rule obviously brings all franchise relationships within its ambit of application.
The new rule was recently challenged by the Chamber of Commerce of the United States and others, and on March 8, 2024 was struck down by a U.S. Texas District Court. In its judgment Judge Barker held:
[E]nforcement against plaintiffs or their members of the rule issued by the National Labor Relations Board on October 27, 2023, entitled Standard for Determining Joint Employer Status, 88 Fed. Reg. 73,946, would be contrary to law as to the rule’s addition of a new 29 C.F.R. § 103.40 and arbitrary and capricious as to its removal of the existing 29 C.F.R. § 103.40 (2020). In both respects, the rule is hereby vacated. [iv]
There are concurrent and other legal challenges that are underway as well. The NLRB Chair responded in a statement, “The District Court’s decision to vacate the Board’s rule is a disappointing setback, but is not the last word on our efforts to return our joint-employer standard to the common law principles that have been endorsed by other courts”.[v]
The issue remains hotly contested, and the outcomes and developments will have critical impact on franchised business in the U.S., and potentially in Canada.
History of the NLRB’s New Rule
Despite what had been a history of relatively stable and predicable definitions of joint employers, in a 2015 decision captioned Browning-Ferris Industries of California[vi], a majority of the Board chose to significantly upset the hitherto-settled law. The majority held that “direct and immediate control” was no longer required, but determined that the joint employer relationship could exist in circumstances of indirect, limited and routine control, or contractually reserved but never exercised control.[vii]
The majority decision opined that it was time to revisit the joint employer rule because “the diversity of workplace arrangements in today’s economy has significantly expanded.”[viii] In the view of the majority, the law was not keeping pace with these changes, and the number of temporary workers, agency arrangements, and employees in the help services industries had substantially grown and expanded. In broadening the test, the Board noted:
“If the current joint employer standard is narrower than statutorily necessary, and if joint-employment arrangements are increasing, the risk is increased that the Board is failing in what the Supreme Court has described as the Board’s “responsibility to adapt the Act to the changing patterns of industrial life.” As we have seen, however, the Board has never clearly and comprehensively explained its joint-employer doctrine or, in particular, the shift in approach reflected in the current standard. Our decision today is intended to address this shortcoming. For the reasons that follow, we are persuaded that the current joint-employer standard is not mandated by the Act and that it does not best serve the Act’s policies.”
A strong dissenting opinion was issued against the majority holding, which cited, among other examples of unintended consequences, the potentially subversive impact on the franchise relationship.
[O]ne important aspect of the franchising relationship is the franchisee’s ability to reap the benefits of manifesting to the customer the appearance of a seamless enterprise through the use and maintenance of the franchisor’s trademark. Federal franchise law recognizes this benefit and requires that the franchisor maintain the mark by maintaining enough control over the franchisee to protect consumers. However, even while franchise law requires some degree of oversight and interaction, it was never the intent of Congress, by that interaction, to make a franchisee the agent of its franchisor for any purpose. Thus, the new joint employer standard portends unintended consequences for a franchisor’s compliance with the requirements of another Federal act that are totally unrelated to labor relations. The Board has been repeatedly reminded that it “has not been commissioned to effectuate the policies of the Labor Relations Act so single-mindedly that [we] may wholly ignore other and equally important Congressional objectives.” Southern Steamship Co. v. NLRB, 316 U.S. 31, 47 (1942). Rather than providing a “careful accommodation of one statutory scheme to another,” the majority’s new standard places “excessive emphasis upon [the Board’s] immediate task.” Id
The majority’s decision was appealed to the D.C. Circuit Court, and was reversed in part and remanded back for re-decision by the Board. It was held that the 2015 decision would “substantially affect reasonable, settled expectations for relationships established on the prior standard.”[ix] The Board’s decision was therefore not retroactively applied. However, the D.C. Circuit Court did endorse “as fully consistent with the common law the Board's determination that both reserved authority to control and indirect control can be relevant factors in the joint-employer analysis”.[x]
Notwithstanding, the debate continued. The Board has the authority to makes rules that are “for the purpose of carrying out the provisions of the NLRA”. In light of the remanded decision, the Board was prompted to propose a new rule further restraining the definition of Joint Employers.[xi] The rule first proposed in 2018 was affirmed and made final in 2020. Pursuant to the rule, the definition reverted back to the test in place prior to Browning-Ferris:
To establish that an entity shares or codetermines the essential terms and conditions of another employer's employees, the entity must possess and exercise such substantial direct and immediate control over one or more essential terms or conditions of their employment as would warrant finding that the entity meaningfully affects matters relating to the employment relationship with those employees.[xii]
While evidence of indirect control can be used to inform the analysis, such use is limited and applicable “only to the extent it supplements and reinforces evidence of the entity's possession or exercise of direct and immediate control over a particular essential term and condition of employment”.[xiii]
The 2020 Rule also did not settle the issue, and uncertainty in the law remained. In September 2022, the Board proposed to replace the rule, again reverting back to a broader definition. As plainly stated in its background rationale, the Board now seeks to establish a rule that codifies the expanded test appearing in the majority decision in its 2015 Browning-Ferris ruling:
Because the Board believes, contrary to our dissenting colleagues and subject to comments, that the 2020 final rule (2020 Rule) repeats the errors that the Board corrected in BFI, it proposes to rescind that standard and replace it with a new rule that incorporates the BFI standard and responds to the District of Columbia Circuit's invitation for the Board to refine that standard in its 2018 decision on review.[xiv]
The new definition allows for a finding of a joint employer relationship where only indirect control was in evidence, or even where an employer merely has the right to exercise control. The new rule provides:
(b) For all purposes under the Act, two or more employers of the same particular employees are joint employers of those employees if the employers share or codetermine those matters governing employees' essential terms and conditions of employment.
(c) To “share or codetermine those matters governing employees' essential terms and conditions of employment” means for an employer to possess the authority to control (whether directly, indirectly, or both), or to exercise the power to control (whether directly, indirectly, or both), one or more of the employees' essential terms and conditions of employment.
…
(e) Whether an employer possesses the authority to control or exercises the power to control one or more of the employees' terms and conditions of employment is determined under common-law agency principles. Possessing the authority to control is sufficient to establish status as a joint employer, regardless of whether control is exercised. Exercising the power to control indirectly is sufficient to establish status as a joint employer, regardless of whether the power is exercised directly. Control exercised through an intermediary person or entity is sufficient to establish status as a joint employer.[xv]
The “essential terms and conditions of employment” cover categories that are features of employment such as wages, benefits, and compensation. However the new expanded definition introduces a further basket-clause of “work rules and directions governing the manner, means, or methods of work performance”. Undoubtedly, these are matters that are fundamental to maintaining a consistent and disciplined franchise system. The Board’s rule is expressly aimed at the franchise industry, among other categories of workers including trade unions, contractors and temporary help service users.[xvi]
The proposed rule underwent a process of public comment, and there were many voices who for various reasons oppose the proposed changes. The rule was ultimately confirmed by the Board on October 27, 2023.[xvii] Following the decision, the rule was immediately challenged. The Board subsequently delayed the effective date for the rule to come into effect to February 23, 2024 to deal with these various challenges.[xviii] Judge Barker’s determination is the most recent word, but certainly not the last.
Joint or common employers and vicarious liability in Canada
The circumstances in which courts may find joint or common employers are of course varied. The circumstances engage labour legislation across Canadian provinces, which include specific but diverse tests and definitions of the term “employer”.[xix] These regimes exist alongside the common law, and the purposes of the definitions are to extend joint and several liability where warranted.
In Ontario, the common law test for common employers has remained relatively stable, and the analysis continues to have respect for the fundamental precepts of corporate separateness. The question of the intention of the parties to create an employment relationship remains relevant, and thus far it appears that the contractual relationship will be interpreted within the context of general commercial contracting principles.
The Ontario Court of Appeal’s decision in O’Reilly v. ClearMRI Solutions Ltd. re-stated the leading conception of corporate separateness, and affirmed the rejection of a “group enterprise” theory of liability:
A corporation is a distinct legal entity with the powers and privileges of a natural person: OBCA, s. 15. These powers and privileges include owning assets in its own right, carrying on its own business, and being responsible only for obligations it has itself incurred.
The fact that one corporation owns the shares of or is affiliated with another does not mean they have common responsibility for their debts, nor common ownership of their businesses or assets. A corporation’s business and assets are not, in law, the business or assets of its parent corporation: [citations omitted]. Similarly, a parent (shareholder) corporation is not liable, as such, for the debts and obligations of a subsidiary….
The fact that corporations are related and coordinate their activities does not, in and of itself, change this paradigm. Ontario law rejects a “group enterprise theory” under which related corporations that operate closely would, by that very fact, be considered to jointly own their businesses or be liable for each other’s obligations. Although the group might, from the standpoint of economics, appear as a unit or single enterprise, the legal reality of distinct corporations governs: [citations omitted].[xx]
One of the circumstances where joint liability may be imposed, and will not be considered an impermissible piercing of the corporate veil, is where the court makes a finding of a joint or common employer. To remain consistent with the limitations of corporate separateness, however, the doctrine depends on a finding of an intention and actual facts that support the alleged common employer having a direct relationship with the employee:
The common employer doctrine does not involve piercing the corporate veil or ignoring the separate legal personality of each corporation. It imposes liability on companies within a corporate group only if, and to the extent that, each can be said to have entered into a contract of employment with the employee: [citations omitted]
Thus, consistent with the doctrine of corporate separateness, a corporation is not held to be a common employer simply because it owned, controlled, or was affiliated with another corporation that had a direct employment relationship with the employee. Rather, a corporation related to the nominal employer will be found to be a common employer only where it is shown, on the evidence, that there was an intention to create an employer/employee relationship between the individual and the related corporation: [citations omitted]
As illustrated by the issue in this case, where Mr. O’Reilly alleges that Tornado is liable for specific employment obligations, the common employer question is one of contractual formation – did the employee and the corporation alleged to be a common employer intend to contract about employment with each other on the terms alleged? When such an intention is found to exist, no violence is done to the concept of corporate separateness because the corporation is held liable for obligations it has undertaken.
To determine whether the required intention to contract was present, the parties’ subjective thoughts are irrelevant. Nor need the intention necessarily have been reflected in a written agreement. The common law’s approach to contractual formation is objective; intention to contract can be derived from conduct. As the Supreme Court has stated in a similar common law contractual formation context, what is relevant is “how each party’s conduct would appear to a reasonable person in the position of the other party”: [citations omitted]
A variety of conduct may be relevant to whether there was an intention to contract between the employee and the alleged common employer(s). As they bear upon this case, two types of conduct are important. One is conduct that reveals where effective control over the employee resided. The second is the existence of an agreement specifying an employer other than the alleged common employer(s).
The conduct most germane to showing an intention that there was an employment relationship with two or more members of an interrelated corporate group is conduct which reveals that effective control over the employee resided with those members…. This is consistent with how the law distinguishes employment from other types of relationships. Control over such matters as the selection of employees, payment of wages or other remuneration, method of work, and ability to dismiss, can be important indicators of an employer/employee relationship: [citations omitted].[xxi]
The common law test therefore hinges on the actual contract and the type and degree of control exercised. By linking the definition to the principle of avoiding the implications of piercing the corporate veil, the underlying rationale that a corporation only be “liable for obligations it has undertaken”, the Court’s analysis indicates that there can be some certainty for contracting corporations. The underlying purpose is to prevent corporations, through complex organizational structures, from “inappropriately shielding themselves from liability in wrongful dismissal actions”.[xxii]
Similarly, the common law test for determining whether a person is an employee or an independent contractor for the purposes of extending vicarious liability also hinges on an assessment of the degree of control. This is also defined as relative to the intention of the parties, as objectively expressed by their contracts and their conduct. However, the Supreme Court in Sagaz Industries ultimately concluded that there is no universal or conclusive test that can be applied, and each case must be assessed on its own facts:
Although there is no universal test to determine whether a person is an employee or an independent contractor, I agree with MacGuigan J.A. that a persuasive approach to the issue is that taken by Cooke J. in Market Investigations, supra. The central question is whether the person who has been engaged to perform the services is performing them as a person in business on his own account. In making this determination, the level of control the employer has over the worker’s activities will always be a factor. However, other factors to consider include whether the worker provides his or her own equipment, whether the worker hires his or her own helpers, the degree of financial risk taken by the worker, the degree of responsibility for investment and management held by the worker, and the worker’s opportunity for profit in the performance of his or her tasks.
It bears repeating that the above factors constitute a non-exhaustive list, and there is no set formula as to their application. The relative weight of each will depend on the particular facts and circumstances of the case.[xxiii]
This common law test for vicarious liability vis-à-vis the independent contractor/employer analysis is similar to the analysis conducted with respect to certain of Quebec’s civil laws. The Supreme Court of Canada recently considered this issue in Modern Cleaning Concept Inc., finding that the “critical factor” to the determination was assessing the “respective degree of risk and the attendant ability to make a profit. The independent contractor, in attempting to generate profit, accepts the business risk. Artisans, on the other hand, do not.”[xxiv] The Supreme Court expressly referred to franchise relationships, and held that the plaintiff’s “status as a franchisee is not determinative”.[xxv] The analysis was in respect of the particular definition and interpretation of a Quebec law, however the general judicial approach appears consistent with respect to considering the particularities of each individual commercial relationship.
Common employers and vicarious liability in the franchising context
Given the fact-specific emphasis of the relevant analyses, the case law has not yet developed to the point where there exist definitive principles serving to protect or otherwise distinguish the franchisor-franchise relationship.
To date, the decisions in Jogia v. RE/MAX Ontario[xxvi] and 1738937 Alberta Ltd. v. Fair Waves Coffee Inc. (Waves Coffee House) [xxvii] provide the most helpful statements and analysis of these issues in the franchise context. In both of these cases the plaintiffs sought to extend liability to the franchisors for claims against the franchisee. The courts considered the facts of each case, and, happily for franchisors, each court held that generally, the franchise relationship is not a category that typically attracts vicarious liability per se. However, neither the Ontario nor the Alberta court concluded that the franchise relationship was in and of itself conclusive. Each case must be analyzed on its own facts:
In general, a franchisor/franchisee relationship is more akin to an owner/independent contractor relationship, such that the franchisor is not typically exposed to vicarious liability for alleged wrongs committed by the franchisee: Chow v. Subway Franchise Restaurants of Canada Ltd., 2017 BCSC 1034. There may, however, be circumstances in which a franchisor should be held vicariously liable for the acts or omissions of its franchisee based on policy grounds.
Such a circumstance could arise where the franchisor exercises a significant degree of control over the franchisee’s day-to-day operations and stands to profit from those operations, in which case the franchisor arguably ought to assume the business risk associated with the franchisee’s operations.[xxviii]
In each case the focus was on considering whether there were any direct representations made to, and contact with, the plaintiffs. This kind of analysis appears grounded in principles of fairly extending liability where some direct undertaking is given. The analysis then proceeds to examine whether there was any reasonable basis to suggest the franchisor had (and actually exercised) substantial and significant control over the franchisee in general, and in the context of the contact with the plaintiffs. While this is somewhat helpful, it remains true that each case will turn on its specific facts, and the question is one of substance over procedural form.
What’s next?
The law in Canada has not gone as far as the new proposed joint employer rule in the United States; namely, that mere apparent, indirect, or potential authority to control day to day operations or the conditions of employment will suffice for a finding of vicarious liability or a common employer relationship. However, open ended statements such as may be found in Jogia suggest that having a “significant degree of control over the franchisee’s day-to-day operations” could potentially be problematic for a franchisor.
Canadian courts appear to consistently avoid any definitive conclusion that the franchise relationship does not lead to vicarious liability. On the other hand, Canadian courts do continue to endorse a requirement of direct representations and/or direct and significant control.
The NLRB’s backgrounder suggests that the changes to its Rule and the developments in United States law have been prompted and motivated by societal changes, especially the growth of the gig economy and the evolving nature of work and employment relationships. Such changes are not unique to the United States and similar considerations may well begin to have greater influence on the analysis in Canada. Because maintaining and creating a successful franchise system necessitates control and consistency in the delivery of products and services, a franchisor’s control over its franchisees’ day-to-day operations could easily produce unintended consequences. Adopting rules akin to those in the United States would fundamentally undermine franchising in Canada, and compromise the viability of the entire industry.
Franchisors and their counsel should bear these issues in mind when issuing franchise agreements, as well as in their actual conduct when overseeing franchisees’ employees. The law will continue to develop as the debate continues, and undoubtedly legislators in Canada will be paying attention.
[i] 29 U.S.C. §§ 151-169 [NLRA].
[vi] Browning-Ferris Industries of California, Inc. d/b/a BFI Newby Island Recyclery and FPR-II, LLC d/b/a Leadpoint Business Services (32-CA-160759 and 32-RC-109684; 369 NLRB No. 139
[ix] Browning-Ferris Industries of California, Inc. d/b/a BFI Newby Island Recyclery and FPR-II, LLC d/b/a Leadpoint Business Services (32-CA-160759 and 32-RC-109684; 369 NLRB No. 139 at 3
[xix] For example, under Ontario’s Employment Standards Act, 2000, S.O. 2000, c. 41, “employer” is defined to include “any persons treated as one employer under section 4, and includes a person who was an employer”, which under s. 4(1) and (2) are defined as “associated or related activities or businesses are or were carried on by or through an employer and one or more other persons”. British Columbia’s Employment Standards Act, R.S.B.C. 1996, c. 113 more expressly refers to “associated employers”, with a similarly broad definition of a discretionary decision that the tribunal can find joint liability if the “director considers that businesses, trades or undertakings are carried on by or through more than one corporation, individual, firm, syndicate or association, or any combination of them under common control or direction”. These statutory tests are related, but separate from the common law.
[xxi] O’Reilly at ¶49-53 [emphasis added]. O’Reilly was more recently affirmed in Rahman v. Cannon Design Architecture Inc., 2022 ONCA 451 at ¶41-42. The common law test is similar in other provinces, see, e.g., Leclair v Patel Pharma Inc., 2021 BCSC 1904
[xxiii] 671122 Ontario Ltd. v. Sagaz Industries Canada Inc., 2001 SCC 59 at ¶47-48 [emphasis added]
[xxiv] Modern Cleaning Concept Inc. v. Comité paritaire de l’entretien d’édifices publics de la région de Québec, 2019 SCC 28 at ¶30
[xxv] Ibid. at ¶37, 56, 59 finding that it was in fact the Franchisor that had assumed the business risk, and therefore the putative franchisee was held to be an “artisan” (read, employee).
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