Sotos LLP will continue to monitor government announcements and we will update and circulate this Informational Circular as warranted.

1. Ontario Small Business Support Grant

Applications are open for the new Ontario Small Business Support Grant (“OSBS”).  The OSBS is available for small businesses that have been required to close or significantly restrict services under the province-wide shutdown effective December 26, 2020.

The grant starts at $10,000 for all eligible businesses, and provides all eligible businesses with funding to a maximum of $20,000 to cover decreased revenue expected as a result of the province-wide shutdown.

Businesses can use the support however they choose (for example, to pay employee wages or to assist in maintaining their inventory).

Applicants must demonstrate that they experienced a revenue decline of at least 20% when comparing their monthly revenue in April 2020 to that of April 2019.  The government has explained that this time period was selected because it reflects the impact of the public health measures taken in the spring of 2020, and as such, provides a representation of the possible impact of these measures on small businesses.[1] Businesses that were established since April 2019 are also eligible provided they meet the other eligibility criteria.  In order to receive OSBS, small businesses must meet the following criteria:

• be required to close or restrict services subject to the province-wide shutdown that went into effect on December 26 2020;
• have fewer than 100 employees at the enterprise level; and
• have a Canada Revenue Agency (“CRA”) business number.

Businesses are not eligible if they were already required to close prior to the modified Stage 2 measures that were introduced on October 10, 2020, or if they are essential businesses permitted to operate with capacity restrictions (e.g., discount and big box stores selling groceries, supermarkets, grocery stores, convenience stores, pharmacies, and beer, wine and liquor stores).[2]

On March 24, 2021 the government announced a second round of support through the OSBS.  Businesses that were determined as eligible for the first round will automatically be entitled to a second payment in the same amount as the first payment.

2. Rebates for PPE and Property Taxes

The Government of Ontario is providing businesses a one time grant of up to $1,000 to assist with the cost of personal protection equipment (“PPE”). To be eligible, businesses must have between 2 and 19 employees and be in one of the following sectors: retail, accommodation and food services, repair and maintenance, personal and laundry services, gyms and yoga studios, and arts, entertainment and recreation.

Applicants are required to submit receipts or proof of costs for PPE purchased since March 17, 2020.  This includes: gloves, gowns, face shields, eye protection, masks, sanitizer, sanitizing wipes, thermometers, temperature monitors or cameras, physical changes (including the installation of hand sanitizer stations and plexiglass dividers) and signs to guide or inform customers and employees.

Eligible businesses may also apply for rebates of municipal and education property taxes. Funding will cover the entire length of time that regionally targeted public health restrictions are in place.

In order to apply, applicants will need to provide general business information (for example, CRA business number) and their banking information (for example, banking institution, account number, branch code).  Further, they will need to submit proof of costs – meaning their property tax bills (or proof of costs associated with property taxes).[3]

3. COVID-19 Energy Assistance Program for Small Business

The COVID-19 Energy Assistance Program for Small Business (“CEAP”) provides a one-time, on-bill credit to eligible small business and registered charity customers. Small business and registered charity customers may be eligible for up to $1,500 in support to be paid towards their electricity, unit sub-meter provider (“USMP”) or natural gas bills (both or separately).

In order to be eligible for CEAP, small businesses and registered charities must have an active account with an electricity distributor, USMP or a natural gas distributor, and the applicant’s account must meet certain usage criteria. The applicant must also have a registered business number or charitable registration number for the small business or registered charity operating out of the premises.  Further, the applicant must have overdue amounts owing from one or more electricity or gas bills since March 17, 2020. [4]

Funding for CEAP is limited, and utilities are expected to process applications in the order in which they are received. As such, submitting an application for CEAP does not guarantee funding. Applicants who applied and received CEAP support in 2020 can apply for the increased funding amount.  Applicants must apply through their utility provider.

4. Pausing Commercial Evictions

The Government of Ontario has temporarily banned evictions for tenants who have been approved for the Canada Emergency Rent Subsidy (“CERS”).  Any such tenant (with proof of approval) will be protected from eviction for a 12-week period from the date of approval. If a tenant re-applies for a new CERS payment, the 12-week ban is effectively restarted from the date of the new CERS approval.

Tenants must provide their landlord with proof of each new approval. The last possible date a CERS-approved tenant could be protected from eviction is April 22, 2022.[5]

5. Employer Health Tax relief

The Employer Health Tax (“EHT”) is a payroll tax on remuneration paid to employees and former employees.  Due to the outbreak of COVID-19, the Government of Ontario has increased the EHT exemption from $490,000 to $1,000,000 permanently.

To be eligible for the tax exemption, employers must be “eligible employers” as defined under the EHT Act. As such, employers who have a municipal representative on their board of directors, or who are under the control of any level of government, are generally not eligible employers.  Further, employers normally cannot claim the exemption if their Ontario payroll for the year (including the payroll of any associated employers) is over $5 million (except for eligible employers).[6]

6. Regional Opportunities Investment Tax Credit

The Regional Opportunities Investment Tax Credit is a 10% refundable corporate income tax credit for capital investments. The tax credit has a cap of $500,000 and is available for expenditures in excess of $50,000.  It is available to Canadian-controlled private corporations who make qualifying investments that became available for use on or after March 25, 2020.  Examples include expenditures for constructing, renovating, or acquiring eligible commercial and industrial buildings and other assets in designated Ontario regions.[7]

At Sotos LLP, our team of experts has been advising businesses in the automotive, restaurant, grocery, personal, home and professional services, hotel, retail and cannabis sectors as they face challenging economic and financial issues relating to the current pandemic. Please contact us if you wish to discuss your eligibility for any of the government assistance programs, and to determine an effective approach to combatting business challenges caused by the outbreak of COVID-19.

Anna Thompson-Amadei, Sotos LLP

Anna is an associate with Sotos LLP in Toronto, Canada’s largest franchise law firm. She practices business law with a focus on franchising, licensing, and distribution. Please contact Anna at 416.572.7322 or athompson-amadei@sotosllp.com if you would like to discuss this or any other topic relating to the operation of your business.

[1] https://www.ontario.ca/page/businesses-get-help-covid-19-costs#section-1

[2] https://www.ontario.ca/page/businesses-get-help-covid-19-costs#section-0

[3] https://www.ontario.ca/page/businesses-get-help-covid-19-costs#section-1

[4] https://www.oeb.ca/rates-and-your-bill/covid-19-energy-assistance-programs/covid-19-energy-assistance-program-small

[5] https://www.ontario.ca/page/renting-commercial-property-ontario#section-1

[6] https://www.fin.gov.on.ca/en/tax/eht/index.html

[7] https://www.ontario.ca/page/regional-opportunities-investment-tax-credit

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The Canadian Context

For years, many of Canada’s independent grocers, food processors and suppliers have been calling for a grocery sector code of conduct like those adopted in Australia and the United Kingdom (the “UK”). But those calls have largely gone unanswered, until recently.

In the midst of the 2018 bread price fixing scandal, interest in an industry specific code of conduct rose, but Ottawa was not interested in federal regulation at the time. The price fixing issue specific to that scandal was already covered by the Competition Act (R.S.C., 1985, c. C-34) and other producer and supplier issues such as arbitrary fee hikes, good faith and fair dealing enforcement, and disproportionate bargaining power in the grocery industry were not yet considered in need of their own regulation.

Now with the extreme strain on Canada’s system created by the COVID-19 pandemic and resulting government restrictions on grocery producers and suppliers alike, a grocery code of conduct holistically regulating the relationship between producers and suppliers may finally be on the horizon.

The issue came to the forefront late this summer when Loblaws, Walmart and Metro all announced similar, some would say arbitrary, fee hikes on suppliers to offset costs being taken on by each of these major retailers to improve their in-store and digital operations.

However, these fees by retailers are effectively an attempt to offset their rising costs onto their suppliers. Moreover, these hefty fee hikes come at a time when suppliers are facing their own rising production costs and reduced capacity due to new safety protocols related to the pandemic. And with both retailers and suppliers facing modest profit margins in normal years, this passing off of costs from Canada’s major retailers onto suppliers in particular could put many Canadian suppliers out of business.

Interestingly, there was one industry leading retailer that did not follow suit. Michael Medline, as the chief executive officer of Sobey’s parent company, Empire, called the fees being imposed by his industry counterparts “repugnant,” adding he is now in favour of regulation of the industry provided that any code imposes fair-dealing rules on both retailers and vendors alike. The fee hikes we saw from his industry counterparts would likely not be allowed under such regulation.

Looking to the UK’s Code

If the federal government does decide to embark on creating a Canadian Grocery Code of Conduct, such a code would likely benefit from reference to the UK’s Grocery Supply Code of Practice (the “GSCOP” or the “Code”) which was first put into development back in 2003 and has been improved over the nearly two decades since.

Canada’s grocery industry mirrors the UK’s in that, like the UK, Canada has a few main stakeholders that dominate the industry, with independent grocers sharing the remainder of the market. If anything, Canada has even more need of legislation compared to the UK as it has fewer industry leaders sharing the lion’s share of the market. The UK has about 13 industry leading chains that the GSCOP regulates. In contrast, the Canadian retail market is incredibly concentrated with just five retailers controlling 80% of the market share.

The intent of the GSCOP is to protect suppliers from some of the most punitive demands of the largest supermarket chains, but suppliers can also be in breach of the GSCOP’s fair dealing requirements. On the retailer side, the legislation is mandatory but only applies to “Designated Retailers”. To be eligible to be classed as a Designated Retailer, a company’s turnover in sales of groceries in the UK must exceed £1 billion. On the supplier side, the legislation applies to any suppliers of groceries for resale by a Designated Retailer.

The GSCOP originally had a limited impact on industry practices, as it was not mandatory and lacked enforcement authority. However, with the appointment of an independent adjudicator who has the power to investigate, arbitrate and fine retailers that contravene the Code, the GSCOP started to influence the industry in the way it was intended.

The office of the Grocery Code Adjudicator (the “GCA”) is the GSCOP’s enforcement authority.  The GCA’s statutory functions are to: investigate confidential complaints from any source about how supermarkets treat their suppliers; make recommendations to retailers if a complaint is upheld; require retailers to publish details of a breach of the code; and, in the most serious cases, impose a fine on the retailer and/or arbitrate disputes between retailers and suppliers. In theory, the GCA has the power to fine retailers up to 1% of their annual turnover, not just their grocery turnover. However, in practice we have yet to see any retailers being fined for anything approaching the maximum amount even in the face of numerous reports of breaching the Code.

The Adjudicator is wholly funded by a levy on the retailers (which was £2 million for 2016/17). The performance of the GCA, and the scope of her remit, were the subject of a statutory review in 2016. The results released in 2017 resoundingly endorsed the Adjudicator’s performance and the effectiveness of the GCA as a regulatory approach to improving supply chain relations.[1]

Any Canadian grocery code of conduct should be taking advantage of the lessons learned by the UK in its 17 year development of the GSCOP. Specifically, the UK started with a voluntary Code but realized it needed teeth to have any remedial impact. It made the Code mandatory in 2008. It also started with a Code that did not have a designated enforcement authority, but realized that mandatory rules could not effect change without anyone to enforce them. In 2013, it created the office of the GCA to monitor the industry and enforce compliance.

What Canada Needs

Unlike the failed push for regulation in the wake of the 2018 bread price fixing scandal, regulation in the wake of the industry turmoil created by COVID-19 seems overdue.

On the supplier side, food and beverage associations, and dairy processor associations across the country as well as Food and Consumer Products Canada (FCPC) and the Canadian Federation of Independent Grocers (CFIC) have all been outspoken in their support for the development of a code. Retailers have traditionally preferred to maintain their control in the industry but Michael Medline’s recent support of regulation, is a telling sign that even those who benefit most from an unregulated system see the need for change. It looks like the government is finally noticing. When federal, provincial and territorial agriculture ministers met in late November this year, the recent fee hikes imposed by Canada’s main grocery suppliers was on their agenda. As the epidemic continues and the importance of stability in the Canadian grocery supply chain has became a household issue, we may begin to see small moves in the regulation of the industry.

However, if federal regulation does come to the Canadian grocery industry, we believe it needs to go further then the GSCOP has done. The UK has come far in its revision of the Code. Making the legislation mandatory and creating an enforcement authority were necessary revisions, but the GSCOP is still fundamentally a remedial regime. The Adjudicator punishes bad behaviour after it has already harmed industry stakeholders and, by extension, consumers. What it needs to do is aim to prevent that bad behaviour from occurring in the first place.

The need for a Canadian grocery code of conduct is due, in part, to the Competition Bureau’s failure to respect its own mandate. Under the preamble to the Competition Act,  the Competition Bureau is responsible for (1) maintaining and encouraging competition in Canada, (2) expanding opportunities for Canadian participation in world markets while at the same time recognizing the role of foreign competition in Canada, (3) ensuring that small and medium-sized enterprises have an equitable opportunity to participate in the Canadian economy, and (4) providing consumers with competitive prices and product choices.

The Competition Bureau has focused too heavily on impact on consumers to the detriment of all its other mandates. A Canadian grocery code of conduct that is based on the UK’s GSCOP and is remedial in nature, would only continue to serve that singular goal instead of focusing on all of the Bureau’s obligations, and especially its obligations to ensure small and medium sized enterprises have an equitable opportunity to participate in the Canadian economy rather then be driven out of it.

As Canada’s leading franchising, licensing and distribution law firm, our team of experts works closely with industry leaders including specifically in grocery retailing, distribution, and manufacturing.  If you would like to discuss how our firm can help your business, please contact us.

John Sotos, Sotos LLP

John Sotos is the founding partner of Sotos LLP and a dean of the franchising, licensing and distribution bar. John has been recognized by Chambers Canada, Canadian Legal LEXPERT Directory, Who’s Who Legal, and Best Lawyers in Canada as a leading Canadian franchise law practitioner. John can be reached directly at 416.977.9806 or jsotos@sotosllp.com.

[1] Department for Business, Energy & Industrial Strategy (UK), Statutory Review of the Groceries Code Adjudicator 2013-2016, July 2017.

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The federal government has introduced the Canada Emergency Rent Subsidy (“CERS”) which has replaced the Canada Emergency Commercial Rent Assistance.  CERS will be available retroactively to September 27, 2020 until June 2021, and the current parameters will apply until June 5, 2021.

CERS takes landlords out the equation by delivering aid directly to applicants. The subsidy is available on a sliding scale – the amount of the subsidy that eligible organizations receive will be proportional to the amount of their revenue losses.  The maximum base rate subsidy is 65% for organizations with a revenue drop of 70% or more. The base rate then declines to a rate of 40% for organizations with a revenue drop 50%, and gradually reduces to 0% for organizations that have not experienced a decline in revenues. The federal government’s CERS website provides a calculator that applicants can use to calculate the amount they can apply for.[1]

Eligible expenses include commercial rent, property taxes, property insurance, and interest on commercial mortgages for a qualifying property, less any subleasing revenues.[2]  Further, only expenses paid under rental agreements in writing that were entered into before October 9, 2020 (and continuations of those agreements) and are related to real property located in Canada are eligible.  If the applicant has not paid the amounts due for the eligible expenses yet, they must attest that these amounts will be paid within 60 days of receiving the rent subsidy payment.

Non-eligible expenses include any expenses that were paid or payable to non-arm’s length entities[3] or for a timeframe that falls outside of the claim period.  Qualifying properties include any buildings or land in Canada that the applicant’s business or organization owns or rents and uses during the course of ordinary activities.  Properties that do not qualify include: residential properties, properties used to earn rental income from arm’s-length parties or any properties that are primarily used to earn rental income directly or indirectly from a non-arm’s length party, that are primarily used by that party to earn rental income.[4]

Expenses for each qualifying period will be capped at $75,000 per location and be subject to an overall cap of $300,000 that would be shared among affiliated entities.

Eligible entities include individuals, taxable corporations, trusts, and non-profit organizations and registered charities.  In order to be eligible, organizations must meet one of the following criteria:

1. Have a payroll account as of March 15, 2020 or have been using a payroll service provider;
2. Have a business number as of September 27, 2020 (and satisfy the Canada Revenue Agency that it is a bona fide rent subsidy claim); or
3. Meet other conditions that may be prescribed in the future.

For the purposes of calculating the CEWS, an entity’s revenue is its revenue from its ordinary activities (in Canada) earned from arm’s-length sources, determined using its normal accounting practices. Revenues from extraordinary items and amounts on account of capital are not counted.  Special rules will be provided in order to take into account certain non-arm’s-length transactions – for example, where an entity sells all of its output to a related company that in turn earns arm’s length revenue.

[5]

Applicants can apply for the rent subsidy retroactively for any period up to 180 days after that period has ended.

Lockdown Support

The new Lockdown Support will provide a 25% top-up as additional support to businesses with locations that are temporarily forced to close or have their business activities significantly restricted by a public health order issued by a federal, provincial, or municipal government, or a local health authority.  This includes situations where the organizations has had to shutdown as a result of an outbreak of COVID-19.

In order to qualify for the Lockdown Support, a business must:

1. have a base rent subsidy rate of more than 0% for the claim period;
2. qualify for the base CERS; and
3. be required to completely shut the location down; or cease some or all of the activities at the location and it must be reasonable to conclude that the ceased activities were responsible for at least 25% of the revenues of your business at that location.

In order to apply, a public health order must be limited based on one of these factors: geographical boundaries, type of business or other activity or risk associated with a particular location.  It must also result in sanctions or be an offence if the business not does comply.[6]

All applications must be made on or before 180 days after the end of the qualifying period. [7] Applicants can apply for CERS as of November 23, 2020.

At Sotos LLP, our team of experts has been advising businesses in the automotive, restaurant, grocery, personal, home and professional services, hotel, retail and cannabis sectors as they face challenging economic and financial issues relating to the current pandemic. Please contact us if you wish to discuss your eligibility for any of the government assistance programs, and to determine an effective approach to combatting business challenges caused by the outbreak of COVID-19.

Anna Thompson-Amadei, Sotos LLP

Anna is an associate with Sotos LLP in Toronto, Canada’s largest franchise law firm. She practices business law with a focus on franchising, licensing, and distribution. Please contact Anna at 416.572.7322 or athompson-amadei@sotosllp.com if you would like to discuss this or any other topic relating to the operation of your business.

[1] https://www.canada.ca/en/revenue-agency/services/subsidy/emergency-rent-subsidy/cers-calculate-subsidy-amount.html#h-3
[2] Note that any sales tax component of these costs would not be an eligible expense.
[3] Note that on February 24, 2021, the government announced a proposed change to amend the rules in the Income Tax Act so that Lockdown Support would be available in situations where the activities of a party not dealing at arm’s length are required to cease as a result of a “public health restriction”, that party rents the property from the entity, and all other conditions for the Lockdown Support are met.
[4] https://www.canada.ca/en/revenue-agency/services/subsidy/emergency-rent-subsidy/cers-expenses-claim.html
[5] https://www.canada.ca/en/department-finance/news/2020/11/canada-emergency-rent-subsidy.html
[6] https://www.canada.ca/en/revenue-agency/services/subsidy/emergency-rent-subsidy/cers-calculate-subsidy-amount.html
[7] https://www.canada.ca/en/revenue-agency/services/subsidy/emergency-rent-subsidy/cers-how-apply.html

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While it may seem like a straightforward decision for all employers to adopt a COVID-19 vaccination policy, there is no one-size-fits-all approach and answers to questions surrounding whether vaccination can be made mandatory in workplaces fall squarely in a grey zone.

To help make sense of this tricky area, here are factors that employers who are considering adopting a COVID-19 vaccination policy should take into account:

Should Employers Have a Mandatory COVID-19 Vaccination Policy?

Employers across Canada have a legal obligation under occupational health and safety legislation to provide their employees with safe workplaces and to take all reasonable precautions to protect employees from getting a work-related illness.

For many employers, implementing a COVID-19 vaccination policy may be one effective way of meeting this legal obligation and providing a safe workplace for all staff in addition to clients and members of the public who may enter the workplace.

The vaccines available in Canada are currently thought to be between 80% and 95% effective in either preventing infection, or preventing symptoms of COVID-19 in the vaccinated person. More studies and time are needed to understand exactly why the vaccines are effective and whether vaccination also affects potential asymptomatic transmission of COVID-19 between a vaccinated person and a non-vaccinated person.

Although immunization is one of the best ways of preventing COVID-19 transmission and infection in workplaces, it does not mean that a vaccination policy will be necessary or justified for every workplace.

Is a Workplace COVID-19 Vaccination Policy Necessary or Justified?

It depends. Not all workplaces pose the same level of risk of infection and transmission either to employees or to others who enter the workplace.

Health care institutions, shelters, child care centres, educational institutions, industrial settings (including factories), retail establishments, hospitality sector settings (including restaurants), grocery stores, and office settings all have different risk factors to consider in determining what a reasonable policy might look like.

Employers should consider the following in determining whether a policy is necessary or justified:

• Ability to work from home. Can employees perform their job by working remotely at home? If yes, is it necessary to require vaccinations and order employees to return to the physical workplace? Or is it possible to continue with a work from home arrangement while public health guidelines continue to recommend it? Are there issues concerning staff productivity that cannot be addressed other than by a return to the physical workplace?
• Physical proximity. If employees cannot work remotely from home, can they safely practice physical distancing, masking, and good hand hygiene at work? Do the requirements for physical distancing, masking, and good hand hygiene pose a significant impediment or challenge to operating the employer’s business?
• Vulnerability of clients or members of the public served. Does the workplace involve the provision of care or services to a vulnerable group? (e.g. healthcare employees in a long-term care setting)
• History of workplace transmission. Have employees or anyone else entering the workplace become infected with COVID-19? Is immunization likely to significantly alter the current risk of infection in the employer’s particular workplace?
• Timing of vaccination: What is the demographic of the workplace? Do all employees fit within one of the groups given priority status in receiving a vaccine in Canada? Or will certain employees become vaccinated sooner than other employees and receive preferential treatment because of their immunization status?
• Available healthcare infrastructure. Is the workplace situated in an area with reduced access to healthcare infrastructure? Is the workplace situated in a COVID-19 “hotspot”?
• Unionized setting. Is there a collective agreement and/or a joint health and safety committee that should be consulted and have input into the development of the policy?

Employers should avoid boilerplate policies that do not take into consideration the specific circumstances of their workplace. A policy for a healthcare or industrial setting in which employees cannot work remotely and have challenges practicing physical distancing and other preventative measures will necessarily look much different than a policy for an office setting in which employees can work remotely for the foreseeable future.

As employers consider drafting their policies, it should be kept in mind that it is unclear how courts or boards of arbitration may respond to any potential legal challenges to vaccination policies brought forward by unions on behalf of employees, or employees themselves in tribunals or courts.

In the past, some unionized employees have successfully challenged vaccination policies implemented by employers. For example, in the case of Sault Area Hospital and Ontario Nurses’ Association, 2015 CanLII 55643, the Ontario Nurses Association objected to the implementation of a “vaccinate or mask” policy that required healthcare workers in a hospital setting to wear surgical/procedure masks each year throughout the five to six month flu season if they had not received vaccination for influenza. The union’s position was that the policy was an unreasonable exercise of a management right. The arbitrator agreed with the union after hearing from several leading experts in epidemiology and the employer was not permitted to implement its policy.

However, COVID-19 is much more lethal than the flu and there are indications that arbitrators and courts may reach different conclusions about workplace policies relating to COVID-19. In Caressant Care Nursing & Retirement Homes v Christian Labour Association of Canada, 2020 CanLII 100531, the union challenged the employer’s policy requiring mandatory testing of all staff at a retirement home for COVID-19. The union argued that COVID-19 testing is painful and a serious invasion of an employee’s privacy. The arbitrator disagreed, holding that in weighing the intrusiveness of the COVID-19 test against preventing the spread of COVID in a retirement home, the employer’s policy was a reasonable one.

Can Employers Make Vaccination Mandatory For Every Worker?

The short answer is, no.

Employers can strive for 100% vaccination rates in their workplace, but there are limits to making a vaccination policy mandatory for every employee.

Employees may refuse to become vaccinated and must be accommodated by their employer to the point of undue hardship if the basis of their refusal is related to:

Medical reasons: Employees who cannot receive a vaccination because they may suffer an adverse reaction (e.g. employees with allergies at risk of anaphylaxis), employees who take medications that are contraindicated with the vaccine, or employees who are otherwise advised by medical practitioners to not take the vaccine, may refuse to become vaccinated.

Religious or moral reasons: Employees who object on the basis of religion or freedom of conscience may also refuse to become vaccinated.

Employees may be required to provide documentation to an appropriate person within the employer’s organization to substantiate their refusal to become vaccinated.

Employees’ Charter rights and human rights can engage complex considerations on the part of an employer. Employers should seek advice to understand how to meet their obligations to employees who cannot or will not become vaccinated on these grounds.

Employees who cannot become vaccinated or refuse to become vaccinated should be prepared to discuss what accommodation they are seeking from their employer and recognize that their requested accommodation may not be provided, but other reasonable alternatives may be provided instead.

Generally speaking, if an employee cannot be accommodated by being provided with modified work or an accommodation in the form of working from home, or working different hours, then an employee is entitled to take a job-protected unpaid infectious disease leave in connection with the COVID-19 pandemic. In Ontario, employees are entitled to remain on infectious disease leave until at least July 3, 2021, or potentially longer if they meet certain conditions.[1]

While valid exemptions from vaccination must be respected, vaccine hesitancy will also give rise to challenges in the workplace. Although these types of concerns will not trigger the same obligations in the form of accommodation, employers should seek to understand their employees’ concerns and determine if they will choose to hold townhalls or other information sessions to strongly encourage vaccination and provide credible information concerning its safety and efficacy.

Can Employers Require Proof of Vaccination?

Several sectors in Canada are contemplating “immunity passports”, or standardized documentation that proves a person has been vaccinated in order for that person to access services such as airline travel, or attending sporting or entertainment events with large groups in attendance.

While there is a precedent for requiring proof of immunization in certain contexts such as travel (e.g. yellow fever certificates for entry to countries with persistent transmission) and education (e.g. vaccination of school aged children against certain infectious diseases), the application of an immunity passport in a workplace setting is a new one that may present challenges.

Before employers invest in apps or other programs designed to verify employees’ vaccination status, they should consider the following:

Form of proof of immunization: Which documents will be considered valid in substantiating vaccination? Will employees be required to undergo anti-body testing? Will medical certificates from healthcare providers be required? What information must be included in a medical certificate? Who will pay for anti-body testing and/or medical certificates?

Privacy of personal health information: Who is gathering employees’ personal health information regarding their immunization status and what protections are in place to safeguard the privacy of the information? Who within the employer’s organization will have access to the personal health information?

How proof of immunization will be used: What privileges or responsibilities will employees who provide proof of vaccination receive? What privileges or responsibilities will be withheld from employees who have not been vaccinated or who do not provide proof of vaccination? Will this cause morale issues?

If employers choose to implement a workplace COVID-19 vaccination policy and collect proof of immunization and other personal health information belonging to their employees, they must ensure that strict privacy controls over the information is maintained and that the information is shared with as few people as possible and only for the purpose of managing attendance at the employer’s premises.

Can Non-Vaccinated Employees Have Their Employment Terminated?

Whether employers can make vaccination a condition of ongoing or new employment is a question that can only be answered by looking at the full context of the workplace.

Requiring vaccination as a condition of employment may be a justifiable or reasonable requirement if the circumstances of the workplace make it impossible for employees to perform their jobs remotely and other factors make the workplace one that is at high risk of transmitting COVID-19 in the workplace.

Some employers may consider revising employment contracts to make vaccination mandatory, except in the case of the valid exemptions described above. If employers choose this approach, they should consult with legal counsel to ensure the new contracts will be enforceable.

Bottom Line Practical Advice for Employers

Implementing a workplace COVID-19 policy requires careful consideration. Employers should assess the particular circumstances of their workplace and consult their employees to determine their present intentions on receiving, or not receiving, the COVID-19 vaccine once it becomes available to them. Surveys determining employees’ vaccination willingness should be anonymous.

If employers determine that a vaccination policy is necessary, the logistics of how information and expectations concerning vaccination will be communicated to employees and how proof of immunization will be collected should be determined well in advance. Internal processes for employees requesting workplace accommodations for valid exemptions, and the drafting of any new or revised employment contracts should also take place early in the process.

Finally, employers should keep in mind that even if they are successful in achieving high rates of vaccination within the workplace, because the available COVID-19 vaccines are not 100% effective and their effect on asymptomatic transmission is unclear, other prevention measures including physical distancing, masking, and good hand hygiene should remain in place in workplaces until public health guidelines change.

For assistance with COVID-19 employment related questions, please contact Louis Sokolov. Louis regularly provides employment law advice to our clients. Louis can be reached directly at 416.572.7316 or lsokolov@sotosllp.com.

[1] Infectious Disease Emergency Leave, O. Reg. 228/20.

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The main difference between a ghost kitchen and a virtual restaurant is that the latter is usually associated with a restaurant or franchise system using existing kitchens in existing bricks and mortar restaurants to produce and promote products for delivery only through delivery apps under a brand not associated with the restaurant itself.  By contrast, ghost kitchens tend to be brands which rent the use of facilities which are established for the production of virtual brands.  Ghost kitchens may produce multiple brands for the same owner utilizing similar ingredients but packaged in completely different ways.  Ghost kitchens can also be utilized by more than one organization at one time in shared facilities.

Ghost kitchens are an excellent way for a new chef or an existing brand to test out new concepts or new items without making the investment into a brick and mortar location.  They are somewhat restrictive in that they can only offer limited geographical coverage.  An operation may therefore need to utilize several ghost kitchens in various locations to get necessary delivery coverage beyond a small geographical area.

There are a number of legal considerations involved in the creation and operation of ghost kitchens and virtual restaurants which are highlighted in this article.

1. Names/Lease Use Clauses

Although ghost kitchens and virtual restaurants typically have no visible signage and are not promoted in the same way typical restaurants are promoted, a name is no less important to a ghost kitchen or virtual restaurant than for any restaurant.  The same attention must be paid when selecting a name as with a full-scale restaurant.  Trademarking considerations including the trademark rights of others must be taken into account.

A second important consideration for the brand owner is to ensure that it can operate using its chosen name out of its designated location.  If an existing restaurant is being used as a virtual restaurant to promote a virtual brand, the lease must permit the general use of take-out or delivery and must not be restrictive to a particular brand.  Consideration must also be given in these circumstances to whether there are any exclusive use obligations contained in a lease which might restrict what products can be sold out of a virtual restaurant.

2. Reservations of Rights

If a franchisor or franchisor-related entity is establishing a ghost kitchen, it must ensure that its rights to operate have been reserved in the franchise agreements utilized in the franchisor’s system.  Franchisor virtual brands may operate out of franchised locations in an exclusive or non-exclusive franchised territory.  They may combine menu items from existing concepts or serve as testing grounds for products which may or may not be introduced into the mainstream system.

Where such rights may not be expressly reserved, a franchisor or franchisor-related entity will need to consider whether the sale by it of new items typically sold by its franchisees in the franchise system may breach its contractual obligations or offend its statutory fair dealing obligations to any affected franchisee.

Care must be taken to ensure that the establishment and operation of ghost kitchens by franchisors do not have the effect of cannibalizing franchisee business so as to derail the traditional franchised businesses.  System advertising funds must also not be improperly used to benefit the franchisor’s business where no reasonable benefit accrues to the franchisees.  Franchisors may want to consider offering ghost kitchen outlets to a nearest franchisee similar to the practice of offering underdeveloped territories to the nearest franchisee for use as a satellite store.  Such practices avoid the appearance and the potential fact of the franchisor competing with its own franchisees.

Where franchisors require franchisees to utilize their kitchens or ghost kitchens for the production of new items for a virtual brand, it is important that franchisees understand the limits of what interest they may have in the brand and menu items themselves.  The ability of a franchisor to require the franchisee to discontinue the production and sale of the menu items must be communicated to the franchisee clearly as must be the franchisor or its related entity’s ability to offer the same menu items through an alternative system at the same time or subsequently.

3. Disclosure

The existence of such businesses will also need to be disclosed as a matter of statutory franchise disclosure where such disclosure laws exist.  This disclosure alerts a prospective franchisee to the possibility that its menu items may be sold in non-franchised locations either by the franchisor or a franchisor-related entity within its trading area or even more generally.

4. License Rights

If any entity related to a franchisor establishes a virtual brand where it is intended that such production will be sold by franchisees out of their kitchens, they will want to ensure that the proper licensing rights exist between the related entities that would permit the franchisor to sub-license the right to create the new items to its franchisees to be sold by the franchisees under their franchise agreements.

5. Liability/Insurance/Trade Secrets

For a ghost kitchen brand, it is necessary to consider liability and insurance issues if kitchens are being shared by various operators in a commissary situation.  The brand owner will also want to ensure that its new items are protected from other users of the commissary from a trade secret perspective.  Users of ghost kitchens will also want to ensure that the facilities they are using are properly zoned and licensed and adhering to the highest levels of food safety standards.

6. Proprietary Apps

An important initiative in recent years has been the development of proprietary apps for take-out and delivery purposes.  Many restaurant concepts were motivated to develop their own apps for three specific reasons:

1. to reduce the cost of providing delivery services which have produced marginal profitability at best given the cost of using third-party providers;
2. to allow for more uniformity in the pricing of menu items which has often had to be higher when the same items are available through third party providers;
3. to permit for the collection and utilization of customer data and the development of loyalty programs.

There is an opportunity for virtual brands to share collected information.  Users of proprietary apps will need to agree through the terms of use of the apps to the collection and sharing of any personal identifying information.

The development of ghost kitchen and virtual restaurant businesses have received a tremendous boost during the current pandemic.  If some predictions are correct that the increase in the use of delivery systems for meals will be part of the new normal even if the pandemic subsides, it can be expected that these businesses will continue to develop and flourish.  As with all new businesses, we are seeing new forms of agreements and contractual provisions and the development of insurance products to address the legal issues they raise.

Allan D.J. Dick, Sotos LLP

Allan is the co-managing partner of Sotos LLP and sector leader of the firm’s Restaurants practice area. Allan is a trusted primary advisor to many top franchisors, with more than three decades practising law in the franchising, licensing and distribution industry. Allan has been recognized by Chambers Canada, Canadian Legal LEXPERT Directory, Who’s Who Legal, and Best Lawyers in Canada as a leading Canadian franchise law practitioner. He can be reached at adjdick@sotosllp.com or by cell at 416.805.8989.

This article was originally published by Foodservice and Hospitality magazine in August 2020 issue. 

The post Ghost Kitchens and Virtual Restaurants: Legal Considerations appeared first on Sotos LLP.

The government-imposed restrictions and social distancing practices that have been implemented to combat the spread of COVID-19 have led to significant economic hardships for many businesses, especially those in the retail, hospitality, and personal services industries.  Unfortunately, many of these companies have or will become insolvent, and may eventually face bankruptcy. This article will provide an overview of some possible alternatives to bankruptcy that companies should consider if they find themselves in financial trouble.

Bankruptcy vs Insolvency

In Canada, the term “bankrupt” or “bankruptcy” refers to a legal status and process.  Bankruptcy provides protection and relief for individuals who are unable to pay off their debts. When proceedings are initiated under the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“BIA”) it does not necessarily mean that the debtor company is bankrupt – the debtor may be insolvent, but not necessarily bankrupt. For an individual to be bankrupt, they must have either made an assignment under the BIA or had a bankruptcy order made against them.

Section 2 of the BIA defines an “insolvent person” as a person (a “person” can mean a corporation or an actual individual) who is not bankrupt, is a resident or carries on business or has property in Canada, whose liabilities to creditors provable as claims under the BIA amount to at least $1,000, and:

1. who is unable to meet obligations as they generally become due;
2. who ceased paying current obligations in the ordinary course of business as they generally become due; or
3. whose property is not sufficient at a fair valuation to enable payment of all obligations, due and accruing.[1]

A “bankrupt” person is defined as a person who has made an assignment in bankruptcy, or against whom a bankruptcy order has been made, or the legal status of that person. [2] Further, a bankruptcy order can be made against a person that is not insolvent. Sections 42 and 43 of the BIA list a number of “acts of bankruptcy” that can support an application for a bankruptcy order. In order to make a voluntary assignment into bankruptcy, or a proposal under the BIA (discussed below), the person must first be insolvent.

Alternatives – Debtor’s Options

There are several advantages to considering alternatives and avoid filing for bankruptcy: it allows companies to avoid the stigma associated with filing for bankruptcy, it facilitates the preservation of jobs (as much as possible) and can preserve enterprise value, and it allows businesses to maintain customer and supplier relationships.

Get organized

Companies that find themselves in financial distress should first take the time to get organized and get their affairs in order.  The following housekeeping suggestions should be considered best practice, even if a company is in good financial health:

• Protect any loans that were made to the troubled company by affiliated or parent companies by having the appropriate security interests registered.  This ensures that the secured loan will have better standing than any unsecured creditors.  This requires establishing evidence of the loan, generally by way of a promissory note, preparing a loan agreement and general security agreement and registering the security interest with the Personal Property Security Act framework in Ontario.
• Update and maintain a thorough inventory of the company’s assets and liabilities.  Assets include, but are not limited to, leases, trademarks, and licences.  Taking inventory of the assets includes determining which entity owns the asset – i.e., whether it is the distressed company or an affiliate.  It is important to locate and organize all relevant documents including, but not limited to, all financial statements and profit and loss statements.  Corporate documents should be located, brought up to date and reviewed for accuracy.
• If possible, ensure that the company is current with all fees, remittances, and taxes owing to the government.

Informal Discussions

Depending on the circumstances, it may be possible for debtors to contact their creditors directly and negotiate a repayment schedule or lower interest rates. Creditors will expect debtors to present a concise plan that outlines how the debtor plans to meet its obligations.  It is important that debtors submit realistic proposals that include reasonable payment schedules, while keeping in mind that the more drawn out the repayment term, the most interest will be paid.

Creditors do not have any legal obligation to arrange alternative payment plans with debtors; therefore, it is it crucial that any informal discussions that occur are conducted in earnest and in such a way as to convince the creditor that it is in their best interest to be amenable to accepting a special arrangement.  Before considering any proposed arrangement, most creditors will require an opportunity to look at the distressed company’s financials, in order to assess the viability and reasonableness of the proposal.

Proposals

Given the current economic environment, proposals are more likely to succeed now than they were in the past. This article will discuss Division 1 proposals under the BIA and proposals under the Companies’ Creditors Arrangement Act, R.S.C., 1985, c. C-36 (the “CCAA”). The essential difference between a restructuring under the CCAA and one conducted under the BIA is that the process under the BIA has more procedural steps and is set out with strict timeframes, rules, and guidelines.  A CCAA proceeding, on the other hand, is more discretionary and judicially driven.[3]

Division 1 / Commercial Proposals

Under section 50 of the BIA, an insolvent person (which includes individuals, partnerships, unincorporated associations, corporations, cooperative societies and cooperative organizations) can make a proposal to creditors to avoid bankruptcy.  The proposal is similar to a contract that is arrived at with creditors resulting in a restructuring of debt and the orderly payment of the compromised amount in accordance with the proposal.

If a debtor wants to make a proposal under the BIA, it must do so with a licensed insolvency trustee, who will act as the “proposal trustee”.  The proposal trustee is responsible for monitoring the debtor’s affairs, since it remains in possession of its assets, and reporting to the creditors and the court.

The debtor has the option to first file a Notice of Intention to Make a Proposal (“NOI”), or to file a proposal, each of which will immediately impose a stay of proceedings on creditors.  The stay of proceedings is crucial as it allows the debtor much-needed breathing room to focus on developing and implementing its proposal to creditors.[4]

Once a proposal is filed, the proposal trustee notifies the creditors of a meeting to consider the proposal and the creditors vote on whether to accept the proposal or not. Only those creditors that have filed proofs of claim are entitled to vote.  The creditors vote in classes which are established by the proposal.  The unsecured creditors always constitute one class, but the secured creditors may be categorized into different classes.[5]

There are several benefits of making a proposal under the BIA, some of which include:

• all legal collection actions by unsecured creditors for debts covered by the proposal are stopped;
• it remains possible for debtors to obtain new credit or interim financing to fund the proposal process;
• creditors cannot terminate agreements solely by reason of the insolvency;
• the debtor can disclaim certain agreements, including premises leases, that are no longer advantageous;
• it allows for the possible retention of employees; and
• the debtor can sell certain assets or business lines while retaining other parts of the business. [6]

Many of the aforementioned benefits require court approval, which will, of course, affect the professional fees associated with the process.  Further, some mechanisms are also subject to the court’s discretion.  This means the court can decide whether or not a particular mechanism under the BIA is available to the distressed company, given the circumstances.

Requirements

Some of the key requirements for a Division 1 proposal are as follows:

• It must provide a result to creditors that is better than what would be expected in a bankruptcy.[7]
• Unless the government consents, the proposal must provide for payment in full of certain tax claims within six months of court approval.
• If the debtor is an employer, then it must provide for payment to all employees and former employees of all unpaid wages, commissions, etc. up to $2,000.
• If there is a prescribed pension plan, the proposal must provide for payment of certain required payments under the pension plan. [8]

Secured vs Unsecured Creditors

A Division 1 proposal may be made to secured creditors, but must always be made to the unsecured creditors.  If the proposal is made to both secured and unsecured creditors, this means there will be at least two classes of creditors who vote separately.  If not made to secured creditors, if the value of the collateral secured is valued at less than the debt, and therefore a deficiency is expected, a secured creditor may be treated as unsecured for the value of the deficiency. Further, the debtor must continue to keep the terms of any debt or security agreements in good standing throughout the proposal period.[9]

Cashflow Statements

Any debts that the debtor owes prior to the date of filing the NOI or proposal will be put on a temporary “hold”; however, the debtor is required to demonstrate that it has sufficient cashflow to meet its ongoing obligations, which may include payroll, taxes, professional fees, rent, etc. – this is done by filing a cashflow statement, which the proposal trustee must sign off on.[10]

Timeline

It is important for debtors to follow the timeline requirements as set out in the BIA, as failure to do so will result in a deemed assignment in bankruptcy.  After filing the NOI, the debtor has 30 days to file a proposal, or it must seek an extension of time from the court of a maximum of 45 days, and up to a maximum aggregate time of five months after the initial 30-day period expires.[11]

After a Proposal is Filed

In order for a proposal to be accepted, all classes of creditors (except creditors having equity claims) must vote to accept the proposal by a majority in number of creditors (with proven claims) present at the meeting (either in person or proxy), and two-thirds in value of the creditors present at the meeting.[12]

It is not unusual for a debtor to contact creditors in advance of the proposal in an effort to garner support and ensure quorum is achieved at the meeting.  It is also not unusual for amendments to be tabled at, or in advance of, the meeting, or the meeting to be adjourned if certain creditors require more information, or seek some enhancements to the proposal.  Debtors, with the assistance of the proposal trustee, may often negotiate terms of the proposal with certain creditors (usually those with significant claims) because if the proposal is voted down, the debtor is deemed to have made an assignment in bankruptcy.[13]

Proposals under the CCAA

The CCAA is federal legislation that allows financially troubled corporations the opportunity to restructure their affairs through a formal Plan of Arrangement while continuing to operate.  Similarly to Division 1 Proposals under the BIA, the CCAA offers an opportunity for the company to avoid bankruptcy and allows the creditors to receive some form of payment for amounts owing to them by the company. However, while Division 1 proposals are available to corporations and individuals alike, regardless of the amount of debt, proposals under the CCAA are available only to larger corporations that have in excess of $5 million owing to creditors. While the CCAA is a more flexible mechanism that allows for greater business and judicial discretion than proposals under the BIA, it is a complicated legal process and can involve significant costs and impair the ability of unsecured creditors to collect money from a debtor company.

Restrictions and Eligibility

A debtor company can make an application under the CCAA when it is insolvent and the total secured and unsecured claims against it and its affiliates exceed $5 million. The CCAA is not available to banks, insurance companies, trust and loan companies or railways.

As with Division 1 Proposals, under the CCAA, the debtor company is not bankrupt. The CCAA also allows a company, if it so chooses, to address its shareholders in addition to its creditors.  Typically, when the shareholders of the company are impacted by the proposal, they are often given the opportunity to vote on it.

Court-Supervised reorganizations

Applications are made in superior court, usually in the province where the head office or chief place of business of the debtor is located.  Applications can be brought by the debtor company or by other interested parties such as creditors, bankruptcy trustees, or the liquidator of the debtor.

A monitor is appointed, who must be a trustee within the meaning of the BIA.  The monitor is responsible for overseeing the business and financial affairs of the debtor company during the reorganization.

Once an application is accepted by the court, the CCAA grants wide-ranging discretionary powers to the court to craft orders and remedies appropriate to the particular reorganization before it.  The court will make orders at the instance of the company and with the support of its monitor.  This often happens over the objections of the creditors.

Commonly used actions by the court include:

• Prohibiting parties from terminating agreements with the debtor company;
• Disclaiming or terminating existing contracts entered into by the debtor company;
• Authorizing post-filing security for debtors-in-possession financing or super-priority charges on the debtor’s company’s assets when necessary to allow debtor company to continue to do business during the reorganization;
• Establishing the existence of creditors’ claims by way of a time-limited claims process to determine creditors’ claims which may be disputed by the debtor company; and
• Approving a plan of arrangement created by the debtor company to compromise or arrange the debts owed to some or all of its creditors, including, importantly, any claims against directors and officers for their statutory liabilities.

While the court does have broad discretion in choosing what steps to take in the reorganization, there are limits on the court’s powers – specifically, an order made under the CCAA cannot compel third parties to advance any further money or credit to the debtor company; nor can it prohibit creditors from requiring immediate payment for services provided to the debtor company during a CCAA proceeding.  Further, if the reorganization is unlikely to be successful, the stay of proceedings may be lifted by the court – this would terminate the CCAA proceedings and lead to bankruptcy proceedings under the BIA.

Informal Restructurings

Informal restructurings allow distressed companies to try to arrive at consensual resolutions with their creditors and stakeholders as a first resort – before commencing formal court proceedings.

An informal restructuring can take many forms: it may address debt problems with an offer of deferred or partial payments to creditors, an exchange of debt for equity, or other forms of balance sheet solutions.  It can also address operational issues, which could include the creation of additional corporations, the transfer of assets or operations, or the sale of all or part of a business.

Other forms of informal restructurings include:

• the partial sale of the debtor’s assets;
• refinancing of existing debt;
• bridge loans; and
• creditor or stakeholder forbearance.

Benefits

The benefits of engaging in informal restructurings stem from the avoidance of undergoing any formal proceedings.  As well as avoiding the stigma that follows filing for bankruptcy, this also allows debtors to avoid paying the fees and costs associated with formal restructuring processes, as well as the risk of losing all of the company’s assets or any ongoing business shutdown.

Downsides

The lack of structure, in turn, also presents some downsides.  First, without a formal process in place, the debtor is not protected by a stay of proceedings and is vulnerable to enforcement and other action by creditors and stakeholders. Furthermore, creditors are not obligated to settle; however, they are more likely to do so if they feel the offer promises a better return than would be the case if the company either ceased to operate or filed for bankruptcy.

The level of complexity of the debtor’s financial structure will also play a role in determining the wisdom of attempting an informal restructuring – the more complex the debtor’s financial structure and the greater the number of stakeholders, the more difficult it will be for the debtor to restructure informally.

Lastly, informal proposals to creditors may require showing the creditors the debtor’s current financial statements and providing an explanation of the financial distress, and in the case of self-directed informal restructuring, the CRA will not compromise its debt, meaning interest and penalties will continue to accrue.

It is prudent when considering informal proposals to first speak with a professional advisor, especially before beginning negotiations with creditors.  Debtors need to be aware of the correct process for obtaining a full release from any remaining debt and to understand the implications of stopping payments to creditors.

Secured Creditor Imposed Restructurings –  Forbearance Agreements

In certain circumstances where a borrower has fallen into financial distress and has defaulted under the terms of a credit agreement, the creditor may propose to enter into a forbearance agreement.  Forbearance agreements typically acknowledge that the lender has the right to enforce its security at that time, but will forbear for a period of time, based on certain important considerations.

The purpose of a forbearance agreement is to give the borrower time – time that may be used to refinance the business, sell off assets, obtain an injection of equity or deal with other creditors that are essential to a successful restructuring.  During this time, the lender can also gather more information regarding the financial situation of the borrower and assess what its financial needs will be going forward.  Both parties can also take this time to engage any consultants to assist in determining possible solutions to the current financial distress of the borrower.

Some terms that are typically found in forbearance agreements include:

• requiring additional financial reporting;
• mandating the preparation of cash flow projections for an extended period to be updated on an ongoing basis in order to show the actual results from the borrower’s operations;
• the grant of additional security by either the borrower or a guarantor;
• the correction of any deficiencies in the current security agreement; and
• rights of extension for further defined periods if certain milestones are met.

The lender may also appoint a monitor or another outside consultant that would monitor the business activity of the debtor, and assist them in ensuring that they are completing their obligations under the forbearance agreement. This would be at the expense of the debtor.

These types of agreements give the distressed company time to try to stabilize its business operations, seek alternative solutions, or sell some or all of its assets – all outside of a formal restructuring proceeding.  As with other informal processes, it is important to establish and maintain clear communications with suppliers and customers alike.

Conclusion

The most important take-away for debtors should be the importance of being proactive and engaging insolvency advice earlier rather than later.  The project of getting one’s house in order and getting organized can potentially bring alternative financial solutions to light that had not previously been considered, as well as facilitate discussions with creditors and other stakeholders.

Some things to consider when developing an action plan:

• Act early and be proactive to get the best result.
• Infusing more money is not necessarily the answer to financial difficulties.
• Consider whether the management team that got the company into trouble is the management that can lead it out of trouble.

No matter what alternative approach is attempted, cooperation and a clear understanding of the debtor’s financial reality among the stakeholders will be essential. Remember, creditors are not obligated to cooperate or extend any courtesy to the debtor; however, they are more likely to do so if they feel negotiations will result in a better return than if the troubled company is forced to cease operations altogether and file for bankruptcy.  Lastly, it is important to think about problem-solving before the situation becomes dire.  The ability to recognize there is a problem and prepare a proactive action plan will maximize a debtor’s options and opportunities.

At Sotos LLP, our team of experts has been advising businesses in the automotive, restaurant, grocery, personal, home and professional services, hotel, retail, and cannabis sectors as they face challenging economic and financial issues relating to the current pandemic. Please contact John Yiokaris (jyiokaris@sotosllp.com or 416.977.3998) or Anna Thompson-Amadei (athompson-amadei@sotosllp.com or 438.827.4020) if you wish to discuss any financial issues you may be facing and determine an effective approach including alternatives to bankruptcy that may be available.

[1] Bankruptcy and Insolvency Act, s.2

[2] Bankruptcy and Insolvency Act, s. 2

[3] https://www.insolvency.ca/en/resources/IIC_Bankruptcy_Primer.pdf

[4] Bankruptcy and Insolvency Refresher and Tips for Business Lawyers, Cho and Wanniarachige, 7

[5] Bankruptcy and Insolvency Act s. 50(1.1)-(1.4)

[6] Alternatives to bankruptcy materials

[7] (Re Allen Theatre Ltd. (1922), 2 CBR 147 (SCJ).

[8] Bankruptcy and Insolvency Act, s. 60(1.1), s.60(1.3), (s.60(1.5)

[9] Bankruptcy and Insolvency Refresher and Tips for Business Lawyers, Cho and Wanniarachige, 6

[10] Bankruptcy and Insolvency Refresher and Tips for Business Lawyers, Cho and Wanniarachige, 6

[11] Bankruptcy and Insolvency Act, s. 50.4(9), 50.4(8) BIA

[12] Bankruptcy and Insolvency Act, s.54(2)

[13] Bankruptcy and Insolvency Refresher and Tips for Business Lawyers, Cho and Wanniarachige, 7

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As most restaurants operate from leased premises, they are aware of the requirement upon them to secure insurance on the terms specified by the landlord.  The requirement to obtain business loss coverage is a standard coverage required by leases.  In the usual course, a restaurant owner will submit a landlord’s requirements to its broker and request and expect that the broker will procure for it the necessary policy of insurance.

An insurance policy is primarily a contract between an insurer and an insured.  Certain legislative requirements may be incorporated into the policy.  As such, whenever an insured suffers a loss or becomes exposed to a claim, the first place that needs to be considered is the policy itself.  Commercial policies issued by the different insurers do contain significant differences.  As such, each restaurant owner must consult the specific policy which it purchased.

Various insurers made changes to their business interruption coverage following the SARS and MERS pandemic scares.  Specifically, some excluded claims relating to the impact of viruses.  In the cases of policies that have this specific exclusion, it is unlikely an insurer’s position for denying coverage based on this express exclusion will be successfully challenged.  In other cases, some insurers sold policies that specifically provided coverage for losses for such diseases.

Insurers are also relying on a second ground for denying coverage where provided for in their policies.  This relates to express exclusions for damage caused by “pollutants”.  It is this writer’s view that a denial of coverage  is ill-founded if based on a pollution exclusion.  In the case of the COVID-19 virus, the virus itself does not “pollute” or change the character of the underlying substrata.  As such, it does not meet the normal definition of a pollutant.

Assuming these exclusions are addressed, the most common denial is based on the lack of “physical damage” to the restaurant premises which is the primary pre-condition in most policies for business loss coverage to apply.  Insurers are denying that restaurants are being closed due to “physical damage”.  Although the COVID-19 virus does not cause a typical form of damage that the policies were addressing when providing coverage, the term “physical damage” is not typically a defined term in a policy.  It is urged here that even if it cannot be proven that on any particular date the virus was present in a restaurant premise which resulted in damage and a subsequent closure of the restaurant, the government orders forcing closures are themselves premised on the contagious nature of the virus.  The underlying assumption is that a dine-in restaurant is a hot spot for the contagion.  By its nature, the virus will be present in the physical premises if brought into the restaurant.  It is for this reason that restaurants have remained closed by government order.  The damage caused by the virus therefore is certainly physical in nature.  This damage prevents the use of the physical premises because of the virus.  There may therefore be merit in challenging a denial based on this ground.

Class actions have been launched by groups of restaurant owners in the United States as well as in Canada to have it determined that the insurers have wrongly denied these claims.  There may also be governmental pressure placed on the insurance community at some point to do its part to contribute to the losses being suffered by the restaurant industry.  It is therefore important for insured restaurants to file their claims and proofs of loss to assert their entitlements.

The calculation of the business loss may be limited by the policy to a specific period of time such as one year.  The loss may cover fixed costs and lost profits.  Proving these losses can be a challenge under any business loss policy.  Businesses which have accessed government programs will also need to take into account those benefits in calculating their losses.

Lastly, it can be expected that business owners will be asking questions of their insurance brokers to understand why they did not have the requisite coverage if their claims are denied.  There is a potential for a broker (which is also typically covered by professional indemnity insurance) to be exposed to a claim by its client for failing to either secure the requisite coverage or failing to advise the client of the available possible options in the marketplace for obtaining that coverage.

In summary, despite the well-publicized general position of denial being taken by the insurance industry to avoid paying out significant sums to cover COVID-19 related business losses, every restaurant owner should seek advice on whether there is or may be coverage under its applicable policy and whether there may be other claims which it may be advised to consider.

At Sotos LLP, our team of industry experts has been advising many restaurant owners as they face challenging leasing, employment, franchising and insurance issues relating to the current pandemic.

Allan D.J. Dick, Sotos LLP

Allan is the co-managing partner of Sotos LLP and sector leader of the firm’s Restaurants practice area. Allan is a trusted primary advisor to many top franchisors, with more than three decades practising law in the franchising, licensing and distribution industry. Allan has been recognized by Chambers Canada, Canadian Legal LEXPERT Directory, Who’s Who Legal, and Best Lawyers in Canada as a leading Canadian franchise law practitioner. He can be reached at adjdick@sotosllp.com or by cell at 416.805.8989.

This article was originally published by Foodservice and Hospitality magazine in July 2020 issue. 

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Constructive Dismissal Under the ESA and at Common Law

Employers do not have an unrestricted ability to temporarily lay off employees from their employment. In order for an employee to be temporarily laid off, it must be an express term of their employment contract that the employer is entitled to place the employee on temporary lay-off and recall them at a later date.

These laws are intended to promote job stability and protect employees from their employers improperly laying them off. Employers that place employees on temporary lay-off without the proper contractual provisions in place, or, employers that reduce employees’ hours of work or overall remuneration by 20% or more, are vulnerable to a claim by an employee for constructive dismissal.

The New Infectious Disease Emergency Leave Regulation under the ESA

On May 29, 2020, the Ontario government introduced a new regulation to the Employment Standards Act, 2000 which removes employees’ protection from improper temporary lay-offs and reduced hours and remuneration, and expands employers’ power to implement such changes unilaterally.

Under the Infectious Disease Emergency Leave[1] regulation a temporary reduction or elimination of an employee’s hours of work by their employer for reasons related to COVID-19, or, a temporary reduction in an employee’s wages by their employer for reasons related to COVID-19 will be deemed to not constitute a constructive dismissal under the Employment Standards Act, 2000. [2]

The regulation also converts temporary lay-offs during the COVID-19 pandemic to “infectious disease emergency leave” [3], which is an unpaid leave under the Employment Standards Act, 2000 that was recently created to allow employees to take an unpaid leave of absence from work due to COVID-19 related reasons. This effectively eliminates employees’ ability to claim constructive dismissal if they were either improperly temporarily laid off, or, if their temporary lay off exceeded 13 weeks.

Time Limits for Relying on the Regulation

Employers may only rely on the new regulation for imposing temporary lay-offs or unilaterally reducing hours or wages for the period of time beginning on March 1, 2020 and ending on whichever date is six weeks after the provincial declaration of emergency order is terminated. For example, if the province of Ontario terminates the declaration of emergency order on July 3, 2020, employers could continue to rely on the regulation until August 14, 2020 after which point the usual employee protections under the Employment Standards Act, 2000 will resume.

One time-based exception to the application of the regulation is for employees who, as of May 29, 2020, had already been on temporary lay off for a period longer than 13 weeks in a 20 week period.[4]

Certain Constructive Dismissal Claims May Survive

Notwithstanding the introduction of this regulation, employees may continue to advance constructive dismissal claims in a number of scenarios.

Employees that are exempt from the coverage of the Employment Standards Act, 2000 and unionized employees are not subject to the regulation. In the case of unionized employees, the terms of the collective agreement provisions will continue to apply in governing the terms of their employment.

One area of uncertainty concerns whether employees with contracts of employment governed by the common law, such as employees without any written employment contract, may be permitted to advance a claim for constructive dismissal at common law and argue that the new regulation does not apply to them. This argument has not yet been tested in courts or tribunals and it remains to be seen how the regulation may be interpreted in that context.

[1] Infectious Disease Emergency Leave, O Reg 228/20.
[2] Infectious Disease Emergency Leave, O Reg 228/20, s. 7.
[3] Infectious Disease Emergency Leave, O Reg 228/20, s. 4(1), s. 6(1).
[4] Infectious Disease Emergency Leave, O Reg 228/20, s. 6(2) and s. 7(2).

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Take Employee Health Concerns Seriously

While not every business in the hospitality industry has been able to keep its doors open, many have and are adapting to a new normal with a sharply reduced staff complement. With exposure to the public and to other workers, employees are likely to have concerns about their health and safety at work. Employers should take these concerns seriously and discuss them with their employees and any relevant committees. For an employee to refuse to come to work, their health and safety must be endangered, not just at risk. Employers must educate themselves to recognize the difference. Failure to protect employees’ health not only results in an unsafe working environment for everyone, it could also result in labour inspection orders or fines.

Provide Job-Protected Leaves and Workplace Accommodation

Employees who have contracted COVID-19 or who are taking care of an ill family member are protected by human rights and employment legislation. Some employees who are not ill may require workplace accommodation to care for children who are not attending school or daycare due to COVID-19 related closures. Where working from home is not an option, employers may need to provide other accommodation such as a different shift or provide a job-protected unpaid leave of absence. Employers need to individually assess each request for accommodation to determine what can be done, up to the employer’s undue hardship. Where employers suspect an accommodation is required but an employee has not requested it, employers have a duty to inquire.

Understand Lay-offs and When Termination or Severance Pay Is Required

The notion of temporary lay-off is widely misunderstood. The only time a legal right to temporarily lay off employees arises is when there is a written employment contract or collective bargaining agreement in place that expressly allows for temporary lay-offs. Without this, employees are entitled to claim constructive dismissal and seek termination and/or severance pay under employment legislation or at common law, where applicable. This does not mean every employee who was put on temporary lay-off when they should not have been is likely to rush to sue their employer in the current climate, but employers should be aware of the risk.  Employers might consider negotiating an improperly laid-off employee’s return to work by recognizing the employee’s duration of employment as being unbroken in exchange for the employee relinquishing their right to claim constructive dismissal. This represents a win-win situation for employees looking to return to work and employers who are eager to welcome them back.

Where permanent lay-offs are necessary, employers need to provide notice of termination of employment or pay in lieu of notice to employees. Each employee’s circumstance is unique and employers must take care to ensure they are meeting all of their legal obligations, including paying all outstanding wages and providing fair and adequate notice in order to avoid director liability for unpaid wages and potentially costly constructive dismissal or wrongful dismissal lawsuits in the near future.

Consider Continued Employment for Certain Key Employees

Employers need to move beyond a siege mentality and shift gears to planning for the near future when restrictions are loosened but physical distancing remains necessary. For this purpose, marketing employees, general mangers and executive chefs will all prove to be crucial employees that employers should retain, even if only on a part-time basis for the time being. For employers in the foodservice industry, a shift to a predominantly take-out or delivery model means menus will likely need to be reinvented or changed substantially and interiors redesigned to make guests feel at ease if and when they dine in. Employers in the accommodation sector should also shift their focus to attracting local guests who are apt to be wary of air travel or being far away from home. Teams need to continue to work together if innovative ideas and strategies are to be successfully developed for the post-COVID-19 era and that means continued employment for at least some employees.

Embody the New Characteristics of Successful Businesses

Now more than ever, consumers report that their spending decisions are tied to how well they think businesses treat their employees. A recent study found that empathy, patience, support and cooperation may be the new characteristics of successful businesses following the COVID-19 pandemic. While it may seem prudent to take an approach that favours cash preservation above all else, employers need to treat their workers with respect and be seen to be doing so. Emerging on the other end of the COVID-19 pandemic requires strong teams and thinking ahead to a future which promises both radical change and unprecedented opportunities for the entire hospitality industry.

With over 40 years of experience servicing the hospitality and franchise industry, Sotos LLP is actively involved in providing employment related legal advise. Our lawyers are actively engaged in helping industry participants address their employment related issues related to COVID-19.

Allan D.J. Dick, Sotos LLP

Allan is the co-managing partner of Sotos LLP and sector leader of the firm’s Restaurants practice area. Allan is a trusted primary advisor to many top franchisors, with more than three decades practising law in the franchising, licensing and distribution industry. Allan has been recognized by Chambers Canada, Canadian Legal LEXPERT Directory, Who’s Who Legal, and Best Lawyers in Canada as a leading Canadian franchise law practitioner. He can be reached at adjdick@sotosllp.com or by cell at 416.805.8989.

This article was originally published by Foodservice and Hospitality magazine in June 2020 issue. 

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Although only several weeks into closures or significant reductions in offerings, we have identified the following areas where hospitality businesses have had to react and need future plans:

Leases

Most businesses have had to review their leases to determine their legal rights and practical options related to full or partial closures of their location(s).  Following SARS, a number of landlords specifically included viruses as an exception in the “force majeure” provisions of their leases to deny an operator’s right to use an epidemic or pandemic as a basis for avoiding its lease obligations.  Even without that express exclusion, many businesses are surprised to be told that the force majeure provisions of their leases may well not allow them to suspend their lease obligations.  As a matter of planning moving forward, we can expect this “boiler plate” provision to be hotly negotiated in the future.

Every operator is making its own assessment of its ability to survive the crisis or avoid a lease with a careful eye on any personal guarantees under the lease.

Insurance

Having the right insurance in place to cover identified risks has long been an element of good crisis management planning.  The insurance industry also reacted to SARS and many insurers excluded viruses as an event triggering coverage in their policies.

Most business interruption provisions require there to be physical damage to the business before coverage is available.  Class actions have already sprouted up in the United States to address the denials of coverage which have been  communicated in response to claims made in the industry.  Denials of coverage responses have also been made to claims made by Canadian restaurants.  It is possible that a restaurant could have closed because of physical damage caused by the COVID-19 virus,  which we know can linger on surfaces for varying and lengthy periods of time. However, proof of that fact and the quantification of the loss relating to that event may be exceedingly difficult.  Massive litigation over the application of business interruption insurance can be expected in Canada as well with very uncertain outcomes.

Communications to Suppliers, Customers and Franchisees

Businesses in the hospitality industry have had to hastily craft their communications messages to their suppliers, customers and, for franchisors, to their franchisees, without much evidence of advance planning having been in place.  Health and safety shutdowns have long been been identified as a serious risk factor in the industry requiring preparedness.  Most plans though have centered on the need for operators to know whom to call and to have public relations firms at the ready to respond to social media targeting a location hit by a health and safety event.  With COVID-19, no business in the industry has been left unaffected, so few businesses have felt like they have been put in the spotlight for adverse media attention.  Nevertheless, proper messaging has been needed to ensure suppliers, customers and franchisees know the position of the business, and know the business plan to function through and survive following the closures, including providing for customer and employee safety where operations have continued.

Formulating and communicating to franchisees what is expected of them and what support is available to them is necessary to ensure that franchise systems remain intact.  Franchisors should be a resource to help franchisees with their own financial challenges, including guiding them through the various government programs and providing information that can be used commonly when addressing landlords, lenders and their own employees and customers.

Employees

Three important issues have arisen in managing employees during the current crisis.  The first concerns their physical health and well-being.  For those operators that continue, businesses have had to ensure that those coming to work are aware of their responsibilities to themselves, their families, their co-workers and their customers to practice physical distancing and proper hygiene to avoid contracting and passing on the virus.  The requirement to stay at home if any symptoms appear has been a clear message.  The second concerns the necessary planning if any employee is identified as possibly having COVID-19.  Restaurants must have their procedures in place for closing, disinfecting, identifying which other employees must self-isolate for 14 days, having replacement workers at the ready, and communicating with customers.   The third concerns lay-offs.  Many businesses have had no choice but to lay off a significant percentage of their employees.  In the hotel industry, collective bargaining agreements often address this right.  For restaurants, the notion of a lay-off is often misunderstood.  Lay-offs can give rise to constructive dismissal and employment standards claims if the required notice period was not given.  These dismissals will occur in a market where it will be difficult for terminated employees to mitigate their damages by finding new positions or know the future solvency of their employer to pay any entitlements.

It can also be expected that there will be a large number of talented and experienced people who will be on the market once businesses start back up. There are  projections that perhaps a third or more of all restaurants will not re-open for business once the pandemic passes. That presents an opportunity worthy of proper planning for those that want to access cooks and other staff.

Public Relations and Public Affairs

The need to have a public relations and in particular a social media response to the linkage of a case of COVID-19 infection to a particular business may have lessened given the widespread impact and effects of the disease. It is, nevertheless, important that the hospitality industry use this time to plan campaigns for connecting with the public during the pandemic and have a re-emergence strategy.  Restaurants are hygienic and safe places to eat while physical distancing, which may continue, could be accommodated. It can be expected that the public will return to dining out before it may necessarily go to a movie, concert or sporting event.  Getting the message out early and building up the demand and the ability to be ready for it is an important strategy which is best planned for in advance.

Similarly, the industry associations have been hard at work lobbying governments and making their concerns known to those making decisions about their future including the financial support needed by these businesses.  It is therefore important for industry participants to stay active and current and to know the people and resources they can access to get information on a timely basis.  It has often been said that by the time information becomes available to the public, it is beyond its value for planning responses.  The lesson here is to stay engaged with industry representatives and in front of the decisions which will may be made affecting your businesses.

Finance and Resources

The pandemic has reinforced the need to have planned for cash reserves and credit available to allow businesses to survive through a shutdown.  Whether for purposes of retaining key employees, keeping locations open where landlords may be challenging, or funding necessary professional service providers, financial resources are necessary at a time when revenues are either not available or significantly reduced.

Knowing which sources you will be looking to for providing timely and accurate information must also be in place.  Whether it is to know the state of the virus, projections for lockdown periods and recovery times and knowing which government programs are available or being considered, hospitality businesses must know to whom they can turn for timely and accurate information and advice.

It is also a time where budgets must be revisited and financial planning conducted for a series of possible eventualities. These plans should consider weekly, monthly, quarterly, semi-annual and yearly scenarios using carefully considered assumptions to enable changes to be made quickly.  It can be expected that those assumptions and the results they produce will change frequently given the fluidity of the pandemic and its impact.

Your Team

A good crisis management program begins with the right team.  Your key management personnel, board members where relevant, public relations, legal and financial advisors should all be in place together with a communications plan to allow meetings and real-time decision-making to occur.

Conclusion

It is understandable that many in the industry had not planned for this COVID-19 pandemic as part of their crisis management planning.  Nevertheless, we are still at the early stage of this crisis in North America.  There are many unknowns as we progress through the pandemic. Planning can and should continue following best practices.

With over 40 years of experience and as Canada’s largest franchise law practice,  Sotos LLP is actively involved in crisis management planning and advisory for the hospitality and franchise industry.  Our lawyers are engaged in helping industry participants make the best decisions in their fight with COVID-19 and to be ready to hit its other side running.

Allan D.J. Dick, Sotos LLP

Allan is the co-managing partner of Sotos LLP and sector leader of the firm’s Restaurants practice area. Allan is a trusted primary advisor to many top franchisors, with more than three decades practising law in the franchising, licensing and distribution industry. Allan has been recognized by Chambers Canada, Canadian Legal LEXPERT Directory, Who’s Who Legal, and Best Lawyers in Canada as a leading Canadian franchise law practitioner. He can be reached at adjdick@sotosllp.com or by cell at 416.805.8989.

This article was originally published by Foodservice and Hospitality magazine in May 2020 issue. 

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