Christine Jackson, Andraya Frith, Tom Peters
Mar 25, 2020
For further information on the changes below or other franchise matters, please contact one of the authors above or any member of our Franchise or Franchise Litigation Groups.
If you are considering implementing or updating a health and safety policy in light of the global COVID-19 pandemic (a COVID-19 Policy), there are a number of legal issues surrounding the ability of a franchisor to impose such a COVID-19 Policy on its franchisees. This Osler Update provides a roadmap to guide franchisors when deciding whether to implement a COVID-19 Policy.
1. Do I have the contractual right to impose a COVID-19 Policy on my franchisees?
While most franchise agreements will not likely have an express contractual provision contemplating the implementation of a policy such as a COVID-19 Policy, there are a number of provisions that will be helpful in supporting your position that you have the contractual right to implement such a policy. Examples of these types of provisions include:
- the right of the franchisor to make updates to the system and the operations manual from time to time, including the introduction of new policies;
- an obligation on franchisees to operate the franchised business in compliance with applicable laws, including occupational health and safety laws;
- an obligation on franchisees to meet the system standards, methods of operation, procedures and specifications that the franchisor may establish from time to time;
- an obligation on franchisees to adhere to the highest standards of honesty, integrity, fair dealing and ethical conduct when dealing with customers; and
- an obligation on franchisees to conduct the franchised business in a manner that does not reflect adversely on the franchisor, the franchise system or the trademarks of the franchisor.
Your franchise agreement may also give you the ability to default or terminate franchisees if the franchisee is operating the franchised business in a manner that creates an imminent threat or danger to public health or the safety of persons or property resulting from the operation of the franchisee’s business. When exercising a default or termination right, franchisors will be held to the statutory and common law duty of good faith and fair dealing (discussed below).
2. Will franchise-specific laws affect our ability to impose a COVID-19 Policy on our franchisees?
In provinces that have enacted franchise legislation, namely, Ontario, Alberta, British Columbia, New Brunswick, Manitoba and Prince Edward Island, franchisors and franchisees are subject to a mutual duty of good faith and fair dealing. The case law is settled that this duty does not create new obligations between the parties or alter the express terms of the franchise agreement; however, it requires that the parties act in a commercially reasonable manner and take the legitimate interests of the other party into account when exercising their rights and performing their obligations under the franchise agreement. A franchisor cannot act arbitrarily, capriciously or in a manner inconsistent with the reasonable expectations of the franchisees. Generally speaking, Canadian courts will respect the business judgment of a franchisor when assessing whether it exercised its discretion based on a proper motive and as part of a defensible business plan.
Accordingly, if a franchisor is given discretion to impose policies under the franchise agreement, its ability to unilaterally impose such a policy will be subject to the duty of good faith and fair dealing. Franchisors should consider their communications to franchisees on this issue as an opportunity to work collaboratively towards a solution that protects their respective employees and the public at large. If the imposition of a COVID-19 Policy is preceded by open and honest communications that acknowledge the critical steps everyone needs to take to slow the community spread of COVID-19, the likelihood of a successful claim for a breach of the duty of good faith would likely be low. Even where a franchisor is unable to collaboratively work with its franchisees in developing a COVID-19 Policy (due to timing or other constraints), the states of emergency that have been declared in all provinces could be pointed to in support of the commercial reasonableness of imposing a COVID-19 Policy.
3. What about co-employment or joint employer risk if we impose a COVID-19 Policy on our franchisees?
Normally, the franchisor would be one step removed from the management of the franchisee’s employees, which reduces the risk of the franchisor being found liable for employment-related claims of franchisee employees. However, by causing franchisees to implement a COVID-19 Policy that applies to the franchisee’s employees, a franchisor would arguably be taking a more active hand in the management of such employees. Therefore, there may be a heightened risk that in doing so the franchisor could be found to be a co-employer or joint employer of the franchisee’s employees.
However, some franchisors are forming the view that the evolving and critical nature of the COVID-19 pandemic requires decisive actions to mitigate risks to public health and to franchisors’ and franchisees’ respective businesses. In this context, the risk of a co-employment employer or joint employer finding should be appropriately weighed against the risk of not issuing a COVID-19 Policy. In addition, any such policy can be drafted in a way that is attentive to employment-related sensitivities and designed to mitigate risk in this area. For example, the COVID-19 Policy should be focused on public health and issues related to the protection of the brand/franchise system and avoid details such as whether any mandatory leaves will be paid or unpaid (which is a business decision for the franchisee to make in conjunction with its professional advisors).
4. If we decide to impose a COVID-19 Policy on our franchisees, what should we include in the Policy?
Franchisors drafting a COVID-19 Policy should consider the following:
- reiterating a common commitment to the safety and well-being of all franchisees, employees, customers and suppliers and of the communities in which they operate;
- highlighting the proactive steps that were taken before and during the early stages of the pandemic;
- highlighting the guidance of public health authorities, including proper handwashing, avoiding touching one’s face, sneezing or coughing into one’s elbow crease and cleaning all high-touch surfaces often;
- providing basic facts about COVID-19 obtained from reputable sources, such as the World Health Organization, the Public Health Agency of Canada, or the applicable public health authority, including the symptoms and the current estimate from the World Health Organization, as of the date of this bulletin, that it may take 14 days or longer for symptoms to appear after exposure;
- requiring franchisees to ensure that their employees maintain a two-metre distance between themselves at all times in the workplace and take all other steps to protect themselves and the public as recommended by public health authorities;
- requiring franchisees to require their employees who have tested positive for COVID-19, or who are presumptive cases or who have been told to isolate, self-isolate, quarantine or stay home by a health professional or a public health authority;
- requiring franchisees to suggest that their employees not travel internationally and, if they do travel, to require that they not return to the workplace for at least 14 days; and
- requiring franchisees to remain apprised of, and comply with, the current best practices, guidance, directives and orders from the applicable regulatory authorities, including any orders made under emergency legislation applicable in the jurisdiction in which the franchisee operates.
If a franchisor ultimately chooses to issue a COVID-19 Policy for its franchisees, it is imperative that the franchisor continue to update the policy on a timely basis as the pandemic evolves in order to keep pace with the impact of COVID-19 on the franchised business operations.