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Franchisors or Franchisees: Who is the Employer?

Franchisors should be aware that they may be liable to the employees of a franchisee, even where there is a written agreement that states otherwise. An employee, a franchisee or a third party can claim that the franchisor is an employer or co-employer when making a claim related to human rights, employment standards or occupational health and safety violations, or the termination of the employment or franchise relationship. In the case of Kent v. Stop ‘N’ Cash 1000 Inc. et al., 2006 CanLII 22660 (ON SC), the Ontario Superior Court decided that the franchisor and a corporate franchisee were liable for the wrongful dismissal of an employee, on the basis that the employee had performed services for the franchisor, such as assisting with training in other franchises and drafting marketing materials. The court also pointed to the fact that the franchisor had been involved in personnel matters involving this employee, related to her leave of absence and vacation scheduling. Ultimately the court felt that the franchisee and the franchisor were “common employers” to this employee, and therefore both were liable for her wrongful dismissal.

While each case is determined on its facts, the courts view employees as vulnerable parties and will often interpret the circumstances in their favour. Ultimately an adjudicator or judge will examine various factors to determine the extent to which the franchisor exerts control over the franchisee’s business operations. These factors include:

  • Which party exercises direction or control over the employee and does the franchisor communicate directly with employees?
  • Which party bears the burden of remuneration?
  • Which party hires, fires and imposes discipline on employees?
  • Which party is perceived by the worker to be the “employer”?
  • Which party implements and enforces policies and procedures?
  • Is there evidence of an intention to create an employer / employee relationship?

In February 2010 the Canadian Union of Postal Workers filed an application for certification to represent employees at postal outlets at Shoppers Drug Mart and Pharmaprix franchise stores across Canada. The union argued that the franchisor was the true employer of these employees. However, in July 2013 the Canada Industrial Relations Board dismissed the application and found that in this case, it was the franchisees at each location who were the true employers. This is because it was the franchisees who were responsible for hiring, firing, setting wage rates, benefits, and managing leave requests, schedules, hours of work, personnel records and records of employment. (Canada Post Corporation, 2013 CIRB 690)

The courts recognize that franchise relationships require franchisors to retain a degree of control over the business to ensure the consistency in products and services offered. However, franchisors should follow a general “hands-off” approach when it comes to employees. Those who exert too much control over daily operations and become involved in employment issues will expose themselves to significant obligations and liability.

For more information, please contact our Franchise Law team.