Most franchisors understand that franchisees are responsible for their own employees, and that a specific benefit of this arrangement is that it protects the franchisor from employment-related obligations to the franchisee’s employees. Many franchisors believe that the arrangement completely insulates them from such risk. However, under Canadian law, a franchisor can sometimes be treated as an employer of a franchisee’s workers.
This concept is known as the common employer doctrine. It does not just apply to the franchisor and franchisee relationship, but with any work arrangement involving multiple employers who may exercise control over the same workers. When it applies, a worker may be able to pursue employment-related claims against both the franchisee and the franchisor.
While these cases are highly fact-specific, franchisors should understand the types of involvement that can increase legal risk.
Link to What Is a Common Employer? What Is a Common Employer?
Canadian courts recognize that an employee may have more than one employer at the same time. In certain circumstances, related businesses can be treated as a single employer for employment law purposes. The analysis focuses less on corporate structure and more on the reality of the working relationship.
Courts will often examine whether multiple entities exercise significant control over a worker or operate in a way that suggests they jointly employ that worker.
Link to Why Does It Matter? Why Does It Matter?
A common employer finding can have significant consequences.
Depending on the circumstances, a franchisor could become involved in:
- wrongful dismissal litigation;
- employment standards claims;
- overtime and wage disputes;
- occupational health and safety matters; and
- labour relations proceedings.
In practical terms, a franchisor may find itself facing legal liability arising from workers it never intended to employ.
Link to Three Common Risk Areas for Franchisors Three Common Risk Areas for Franchisors
1. Becoming Involved in Employment Decisions
One of the most significant risk factors is direct involvement in the franchisee’s employment relationship.
Problems can arise when a franchisor participates in hiring decisions, determines compensation, disciplines employees, supervises their day-to-day work, or influences termination decisions. The more control a franchisor exercises over a worker, the greater the risk that it will be viewed as an employer.
2. Blurring the Line Between Franchisor and Franchisee
Risk can also increase when employees appear to work for both organizations.
For example, issues may arise where employees are presented as working for the franchisor, where business operations are heavily integrated, or where it is unclear which entity is responsible for the employment relationship.
3. Sharing Employment Functions
Courts may also consider who handles key employment functions.
Administering payroll, issuing employment records, maintaining personnel files, or otherwise participating in the day-to-day administration of the employment relationship may increase common employer risk.
Link to Practical Steps to Reduce Risk Practical Steps to Reduce Risk
Franchisors can often reduce common employer risk by maintaining a clear separation between brand oversight and employment management.
Some practical steps include:
- ensuring employment agreements clearly identify the franchisee as the employer;
- leaving hiring, discipline, scheduling, compensation, and termination decisions to the franchisee;
- avoiding direct supervision of franchisee employees;
- permitting franchisees to manage their own workforce; and
- focusing operational reviews on brand standards rather than directing individual employees.
The key principle is straightforward: the franchisee should manage its employees, while the franchisor focuses on protecting the brand and enforcing franchise standards.
Link to Takeaways for Franchisors Takeaways for Franchisors
Maintaining brand consistency is an important part of operating a franchise system. However, there is a difference between enforcing brand standards and managing a franchisee’s workforce.
Before implementing operational requirements, training programs, or workforce-related policies, franchisors should consider whether those measures could be interpreted as exercising control over franchisee employees. Careful planning and clear boundaries can significantly reduce the risk of a common employer finding.