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Labor & Employment Law

: Thoughts from a Management Lawyer

Vicarious Liability in Franchise Operations

By Michael Fitzgibbon

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An interesting non-employment case recently came to my attention that has some important employment law implications. The central issue in dispute was whether a franchisor was vicariously liable for the actions of one of its franchisees.

The action was commenced in Small Claims Court where the Judge concluded that the franchisor was, indeed, vicariously liable and awarded damages against the franchisor. This decision was appealed. The Court summarized the background:

This action arises out of a fire that occurred in the ... franchise owned by [the franchisee] located on Kingston Road in Toronto on December 12, 2004. Smoke from the fire entered the neighbouring premises in which the plaintiff... operated a restaurant, ..... As a result of the fire, the restaurant was required to close for three days to repair smoke damage. The cost of the repairs, amounting to $5,964.18, was covered by [the plaintiff's] insurance less a $2,500.00 deductible. [The plaintiff] also claimed damages for lost business during its closure in the amount of $1,877.00.

The first question to be considered in this appeal is whether the trial judge erred in finding that the franchisee (corporation) was an employee of the franchisor.

According to the Court:

The trial judge examined the relationship between the franchisee and the franchisor as evidenced by the franchise agreement, and concluded that the franchise agreement was ?riddled with controls over the activities? of the franchisee and that these controls ?point unmistakably in the direction of a relationship?which can only be characterized as one of employer and employee.?

Although the Judge set out the proper test for distinguishing between an employee and independent contractor as set out by the Supreme Court of Canada in Sagaz, he arrived at the wrong conclusion. The Court commented:

Inevitably, there are some provisions of the franchise agreement according to which [the franchisor] exercises control over the franchisee. Such provisions are regular and expected inclusions in a franchise agreement. Franchise agreements by nature ?entail some degree of control by the franchisor, even though the franchisee is generally an independent business person operating the franchise?.

The Court considered the "form" of the agreement and the fact that:

The franchise agreement in this case is clear: there is no agency relationship between the franchisor and the franchisee; the franchisee is an independent contractor completely separate from the franchisor; the franchisee hires and fires its own employees, handles its own finances, maintains its own accounting and business records, financial statements and tax returns; maintains its own insurance on the premises and the property; exercises its own business judgment in the operation of the business; and is the owner of the assets. Jolin was clearly a franchisee and not an employee.

There was no evidence that the franchisor exercised substantial control over the day-to-day operations of the franchisee, and at none of the material times was the franchisor in physical control of the premises in which the franchise was located. The policy reasons behind vicarious liability were not satisfied.

In the franchisor-franchisee context, vicarious liability can also attach where:

.... a franchisor may be vicariously liable for the negligent acts of its franchisees where a third party believed that he or she was dealing with the franchisor, or relied on a representation by the franchisee to this effect, in adopting a certain course of conduct, which ultimately led to loss or injury.

The Court found that "clearly not those in which vicariously liability" could attach on this basis.

The case is important as, in a franchisor-franchisee context, the employment issues are always swimming just below the surface.

Full post as published by Thoughts from a Management Lawyer on February 12, 2009 (boomark / email).

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