One of the essential elements of a successful franchise system is the franchisor’s ability to establish and uphold brand guidelines and standards. Franchise agreements typically grant franchisors significant control over various aspects of their franchisees’ businesses, from setting operational standards and requirements to establishing minimum or maximum pricing of goods and services and overseeing the system’s advertising.
However, franchisors should be aware of the potential risks of exercising significant control over a franchisee’s employment practices. Specifically, a franchisor that exerts “too much” control can be deemed a “joint” or “common” employer, which means the franchisor is legally considered to be the employer of the franchisee’s staff together with the franchisee.
A finding of common employer status exposes the franchisor to liability for employee protections and entitlements, including but not limited to, wrongful dismissal damages, human rights violations and wage and overtime class actions. This effectively shifts the franchisor from being a brand licensor to a direct employer, with the full range of legal obligations and financial consequences flowing from that role.
This article explores the key aspects of a common employer finding and outlines the potential pitfalls and mitigation strategies for franchisors seeking to evaluate their own internal practices and protect their business. Ultimately, there are ways to avoid a finding of common employer status, but doing so typically requires franchisors to forego at least some level of operational control. This is not an easy decision, as franchisors must balance the need to control certain employment practices to maintain brand consistency against the risk of being deemed a common employer. This is a highly individualized balancing act and should be assessed within the context of each franchisor’s unique model.
Common Employer Liability
In Canada, there are various mechanisms that can lead to a common employer finding. These include common law principles, minimum standards legislation and labour relations statutes. Across these various employment law regimes, the preconditions for a common employer finding generally require that: (i) there is more than one corporation involved; (ii) the corporations are engaged in a common business; and (iii) there is common control or direction of the business among the corporations. When these elements are present, it is more likely that multiple corporations will be found to be common employers, thereby extending employment rights, obligations and liabilities to each of them.
Consequences of a Common Employer Finding
Being designated as a common employer carries significant implications, including:
- Joint and Several Liability. Common employers are jointly and severally liable, meaning they share liability for employment-related obligations. Either or both employers may be responsible for unpaid wages, termination pay or severance. This does not allow employees to claim double entitlements from each entity, but rather, they may claim against a still-operating entity if another becomes insolvent or ceases its business.
- Statutory Entitlements and Employee Protections. A common employer finding can also create liability related to such obligations as overtime violations, missed breaks and non-compliance with applicable employment legislation including the Ontario Employment Standards Act.
- Personal Liability. Directors and officers of the franchisor deemed to be a common employer may also face personal liability. For instance, under Ontario law, directors can be personally liable for up to six months’ wages per employee, while in British Columbia, the limit is two months.
- Reputational Harm. High-profile employment violations can affect the entire franchise brand, including through social media amplification, consumer boycotts and negative publicity. Additionally, operational disruption from regulatory scrutiny, increased compliance audits and media attention during employment litigation can undermine franchise recruitment and existing franchisee relationships.
Practices That Increase the Risk of a Common Employer Finding
There are several franchisor-specific practices that demonstrate significant control and can ultimately lead to a common employer finding. These include, for example:
- Setting specific wage rates, controlling compensation structures, managing payroll or requiring approval for wage increases;
- Requiring franchisees to obtain franchisor approval for hiring employees;
- Engaging in disciplinary actions or mandating terminations;
- Directly training or supervising employees;
- Coordinating, scheduling or monitoring employees;
- Requiring handbooks or human resources policies that extend beyond customer service standards, appearance requirements and safety protocols; and
- Providing direct instructions, guidance, tools or assistance to employees in any other manner.
Mitigating the Risk of a Common Employer Finding
Franchisors can protect their franchise system from a finding of common employer status by maintaining separation between themselves and their franchisees’ employees. The following steps should be considered whenever feasible:
- Maintaining a “hands-off” approach to staffing:
- Franchisees should make all hiring and termination decisions independently.
- Franchisors should refrain from dictating employee wages, hours or schedules.
- Franchisor-led training should be limited to the franchisee and its management, with the franchisee providing direct training to its own employees.
- Drafting a precise franchise agreement:
- Parties should acknowledge their mutual intent to maintain an independent contractor relationship without employment, agency or joint employer connections.
- Clear language in the agreement should designate the franchisee as solely responsible for all employment matters (i.e., hiring, firing, compensation, scheduling and discipline).
- An indemnification provision should require the franchisee to indemnify the franchisor for any losses or legal costs arising from employee claims.
- Communicating and acting consistently:
- Franchisees should be required to prominently display signage informing the public of the franchisee’s status as an independent contractor.
- Employee-related documents, such as employment applications, paychecks, employee manuals and business licenses, should clearly identify the franchisee as the employer.
- Banking and other legal structures should maintain clear separations between the franchisor and franchisee entities.
Cost Benefit Analysis
Engaging in a cost-benefit analysis is a critical exercise for franchisors when navigating the risk of common employer status. This process should involve a careful evaluation of the operational practices and safeguards they choose to implement. For example, considerations can include:
- What is the actual business cost of not taking control of certain employment practices?
- How important is that exercise of control for brand consistency?
- Are there any creative solutions that can be implemented to maintain some desired control while mitigating risk as much as possible?
The business costs arising from not controlling employment practices can be significant, ranging from brand damage to poor customer service by untrained staff to potential fines from regulatory bodies for employment standards violations. However, the cost of excessive control is potential liability for a franchisee’s employment related actions and legal fees. Franchisors accordingly must weigh this potential liability against the perceived benefit of direct control.
The importance of employment-related control for brand consistency also varies across businesses. For some brands, a standardized hiring and training process is crucial to delivering a uniform customer experience. For others, consistency is primarily determined by products and operating procedures, with less need for strict employee-related mandates. The key is distinguishing between which controls are truly essential for the brand, and which are merely “nice to have”.
Finally, creative solutions can help balance brand protection with risk mitigation. For example, a franchisor may choose to focus on providing resources as opposed to exerting control such as compiling and vetting a list of trusted third-party vendors for critical functions like HR, payroll and scheduling.
Recent Employment Law Developments in the United States
On September 10, 2025, a bipartisan group in the U.S. House of Representatives introduced the American Franchise Act (the “Act”). The proposal would amend the National Labor Relations Act and the Fair Labor Standards Act to establish a clear statutory standard for determining when franchisors may be deemed joint employers of franchisee employees.
The Act seeks to narrow the definition of joint employment to a single, consistent rule. Under the proposed legislation, a franchisor could only be considered a joint employer if it both: (i) possesses and (ii) exercises “substantial direct and immediate control” over at least one essential term or condition of employment. “Essential terms” are defined to include wages, benefits, hours of work, hiring, discharge, discipline, supervision and direction. Importantly, “substantial direct and immediate control” means control that has a regular or ongoing consequential effect, rather than isolated or incidental involvement.
The Act further clarifies what does and does not constitute such control. For example, a franchisor would be deemed to exercise control by setting the wage rates of franchisee employees. By contrast, measures such as enforcing brand standards, offering training materials or establishing minimum qualifications for safety reasons would not, on their own, trigger joint employer status. The Act also provides that proceedings already underway at the time of enactment would not be affected, thereby limiting retroactive disruption.
If enacted, the Act would provide franchisors in the United States with much-needed clarity, reducing unpredictable liability exposure and allowing for more stable compliance planning. While not binding in Canada, such a statutory framework could nonetheless be highly persuasive for Canadian courts and regulators, signalling a potential recalibration of how joint employment is assessed in the franchising context.
Where to Draw the Line
Franchisors face a challenging balancing act, as they must exercise enough control to ensure brand consistency without imposing so much oversight that they are deemed common employers. However, the key consideration should be whether the practice in question is critical to the overall franchise system and goodwill of the franchisor’s trademarks or merely a specific employment decision left to the individual franchisee.
Franchisors should take the time to develop thoughtful strategies and plans when it comes to their employment-related controls and ensure everyone in the business is aligned on the decisions made. In addition, franchisors should look to recent developments in the law and routinely review their franchise agreements and related operational manuals and policies to ensure compliance.
About the Author
Sofi Katsovskaia is a business law associate in the Franchise Law Group at Cassels. She practices business law, with a focus on franchising, licensing, distribution, and intellectual property. Sofi also advises clients on general corporate, commercial and contractual matters. She has worked with a diverse range of companies, from local startups to international corporations, spanning industries such as hospitality, food and beverage, healthcare, entertainment, financial services, fitness, retail, telecommunications, software, childcare and education, cannabis, and more. In her practice, Sofi strives to provide a practical and efficient approach, emphasizing clients’ business-needs and strategic objectives.
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