Nearly seven years after it began, the “Paramount Trilogy” has now concluded.

The trial[1] and appeal[2] decisions have significantly advanced the law with respect to statutory rescission under Section 6(2) of the Wishart Act.[3]  This article attempts to identify the most important aspects of these decisions and to identify, where applicable, new developments in the law in this area.

Brief facts

Three “Paramount Fine Foods” franchisees delivered notices of rescission in the fall of 2017.  The franchisor rejected the validity of the rescissions, and otherwise relied on several exemptions for its position that it need not have provided disclosure to the franchisees.

The three actions were heard together in a trial that began in late 2021.  Vermette J. (the “Trial Judge”) found one of the three rescissions valid, and granted the franchisor parties’ counterclaims for breach of contract in the other two cases.

All parties appealed nearly every aspect of the Trial Judge’s decision in three appeals and three cross-appeals.  The appeals were heard by the Court of Appeal for Ontario in June, 2024.  In the result, the Court of Appeal dismissed all appeals and cross-appeals, and affirmed all aspects of the Trial Judge’s decision.

Lessons Learned

1. The time to rescind runs from the time the franchise agreement was entered into by the franchisee

At the relevant time, the franchisor had a practice of requiring franchisees to enter into a “generic” franchise agreement.  The franchisor’s witness described this document as a “placeholder” agreement.  Its purpose was to evidence and affirm a party’s commitment to later becoming a franchisee.

The franchisor’s form of franchise grant was tied to location:  its grant gave franchisees the right “to establish and operate the Franchised Business solely at the Premises which Premises should be solely situated in the Territory.”  The generic franchise agreement failed to identify the actual “Premises” or “Territory”.

The parties that signed the “generic” franchise agreement later entered into an entirely new franchise agreement.  This agreement was not an amendment of the “generic” agreement, but a fresh and separate document that did not refer to the earlier “generic” agreement.

The franchisor later argued that the time to rescind ran from the date that the “generic” franchise agreement was entered into by the parties, and that the franchisee was therefore out of time to rescind.

The Trial Judge rejected the franchisor’s argument.[4]  She found that the franchisor’s form of grant required the premises and territory to be defined.  She found that the failure to identify a “Premises” and “Territory” made the grant of franchise incomplete and ineffective.  The parties were not granted a legally enforceable right to operate a franchise.  Accordingly, she found the generic franchise agreement was not a “franchise agreement” within the meaning of the Wishart Act, and did not effect a grant of franchise.  The franchisee’s time to rescind therefore ran from the time it entered into the second (effective) franchise agreement.

While heavily dependent on the facts of this case, franchisors should be mindful of the language of their form of grant.  Purported grants that are tied to defined terms that as yet have no meaning (for instance, “Premises” that do not exist and “Territories” that are not defined) may result in no grant, at all.  The parties should consider when a grant of franchise is complete and perfected, as this will be the date from which a franchisee’s potential right of rescission will run.

2. A franchisee can rescind post-termination

NEW:  the Court of Appeal for Ontario has now expressly confirmed that where a franchisor exercises a contractual right of termination under a franchise agreement, the franchisee may later exercise a statutory right of rescission under the Wishart Act.[5]  A franchisor cannot prevent rescission by terminating a franchise agreement.

The Trial Judge relied on the non-waiver provisions of the Wishart Act (Section 11) to conclude that the exercise of a contractual right (termination) cannot unilaterally deprive a franchisee of a statutory right (rescission).[6]  Citing the Midas[7] case, she found that if contractual termination could pre-empt access to the rescission remedy this would run afoul of the purpose of the Wishart Act, which is to protect franchisees.

The franchisor parties argued on appeal that a terminated contract “ceases to exist” and therefore cannot be rescinded.  The Court of Appeal rejected this argument.[8]  It confirmed that termination does not render a contract voib ab initio but rather absolves the non-breaching party from performing future obligations.  The Court of Appeal generally agreed with the reasoning of the Trial Judge on this point, and confirmed that the Wishart Act does not make statutory rescission conditional on non-termination, even in circumstances where the franchisee is in breach of the franchise agreement.

This outcome will likely come as no surprise to the majority of franchise practitioners.  Notably, several recent rescission cases have proceeded in the Ontario courts notwithstanding  the franchisor had earlier purported to exercise contractual termination rights.[9]  However, the issue of whether the rescission right could be exercised, notwithstanding the earlier termination, was not raised or considered by the Court in these earlier cases.

3. Exemptions

The franchisor relied on three different exemptions to advance its argument that it need not have provided a “disclosure document” to the franchisees in these cases.  All three of these arguments were rejected by the Trial Judge.  Prior to this case, certain of these exemptions had never previously received direct judicial consideration.

In all instances, the Court of Appeal agreed with the Trial Judge’s analyses and conclusions on the franchisor’s exemption defences.[10]

• 5(7)(h) – the “large investment” exemption

NEW: in considering this exemption, each grant of franchise must be considered on its own and cannot be combined with other grants of franchise; the time to assess the quantum of the franchisee’s prospective investment is at the time of the grant.

This is the first case to consider this exemption.

At the time of the grants in these cases,[11] franchisors did not need to provide disclosure to prospective franchisees who were investing in the acquisition and operation of a franchise, over a one year period, in an amount grater than $5MIL.

In these cases, the franchisor advanced two arguments:  1) the three grants made to the three franchisees should be considered a single “grant” for the purposes of the exemption, and; 2) the franchisees, collectively, invested over $5MIL in the acquisition and operation of the three restaurants in the course of their subsequent operations.

The Trial Judge rejected these arguments.[12]

The foundation of her conclusions rest on the definition of “grant” and “franchise”.  She found, as fact, that three separate grants of franchise had occurred.  She found there was no basis to combine these grants or consider them collectively for the purposes of this exemption.

She also found that the relevant time to assess the quantum of the franchisees’ investments is at the time of the grant.  In so doing, she confirmed that the expected, prospective costs of acquisition and investment are determinative for the purposes of this exemption.  The expenses actually incurred by the franchisees during their operations do not retroactively affect whether or not the franchisor had to provide disclosure to the franchisee.

• 5(7)(c) – the “additional franchise” exemption

NEW: distinct corporate franchisees that operate some aspects of their franchised businesses on a collective basis, or that have overlapping or similar shareholders, will not be considered the “same” franchisee for the purposes of this exemption; a franchisee must already be operating the franchised business for the exemption to apply.

This is the first case to directly consider the application of this exemption.[13]

The Wishart Act states that disclosure need not be provided for “the grant of an additional franchise to an existing franchisee if that additional franchise is substantially the same as the existing franchise that the franchisee is operating and if there has been no material change since the existing franchise agreement or latest renewal or extension of the existing franchise agreement was entered into.”

The franchisor argued this exemption applied to it on the basis that the corporate franchisees did not observe separate corporate personality in their operations, and had some common shareholders as among them.  In its submissions, the franchisees were therefore “the same”.

The Trial Judge rejected these arguments.[14]

She found that relevant franchisee was not an “existing franchisee” as it was only ever granted a single franchise.

The Trial Judge then went on to consider whether an “existing franchisee” could be a new corporation with principals who are involved in another corporate franchisee of the same system.  She concluded it could not.  In relying on the wording of the exemption, she found that the qualifying words “substantially the same” described the relationship between the “existing franchise” and “additional franchise.”  These words did not apply to the franchisee.  In other words, she found that the existing and additional franchise could be substantially similar, but that the franchisee had to be “the same.”

The Trial Judge also noted that a plain interpretation of s. 5(7)(c) requires an existing franchisee to be “operating” a franchise for the exemption to apply. The “operation” requirement will not be satisfied if the franchisee has only signed the franchise agreement, or is in the midst of building out/constructing the franchise, and has never actually operated the business that is the subject of the grant.  She found that none of the franchisees were operating any franchised business at the time the relevant franchisee signed its franchise agreement. In arriving at this conclusion, the Trial Judge confirmed the underlying policy rationale for this requirement, namely, that disclosure has little utility if the prospective franchisee is already familiar with the operations of the franchise system and for whom the risk of making a further investment of funds is low.

• 5(7)(a)(iv) – the “franchisee transfer” or “resale” exemption

The Trial Judge found the franchisor could not rely on the resale exemption.  The Trial Judge’s decision[15] follows a long line of case law in which this exemption has been narrowly determined by the courts.[16]

The basis of the Trial Judge’s decision is factual.  First, she found there was no grant of a franchise by a franchisee on the facts.  She found that the previous operator’s franchise agreement was terminated, and the relevant parties entered into fresh agreements.

Second, and in any event, she found that the franchisor “was directly involved and an active participant” in the relevant grant.  Among her findings, she found that the franchisor directed the franchisee to the existing operator, was involved in negotiations between the franchisee and the prior operator, had input on relevant documents, and was involved in discussions about purchase price, and otherwise acted as an intermediary  She also found that the franchisor and the franchisee met at the franchisor’s head office in the absence of the former operator.  Her decision on this defence is generally consistent with prior case law on this exemption.

4. Piecemeal disclosure remains a fatal flaw

The franchisee that validly rescinded, Premium Host Inc., did so on the basis that the Franchisor provided it with material information outside of a “disclosure document”.  In upholding the Trial Judge’s decision, the Court of Appeal confirmed a very long line of cases confirming that disclosure must be provided to a franchisee “as one document, at one time,” and that piecemeal disclosure provides a franchisee with valid grounds to rescind.[17]

Although not directly addressed, this decision also confirms a related line of case law that financial information relating to the operation of the subject unit under a previous operator will generally be “material” within the meaning of the Wishart Act.[18]

5. A franchisee bears the burden of proving a valid rescission and its entitlement to statutory compensation

NEW:  the Court of Appeal for Ontario has now expressly confirmed that a franchisee bears the burden of proving that it rescinded on valid grounds.[19]  Accordingly, a franchisee must prove:  1) what it received from the franchisor; and 2) that the purported “disclosure document” contained a defect that is so material as to render the disclosure document no disclosure at all.

On appeal, the franchisees argued that the franchisee need not prove it received materially deficient disclosure.  They took the position that upon delivery of a notice of rescission in accordance with the Wishart Act, a franchisor could defeat a statutory rescission by demonstrating that it fulfilled its disclosure obligations under the Wishart Act by providing compliant disclosure document to the (then-prospective) franchisee.

In rejecting this argument, the Court of Appeal cited its earlier decision in Raibex, in which the Court (arguably in obiter) stated:  “the Franchisee must not only demonstrate that the FDD was deficient, but also show that it was so deficient that the Franchisor effectively ‘never provided [a] disclosure document.’”[20]

In the result, the Paramount Trilogy cases are somewhat unusual in that the Trial Judge found that no purported “disclosure document” relied on by any party at trial had actually been provided to any franchisee but, notwithstanding, two of the franchisees were not entitled to rescission.  Arguably, this result is at odds with the Court of Appeal’s decision in MAA Diners, in which the Court of Appeal confirmed the lower Court’s decision that a franchisee had validly rescinded its franchise agreement in the absence of any evidence that a disclosure document was provided to that franchisee.[21]

6. Provided the franchisee proves that the expenses it claims were actually incurred in connection with the franchised business, a court may reclassify expenses as between subsections 6(6)(a)-(d)

NEW:  the Trial Judge expressly confirmed that compensation claimed by franchisees under various subsections of 6(6) could be reclassified and recovered under subsections 6(6)(a)-(d).[22]  While various earlier decisions have permitted the recharacterization of amounts claimed,[23] this is the first case to expressly address whether this practice is permissible.

At trial, the franchisor parties argued that the franchisees should not be permitted to reclassify any portion of their statutory compensation claim.  For instance, they argued that amounts originally characterized by the franchisees under 6(6)(a), 6(6)(b), and 6(6)(c) should not be permitted to be reclassified and claimed under 6(6)(d).  The need for reclassification in these cases arose largely as a result of the Trial Judge’s findings about which franchisor parties were and were not “franchisor’s associates” within the meaning of the Wishart Act.

The Trial Judge rejected these arguments and permitted the recharacterization of certain elements of the franchisees’ compensation claim.[24]

7. An employee of the franchisor may be found to be a “franchisor’s associate” on the basis that they were involved in reviewing or approving the grant of franchise

NEW:  The Court of Appeal upheld the Trial Judge’s finding that a non-director/non-officer employee of a franchisor can be “involved in reviewing or approving the grant of a franchise” for purposes of satisfying the second element of the definition of a “franchisor’s associate” under section 1(1) of the Wishart Act.

At trial, the franchisees submitted that the franchisor’s Manager of Franchising was a franchisor’s associate because the individual was controlled by the franchisor (this fact was admitted at trial by the franchisor parties) and because the individual was involved in reviewing or approving the grants of franchise.

The Trial Judge accepted this submission. In so doing, the Trial Judge relied on the fact that the individual’s role included: (a) vetting new franchisees for the initial phase of the recruitment process; (b) reviewing and evaluating franchise applications; (c) advising the franchisor’s principal about the results of this review; (d) initially meeting with prospective franchisees; and (e) advising the franchisor’s principal about these meetings.[25] In addition to performing these duties in the context of these cases, the Trial Judge also noted that the individual was in “constant communication” with the prospective franchisees, including to discuss the progress of their transactions to purchase the franchises.

On appeal, the franchisor parties submitted that the individual should not be found liable as a franchisor’s associate on policy grounds.  They took the position that insofar as individuals are concerned, the definition of a franchisor’s associate should be read to only apply to directors and officers of the franchisor. They argued that failing to do so would create potential liability for all clerical and junior employees that perform rote functions in the grant process.

The Court of Appeal rejected the franchisor parties’ proposed interpretation of the Wishart Act.[26] Moreover, while the individual was not a director or officer of the franchisor, “neither was she a clerical or junior employee”. She performed a significant role in the process of reviewing the franchisees’ applications, exercising professional judgment, and advising the ultimate decision-makers.

Sotos LLP was trial and appellate counsel to the franchisees.

Adrienne Boudreau, Sotos LLP

Adrienne is a partner at Sotos LLP, Canada’s leading franchise law firm. She has earned recognition as a leading Canadian franchise law practitioner from numerous prestigious publications, including Chambers Canada, Best Lawyers in Canada, and the Best Lawyers Global Business Edition. Adrienne is consistently recommended in the Canadian Legal LEXPERT Directory and has been acknowledged by Who’s Who Legal Canada and the Who’s Who Legal Global Guide. Additionally, she is listed as a Leading Litigation Lawyer in the LEXPERT Special Edition – Canada’s Leading Litigation Lawyers. Adrienne can be reached directly at 416.572.7321 or aboudreau@sotos.ca.

Daniel Hamson, Sotos LLP

Daniel is a senior associate with Sotos LLP in Toronto, Canada’s leading franchise law firm. He has received multiple legal accolades, including being named as a “Lawyer to Watch” by the Canadian Legal LEXPERT Directory in the franchise law category, as well as in the LEXPERT Special Edition – Canada’s Leading Litigation Lawyers. Daniel can be reached directly at 416.572.7303 and dhamson@sotos.ca.

[1] Premium Host Inc v Paramount Franchise Group, 2023 ONSC 1507.
[2] Royal Bank of Canada v Everest Group Inc, 2024 ONCA 577.
[3] Arthur Wishart Act (Franchise Disclosure), 2000, SO 2000, c 3.
[4] Premium Host Inc v Paramount Franchise Group, 2023 ONSC 1507 at paras 354-361.
[5] Royal Bank of Canada v Everest Group Inc, 2024 ONCA 577 at para 11.
[6] Premium Host Inc v Paramount Franchise Group, 2023 ONSC 1507 at para 368.
[7] 405341 Ontario Limited v Midas Canada Inc, 2010 ONCA 478.
[8] Royal Bank of Canada v Everest Group Inc, 2024 ONCA 577 at para 11.
[9] See 2352392 Ontario v MSI, 2019 ONSC 4055 at para 6, overturned on other grounds 2352392 Ontario Inc v Msi, 2020 ONCA 237, and 2364562 Ontario Ltd v Yogurtworld Enterprises Inc, 2021 ONSC 5112.
[10] Royal Bank of Canada v Everest Group Inc, 2024 ONCA 577 at para 10.
[11] We note that the language of this exemption has subsequently been amended, and now exempts a franchisor from disclosure in circumstances where a franchisee’s total initial investment is in excess of $3MIL.
[12] Premium Host Inc v Paramount Franchise Group, 2023 ONSC 1507 at paras 326-334.
[13] Bark & Fitz Inc v 2139138 Ontario Inc, 2010 ONSC 1793 at para 26 briefly touches on whether this exemption can be relied upon where the principals of two different corporate franchisees are the same.  However, this discussion occurs in the context of evaluating whether there is a “serious issue to be tried” in an injunction hearing.  Karakatsanis J., as she then was, does not decide the matter.  3574423 Canada Inc v Baton Rouge Restaurants Inc, 2011 ONSC 6697, aff’d 3574423 Canada Inc v Baton Rouge Restaurants Inc, 2013 ONCA 39 discusses this issue in obiter, starting at para. 290.  The discussion relates primarily to whether the franchisee to whom a franchise is granted had to have previously received compliant disclosure from the franchisor to rely on this exemption.
[14] Premium Host Inc v Paramount Franchise Group, 2023 ONSC 1507 at paras 335-342.
[15] Premium Host Inc v Paramount Franchise Group, 2023 ONSC 1507 at paras 343-352.
[16] See, for example, 2189205 Ontario Inc v Springdale Pizza Depot Ltd, 2011 ONCA 467 at para 32.
[17] Premium Host Inc v Paramount Franchise Group, 2023 ONSC 1507 at para 421; Royal Bank of Canada v Everest Group Inc, 2024 ONCA 577 at para 12.
[18] See, for example, 2212886 Ontario v Obsidian Group, 2017 ONSC 1643 at paras 46-53, overturned on other grounds 2212886 Ontario Inc v Obsidian Group Inc, 2018 ONCA 670, leave to the SCC denied at 2212886 Ontario Inc, et al v Obsidian Group Inc, et al, 2019 CanLII 16450. In the within case, the franchisor provided Premium Host Inc. with the weekly gross margin statements of the previous operator, which showed the business’ remaining revenue after subtraction of direct costs.  The Trial Judge’s findings that this information was “material” can be found at Premium Host Inc v Paramount Franchise Group, 2023 ONSC 1507 at para 421.
[19] Royal Bank of Canada v Everest Group Inc, 2024 ONCA 577 at para 4.
[20] Raibex Canada Ltd v ASWR Franchising Corp, 2018 ONCA 62 at para 40.
[21] MAA Diners Inc v 3 for 1 Pizza & Wings (Canada) Inc, [2003] OJ No 430 (Sup Ct J), aff’d Maa Diners Inc v 3 for 1 Pizza & Wings, 2004 CanLII 19240 (Ont CA).
[22] The franchisor parties pursued this matter on appeal.  In upholding the Trial Judge’s decision relating to the validity of the Premium Host Inc. rescission, the Court of Appeal by implication also affirmed the Trial Judge’s reasoning on this point, although it did not specifically comment on this matter in its Reasons for Decision.
[23] See, for example, 2122994 Ontario Inc v Lettieri, 2016 ONSC 6209 at paras 76-77, aff’d 2122994 Ontario Inc v Lettieri, 2017 ONCA 830, and 2483038 Ontario Inc v 2082100 Ontario Inc, 2020 ONSC 475 at paras 72-76.
[24] Premium Host Inc v Paramount Franchise Group, 2023 ONSC 1507 at paras 461-465.
[25] Premium Host Inc v Paramount Franchise Group, 2023 ONSC 1507 at para 458.
[26] Royal Bank of Canada v Everest Group Inc, 2024 ONCA 577 at para 13.

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Franchising a restaurant concept goes through fairly identifiable stages, from “birth” to “emerging” to “growth” to “maturity” and, potentially, to “exit”. Each stage brings with it new challenges and new opportunities. This article explores the typical characteristics of each stage.

Stage 1 – Birth

Most restaurant concepts are not started in anticipation of future growth by franchising. Some, however, are. Irrespective of the original intention for the concept, the birth stage for a restaurant franchise system must have the following characteristics:

• a name that holds prospects for obtaining a registered trademark;
• a unit that not only generates profit, but sufficient profit such that, if operated as a franchised business, it would continue to be profitable in the face of the added expenses that a franchisee would be required to pay to the franchisor (and possibly others); and
• a “system”. A “system” includes all or some of the following components—a distinctive look and feel to the restaurant design, an optimal footprint, proximity to a welcoming customer base, a recommended or fixed equipment list, a methodology for preparation and service and an intended brand image.

The birth stage is also when the would-be franchisor must first understand the legalities and regulatory environment affecting franchise sales and franchise relationships. To that end, where statutorily required, the “system” must also include a form of disclosure document, a franchise agreement and a whole range of potential ancillary agreements to provide to prospective franchisees.

Supplementary issues for consideration at the birth stage include whether the restaurant franchisor intends to supply certain core products to its prospective franchisees and the logistics of doing so, as well as whether it intends to sell units with sites in hand or before sites have been identified. These decisions may change over time.

With these attributes in hand and determinations made, the franchisor can begin to sell franchises.

Stage 2 – Emerging

An emerging system begins with the first franchisee and, from this author’s perspective, continues until the system reaches such a size that the franchisor has created independent value in itself as a franchising company. Hallmarks of value include, among other things:

• a stream of royalties and other payments coming in the door from franchisees;
• receipt of rebates from suppliers; and
• recognition of the brand outside of the trading area of the individual units.

The emerging stage may last for the first ten to twenty units.

From an administrative perspective, during the emerging stage, franchisors begin to evolve from an initial group of all-purpose personnel into an organization with specialized subgroups in charge of various discrete tasks, such as site selection, franchisee sales, menu development, product input selection, compliance, marketing and training. This organizational division will continue from the emerging stage through to maturity.

In addition, with respect to the issues of site buildout and location control, restaurant franchisors often make the important decisions at this stage of their growth whether they will take direct leases for locations or whether they will require franchisees to do so, and what role they will play in the build out of units, including the possibility of doing the construction themselves.

Stage 3 – Growth

In the growth stage, a franchisor is operating a recognized franchise system. Among other things, this translates into:

• the franchisor’s ability to access capital as desired to hire further staff, expand extra-provincially or internationally and to pursue other development strategies. In connection with this, the franchisor has also retained research and development personnel tasked with evaluating what modifications the system may need to adapt the concept to new markets, if necessary;
• the capacity to bring in-house certain activities which may have been previously outsourced (g., marketing, sales, legal, site selection);
• increased market knowledge (g., about the system’s customer base and the attributes of successful franchisees);
• well-established supply chains and rebate agreements;
• a developed philosophy around unit transfers;
• at least one wholesale review of the franchisor’s original agreements to reflect the evolving realities and needs of the system; and
• reliable franchisor profits.

In Canada, the growth phase may include up to forty units, give or take. This milestone may require anywhere from five to ten years to achieve depending on the success of the concept.

Given the length of operations typically required to reach this stage, franchisors at this level of growth also start to face renewals and extensions of franchise agreements, renovation requirements and possibly unit transfers and franchisee-successors. Leases are coming up for renewal and new rents must be negotiated or arbitrated. While the system’s branding may need a refresh, its social media profile, messaging and identity are well-cemented in its markets.

Finally, the franchisor is in a better position to operate locations in the event it needs to terminate a franchise. To that end, in all likelihood, the system has experienced disputes, the creation of franchisee advisory boards and potentially a franchisee association, multi-unit operators, terminations, take backs and re-sales.

Stage 4 – Maturity

At the maturity stage, the sky is the limit in terms of system growth. Units are sold and developed at the rate that the system can handle, subject to what markets are available and feasible in light of supply chain issues, competition and the interest and ability of the franchisor to be in and service those markets.

At this stage, most founders are considering one or more of the following as next steps:

• bringing in professional management;
• bringing in private equity;
• acquiring other systems;
• making an initial public offering;
• internal succession;
• merging with other systems; and
• potentially selling the system in whole or in part to other investors.

Stage 5 – Exit

A thorough discussion of the options available to founders of a mature system seeking an exit is beyond the scope of this article. Suffice it to say that throughout the life cycle of a franchise system that achieves maturity, its founders will become well-acquainted with the available exit strategies and will undoubtedly be giving consideration to what they may want to do eventually.

Two brief points ought to be mentioned:

• early identification of a founder’s long-term goals is critical, particularly when those goals are to eventually exit the system. In that case, the sooner the founder can tailor the characteristics of their system to be most conducive to their proposed exit strategy, the better; and
• as part of the franchisor’s strategic planning session, which is customarily held at least annually (and which also ought to include risk assessments and risk management planning and implementation), the agenda should include discussion of the potential or designed exit plan.

Conclusion

The trajectory of a restaurant franchise’s development is linear, moving from the first stage to the next, and so on. While this article has explored the typical characteristics of each stage, it is important to note that:

• the unit count in each phase may vary from system to system;
• the length of time it takes each system to move from stage to stage will vary; and
• some characteristics of a particular stage may be realized sooner in the lifecycle of a franchise system or later than what is described above.

Ultimately, how fast and how well a franchisor moves from stage to stage will typically turn on the franchisor’s level of sophistication, the demand for franchises and by the levels of satisfaction and growth of its franchisees.

Allan Dick, Sotos LLP

At Sotos LLP, we have assisted franchisors at all stages of growth. We help franchisors accelerate their development by introducing best practices to contribute to their success. Please contact the author at adjdick@sotos.ca or 416-805-8989 if you are interested in franchising or if you are looking for experienced counsel dedicated to your success to assist you with the development of your system.

The post The Stages of Restaurant Franchising appeared first on Sotos LLP.

To find the right franchisee and safeguard your brand, it’s critical that, as a franchisor, you have a strategy that you can put into practice to help you identify your future franchisee partners.  This article will help you identify the right franchisees for your specific system, and provides practical advice about how to assess if a prospective franchisee has what it takes to succeed in your system.

1. Business experience. Franchisees are essentially small business owners.  Prior experience operating a business, even if it’s a business type different than the franchise business they may operate, will help to set a franchisee up for success.  Remember, your new franchisee is going to have a lot of learning to do when they are onboarded to the system:  learning your system standards, understanding your brand values and how those are expressed in your daily operations, and any specific or special skills that may be necessary to operate their franchise business.  A franchisee with an understanding of small business fundamentals, such as basic accounting, budgeting, cash flow management, reporting, sales, marketing and hiring and management of employees is already one step ahead.  Franchisees with no business experience may be completely overwhelmed if, at the same time they are completing their system training, and also have to learn everything about operating a business.

2. Alignment with brand values, mission, and culture. “Fit” is going to mean something different to every franchise system, but it’s one of the most important things that franchisors need to consider in evaluating potential franchisees.  A prospective franchisee who otherwise “ticks all the boxes” but has a fundamentally different view of your brand, or of the system and its overall goals and direction is, at best, unlikely to succeed and, at worst, may create significant problems for you and the system, in general.  What’s the best way to identify the elusive “right fit?”  Here are some practical tips:

• Your initial screening and application processes should include at least some questions that directly address your brand’s values and mission. For example, ask some questions about why they are interested in your brand, in particular, and why they think they are right for the system.
• In interviewing a franchisee candidate, ask historical, behaviour-based questions that will help to reveal their personal characteristics and qualities. For instance, if one of your brand values is customer satisfaction, ask them to give you a specific example of a time in their past when a customer satisfaction issue arose, what it was, how they handled the situation, and what the result was.  These types of questions and answers will likely be very helpful to you in assessing whether the franchisee candidate is the person you’re looking for.  Past experience is often the best indicator of future performance.
• You may want to hold a discovery day or other workshop where the prospective franchisee can learn about your brand and also interact with existing franchisees. Not only will the franchisee learn about whether your system is right for them, but you can observe the candidate and assess whether you think they are right for the brand.  For instance, do they seem excited about your brand?  Do they seem engaged?  Do they get along with existing franchisees?  Are they asking good questions?  Your existing franchisees may also be able to provide you with insight on whether the candidate is compatible with your brand.
• You may wish to conduct reference checks. You might speak to previous employers, business partners or colleagues to gain insights into the candidate’s abilities and alignment with your brand values.  Another good idea is to check publicly available sources (a “Google” search, social media feeds, etc.) to see whether the franchisee candidate has a public presence and, if so, whether it reveals anything about them that is in conflict with your brand.
• You may wish to employ good profiling technology and related services. There are services available that will identify the qualities and characteristics of the most successful franchisees currently in your system, and then analyze franchisee candidates to determine whether or not they possess these same qualities.

3. Sufficient financial resources. No matter how much business experience a candidate may have, or how much they seem to fit into your brand’s culture, that franchisee is virtually certain to fail if the franchisee doesn’t have sufficient financial resources to operate.  A new unit that opens and then rapidly closes may harm the reputation of the brand, as may a unit that opens and then has to cut hours or reduce staff to stay afloat.  Franchisors should set clear financial criteria for prospective franchisees.  In particular, franchisors should ensure that prospective franchisees have a sufficient amount of unencumbered liquid assets to meet initial capital expenses, and sufficient initial operating capital to sustain the business until it is able to generate adequate profit.  The creditworthiness of the franchisee’s principal should also be explored.

4. Ambition and dedication. What are the franchisee’s expectations around business ownership and operation?  Do they intend to personally devote their full time and attention to the franchise business?  Do they understand that opening a new business, even a franchise business with excellent franchisor support, can be hard work?  Or do they think that, because the business is a franchise business, it will essentially “run itself”?  Do they believe they can just “hire a manager” to perform all business functions?  It’s important to assess a candidate’s expectations around these important issues.  Most franchise systems require franchisees to devote their full time and attention to the franchise business.  Individuals who understand this from the outset, and are keen to work hard to build a great business, are best placed to achieve success.

5. Understanding of the franchise relationship. While many franchisees are ambitious, want to be “their own boss”, and often have an entrepreneurial spirit, it’s very important for a prospective franchisee to understand the role of a franchisee within a franchise system.  A franchisor should assess whether a candidate understands that a franchisee will need to carefully follow the franchisor’s standards, methods of operation, management techniques, and business practices.  Success as a franchisee depends on the successful execution of these existing practices and standards.  The reputation of the system also depends, in part, on franchisee compliance with system standards.  For example, while it may be that restaurant franchisees can source individual items for prices lower than those offered by a franchisor’s approved suppliers, buying supplies only from approved suppliers is important to ensure consistency across the brand, manage health risks from food-borne illnesses, and achieve overall lower supply costs that are the result of volume discounts and product bundling.  Those candidates looking to “innovate” or “improve” upon the system need to understand, from the beginning, that their aspirations may not be compatible with the role of a franchisee.  It’s important for franchisors to explain to franchisee candidates the role of the franchisor, the role of the franchisee, and how their different functions work together to create the conditions for system success.

6. The right attitude and realistic expectations. It’s critical that the franchisee candidate has the right mindset.  Misalignments between expectations and reality is a recipe for unhappy franchisees and negative brand publicity.  A candidate should have genuine enthusiasm and passion for being a franchisee in your system, and understand what they can achieve with a franchise business.  It’s important that the franchisee candidate have a realistic understanding of the potential profitability of the franchise business.  In particular, it may be a red flag if a franchisee seems interested only in how much money they can make.  Franchisors who elect to directly provide financial information to franchisees must be very careful to do so in accordance with relevant franchise legislation.  Providing earnings claims or historical financial information in the wrong way may lead to significant claims against franchisors in future.

At Sotos LLP, we assist restaurateurs in determining whether to franchise their systems and guide them through the various stages of development and maturity. We also assist franchisors in every aspect of their sales processes. The author can be reached at aboudreau@sotos.ca.

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Nearly every franchise system includes a franchise marketing and promotion fund, often referred to as an “ad fund.” Typically, an ad fund operates as follows: individual units are obliged to contribute a specific percentage of their revenue to the ad fund, and the franchisor utilizes these funds for advertising and promotional activities to benefit the overall system and brand.

Ad funds serve as a potent tool for fostering system growth and expansion. They create a pool of funds for promotional endeavours that might otherwise be financially burdensome for either the franchisor or individual franchisees to undertake independently. In addition, initiatives funded by the ad fund contribute to maintaining consistent and brand-aligned messaging, as they are centrally coordinated by the franchisor.

However, ad funds can also become a focal point for discontented and divisive franchisees to unite around. Dissatisfied franchisees may join forces to raise concerns – real or “strategic” – regarding the management or administration of the ad fund. Even if these grievances lack merit, they can consume valuable time and resources for franchisors. Moreover, they can sow discord within the franchise system and among franchisees. In the most extreme scenarios, franchisees may unite and utilize their collective resources to initiate and maintain vexatious lawsuits concerning the ad fund, which can result in significant expenses and protracted legal battles for the franchisor.

This article aims to provide guidance on ad fund best practices and to highlight essential considerations for franchisors in creating and managing their ad funds.  Implementing these practices and thinking about these issues can help franchisors avoid the most common potential ad fund pitfalls.

1. Consider what geographic area the advertising fund will cover, and whether franchisees will have additional local marketing obligations

Prior to establishing its ad fund, a franchisor should think carefully about the geographic area the fund will cover. Should the ad fund be national in scope, and responsible for promoting the brand across the country, or should there be multiple regional funds to account for Canada’s size and the distinctness of its many regions?  Or should there be both a national fund and various regional funds? A franchisor should consider these questions in light of the nature of its brand and operations and the current market conditions. Are there important local or regional differences that the franchisor wants to address in its marketing efforts?  Or is it better to focus on a single advertising strategy Canada-wide?

A franchisor should also determine whether franchisees will be required to invest in a local ad fund geared towards promoting their local markets (over and above their obligation to contribute to the franchisor’s national fund), and/or whether they must individually meet certain self-directed local marketing spend minimums.  Making advertising a joint responsibility, by requiring individual unit spend minimums, can be an effective way to preempt complaints about the franchisor’s advertising strategy and decisions.  As discussed in more detail, below, franchisors that opt to require franchisees to participate in marketing should ensure there is appropriate franchisor oversight over the content of such marketing initiatives.  Franchisors should implement a tracking, approval, and reporting system to ensure that franchisees’ marketing efforts align with system standards, and that individual franchisees achieve minimum marketing spend requirements.

2. Management and reporting considerations: creating a special purpose “ad fund” entity, preserving the right records, and reporting to the franchisees

With very few exceptions, it’s generally advisable that the franchisor set up and manage the ad fund as a separate entity within the franchise system.  A general best practice is to incorporate a separate corporate entity whose sole purpose is to be responsible for all matters relating to the ad fund.  Ad fund contributions should not generally be co-mingled with other funds.  Instead, they should be maintained in a separate account in the name of the special-purpose entity that the franchisor has created for management of the ad fund.  While it is technically not improper to deposit ad fund monies into a mixed purpose account, such practice can create significant practical difficulties relating to tracing funds in the event the franchisor receives a demand to account for its use of ad fund monies.  To that end, any transfers in or out of the ad fund account should be properly memorialized.  Original source documentation relating to ad fund expenditures (for instance, invoices from third party marketing services providers) should be organized and preserved for a reasonable period, in accordance with the franchisor’s document retention policies.

A franchisor should maintain accurate financial records detailing contributions to and expenses drawn from the ad fund.  Such financial records should be distinct from those kept by the franchisor as part of its overall business operations.

A franchisor should consider whether it will provide franchisees with some degree of financial reporting relating to the revenue and expenses of the ad fund.  For example, will the franchisor provide regular financial reports to the franchisees about the ad fund?  Or will such reports be provided only in response to franchisee requests?  In any case, a franchisor should make sure it adheres to whatever reporting requirements it may put in place, as failure to do so can provide a pretext for disgruntled franchisees to stir up trouble.

The franchisor will also want to carefully consider the type of financial information it wants to make available to the franchisees in relation to the ad fund.  Will the franchisor provide financial statements, which may require the franchisor to engage external accountants to prepare?  Or, more commonly, will the franchisor provide only a statement of income and expenses, summarizing the revenue and expenses of the ad fund in a particular fiscal period?  In either case, it is generally recommended that franchisors provide such summary financial information to franchisees, rather than access to all source documents relating to the ad fund (for instance, general ledgers, invoices and other information relating to the financial activities of the ad fund).

3. Consider whether all franchisees will benefit equally from, and contribute equally to, the advertising fund, and specify if that is not the case

As a fundamental matter, a franchisor should carefully consider which entities will contribute to the ad fund, how the quantum of such contributions shall be calculated, and what use may be made of the funds.  For instance, is there any obligation for the franchisor to make ad fund contributions and, if not but the franchisor nonetheless contributes to the ad fund, how will such contributions be accounted for and used?  Will corporate and franchisor-owned stores be required to contribute?  What about stores that operate seasonally, or operate in a format that is different from the majority of stores in the system (kiosks, food trucks, special venue stores, ghost kitchens, etc.)  Will all franchisees contribute equally to the ad fund in accordance with a prescribed formula?

Is it fair for all units to pay the same ad fund fees if some units are only operating for a portion of the year?  The answer to this question is not always clear or straightforward.  Sometimes, units with reduced hours or seasonal units are in a prominent location, for instance, major sporting venues or pop-ups during special events, and have the potential to greatly increase brand awareness and attract new customers to existing units operating in traditional formats in the future.  Are these special location units creating goodwill for other franchisees to enjoy, or are they trading off the goodwill that other franchisees have created?

In addition to these considerations, a franchisor should specifically outline whether rebates, marketing allowances, and other amounts received by the franchisor will be contributed to the ad fund or retained by the franchisor for its own use.

Addressing these matters clearly, in both the franchise disclosure document and in the franchise agreement, can help to ensure that the ad fund is administered in a manner that franchisees perceive as transparent and fair.

4. Clearly define the key terms of the ad fund, including how much franchisees are required to contribute, the mediums and content of advertising that are permissible, whether the ad fund will be administered internally and/or externally, and who will pay for ad fund’s administrative expenses

While franchisors generally have a great deal of discretion as to how ad fund monies should be spent, it is important that the scope of this discretion is clearly communicated to the franchisees to avoid accusations of “unfairness” later.  It’s important to preserve the franchisor’s ability to spend the ad fund as it sees fit.  This might mean applying ad fund monies towards assisting troubled regions, or towards initiatives that seek to have the system enter new markets.

A franchisor should consider how the monies it collects for the ad fund will be apportioned, and whether franchisees can expect the ad fund to devote a proportional amount of the collected funds to specific markets or regions. Many franchisors will explicitly state in their franchise agreement that the ad fund has been created for the benefit of the system as a whole, and that franchisees should not expect that ad fund spend will benefit individual units on a proportionate or equal basis relative to their contributions or other franchisees.

To avoid potential disputes, a franchisor should address in specific detail the following considerations when structuring its ad fund:

• What amounts will franchisees be required to contribute? The franchisor should clearly define the amount that franchisees will be required to pay into the ad fund, the frequency with which they will contribute to the fund, and how the contribution will be paid to the franchisor. A franchisor should consider whether the franchisees will be required to make payments in pre-determined amounts, or whether their ongoing contributions will be determined by way of a formula based on their gross revenues or another metric.
• What media and content may the ad fund employ? A franchisor should ensure it reserves the right to employ any and all types of content and mediums of advertising (including television, radio, online, social media, etc.) for the fund as part of its activities.
• Will the ad fund rely on third-party advertising agencies, an in-house advertising department, or a combination of both to carry out its activities? A franchisor should consider whether the ad fund will be administered internally or externally, or through a combination of both. Expenses incurred by a franchisor in directly administering the fund, including direct expenses such as printing and ad placement, and indirect expenses such as salaries and head office rent, may be properly chargeable to the ad fund. When considering what and how much to charge to the ad fund, a franchisor should make a commonsense determination as to whether there is a nexus between the expenses it has incurred and whether these expenses furthered the objectives of the ad fund. Additionally, the quantum of the allocation should be proportional to the expense incurred by the franchisor and assessed reasonably. For instance, if one quarter of the franchisor’s head office space is dedicated to offices for internal marketing personnel, it may be appropriate to charge one quarter of the franchisor’s head office occupancy costs to the ad fund.
• Will the ad fund be used for purposes other than traditional marketing of the system and brand? There are a variety of promotional-related activities in which franchisors are increasingly required to engage. For instance, increased reliance on social media means that, sometimes, a franchisor must engage in reputational “damage control” or respond to negative comments on social media.  What about the cost of administering customer surveys across all or part of the system?  Franchisors should consider whether the ad fund provisions of their franchise agreements permit them to charge the cost of these activities to the ad fund. Ultimately, the franchisor should thoughtfully consider all uses or potential uses of the ad fund monies.

Finally, a franchisor should reserve the right to change and amend the rules relating to its use of ad fund monies, as necessary, to keep up with new advertising mediums and technologies, and to ensure the best possible use is being made of ad fund dollars.

5. Decide who will manage the fund, who will be responsible for its decision making, and whether there will be a franchisee advisory council.

Prior to forming the ad fund, a franchisor should carefully consider who will operate and administer the fund, and whether an advisory committee should be established to oversee and make suggestions as to the ad fund’s activities. In a majority of cases, the franchisor (or an affiliate of the franchisor) will be responsible for administering the fund and crafting the message and media to be employed in its advertising. Such centralized leadership allows the franchisor to broadcast a consistent message to potential consumers regarding its brand and products.

Some franchisors also establish franchisee advertising and marketing advisory councils, which bring together franchisees to make recommendations as to how the ad fund should carry out its activities. Most such councils are limited to making only non-binding recommendations.  However, engaging franchisees can allow franchisors to tap into franchisees’ valuable on-the-ground knowledge.  In addition, involving franchisees in the operations of the ad fund heightens transparency which can, in turn, preempt potential ad fund disputes.

6. Consider how much leeway individual franchisees will have to undertake their own advertising

One of the key advantages of franchising is establishing a common brand which can provide customers with a consistent experience. In establishing an ad fund, a franchisor can ensure that all advertising it produces is consistent with the brand’s policies, standards and image. A franchisor should carefully consider whether there is a place in its system for individual franchisees to undertake their own advertising at a local level, and whether there should be controls on the form and content of such local advertising. A franchisor should consider whether local advertising directed by individual franchisees would complement or conflict with national and regional advertising undertaken by the system’s ad fund.

A franchisor should be especially wary when it comes to a franchisee’s use of social media to promote its franchised business. Social media content and messages can spread quickly and easily.  A franchisor should be sure to clearly delineate the system’s policies on social media usage and content.  Franchisors should also ensure they have effective mechanisms to step in when and if a franchisee’s advertising is inappropriate or inconsistent with the brand.

7. Consider how the franchisor’s disclosure will be affected by the establishment of, or the reservation of the right to establish, an advertising fund

A franchisor should ensure that its franchise disclosure document fully discloses the material specifics of the ad fund it has established and its use of funds, as required by franchise legislation.

If particular franchisees are required to contribute different amounts to the ad fund, the franchisor should consider how widespread these variations are across its system, and whether knowledge of these variations is information that would be material to a decision by a prospective franchisee to acquire a franchise.

Conclusion

A well-managed ad fund, which pools contributions from franchisees, can be a valuable asset and a competitive advantage for a franchise system. However, the process of developing and administering such a fund can be complex. It is important to engage professional advisors throughout all stages of the ad fund’s lifecycle to ensure legal compliance and alignment with the system’s best interests.

At Sotos LLP, we specialize in assisting both emerging and established franchisors in navigating these complexities. Our expertise includes designing systems that adhere to best practices and crafting agreements and disclosure documents tailored to each franchise system’s unique needs.  We also have substantial experience in defending against ad fund-related claims. No matter the system or the issue, Sotos LLP is here to support and guide franchisors in optimizing their ad funds for success.

Adrienne Boudreau, Sotos LLP

Adrienne is a partner with Sotos LLP in Toronto, Canada’s leading franchise law firm. She has been recognized by Chambers Canada, LEXPERT, Who’s Who Legal, and Best Lawyers in Canada as a leading Canadian franchise law practitioner. Adrienne can be reached directly at 416.572.7321 or aboudreau@sotos.ca.

John Yiokaris, Sotos LLP

John Yiokaris is a partner with Sotos LLP in Toronto, Canada’s leading franchise law firm. He has been recognized by Chambers Canada, LEXPERT, Who’s Who Legal, Lexology, and Best Lawyers in Canada as a leading Canadian franchise law practitioner. John can be reached directly at 416.977.3998 or jyiokaris@sotos.ca.

Jason Brisebois, Sotos LLP

Jason Brisebois is a senior associate with Sotos LLP in Toronto, Canada’s leading franchise law firm. He has been recognized by Best Lawyers in Canada in the Ones to Watch category. Jason can be reached directly at 416.572.7323 or jbrisebois@sotos.ca.

The post Franchise Advertising Funds: A Blueprint for Success and Pitfall Prevention appeared first on Sotos LLP.

Franchising presents a powerful opportunity for restaurant concept owners to expand on the success of their brand and accelerate growth. In deciding whether to franchise, restaurant concept owners should carefully consider several crucial factors.

1. Do you have a proven concept?

Franchising should never be the FIRST step in your restaurant venture. Putting your concept into practice, testing its viability, assessing its replicability, and ensuring its profitability are crucial first steps.

You should consider the following (note that this list of considerations is by no means exhaustive, but aims to demonstrate the types of things you should consider in assessing your readiness to franchise):

• Profitability and Cash Flow

Prior to franchising, you will need to evaluate the financial performance of your initial unit or units and ascertain the concept’s ability to generate sufficient cash flow. Model profitability forecasts for both your existing unit(s) and the expected functioning of franchisees, considering their operational differences, additional fees (i.e. franchisees will pay fees to the franchisor that the original restaurants have not), and differences in funding sources and debt obligations.

• Registered Trademark

A strong and protected brand is vital for a successful restaurant franchise system. As such, you should ensure that you have registered trademarks, or have applied for trademarks that you have been advised are very likely to be registrable, and associated with your concept to increase the value and attractiveness of the franchise opportunity.

• Learnability and Replicability

Potential restaurant franchisees want to buy into a business that offers greater ease and chances of success compared to starting from scratch. As such, before beginning to franchise, you will need to ensure that all aspects of your concept including marketing strategies, proprietary methods, standards, and operational procedures are thoroughly tested, documented, and effective and that you have created a replicable “system” that can be easily learned and applied by others in various locations and markets.

• Unique Value Proposition

Assess whether your concept offers distinct characteristics and operates within a market that provides substantial returns and sufficient barriers to entry. If your concept can be set up without assistance, does not require the use of any unique or proprietary methods or features, and is relatively inexpensive to operate, then potential franchisees may not perceive any value in joining your system over simply replicating your concept independently.

2. Do you Understand the Roles and Requirements of a Franchisor?

Franchising your business requires a significant investment of time and effort. In determining whether you are ready to become a franchisor (and whether you want to), you should consider the following:

• Leaving Daily Operations

As a franchisor, you must step away from day-to-day operations and focus on managing and supporting a network of franchisees. This includes creating and delivering comprehensive training programs, providing ongoing guidance, monitoring performance, and addressing any issues that may arise, all while having an eye on keeping your concept fresh and relevant.

• Head Office Infrastructure.

You will need to establish a capable head office infrastructure to provide administrative, operational, and support functions. This may include hiring teams to be responsible for franchise development, training, menu development, marketing, operations, legal compliance, and ongoing support.

• Capitalization Requirements.

You will need to have adequate capitalization to fund the franchise development process, including market research, lead generation, recruitment, and evaluation of potential franchisees. Capital is also needed to cover expenses related to franchise sales efforts, attending trade shows and industry events, and advertising the franchise opportunity to attract qualified candidates.

3. Do You Understand How to Maximize Growth in the Franchise Model?

Within the franchise model, a franchisor can grow and expand their business by employing various strategies and initiatives which are not available outside of the franchise model. In franchising your concept, you will need to learn how to select the best options for you and the growth of your system. Some considerations include:

• Revenue

Within the franchise model, a franchisor can drive growth and expansion by utilizing revenue silos strategically. Revenue silos refer to various income streams that contribute to the financial stability and growth of the franchise system. Examples of common revenue silos utilized in restaurant franchise systems include: franchise fees, royalty fees, marketing fees, build-out fees, product or service sales, technology fees, product rebates, transfer fees, training and support service fees, and ancillary income (income generated outside franchise operations, e.g. through private label supermarket or online sales).

Franchisors must maintain a balance between revenue generation and ensuring the profitability and success of their franchisees. Strong financial health allows franchisors to invest in ongoing support, marketing initiatives, research and development, and other growth-focused activities that drive the long-term success of the franchise system.

• Understanding the Sales Process and Choosing the Right Franchisees.

The sales process for franchises involves a series of steps designed to attract and evaluate potential franchisees, provide them with information about the franchise opportunity, and ultimately close the sale. You will need to determine how to best generate leads through marketing efforts, evaluate potential franchisees, and close the sale.

Choosing the right franchisees is crucial for the success and growth of your franchise system. In determining your sales strategies and plans, you will need to ensure that you establish clear criteria for selecting franchisees, including financial capability, relevant experience, and alignment with your brand values.

• Adaptability and Continuous Improvement

Franchisors must remain agile and innovative to stay ahead of market trends and consumer demands and ensure the continued growth of their system. One source of new ideas and suggestions for improvement is the franchisees themselves. Franchisors should encourage franchisees to share ideas and suggestions for improvement and leverage their collective insights to drive innovation across the franchise network.

4. Franchising with Knowledge and Compliance

Once you have a proven concept and are ready to move forward with franchising, the actual process can begin. At this point, you should ensure that you retain the necessary and appropriate professional advisors to guide you through that process and ensure that you understand the various requirements and your rights and obligations.

• The Regulatory Regime and the Law

Franchising involves legal and regulatory complexities that must be carefully navigated and which contain serious repercussions if done wrong. As such, prior to franchising your concept, you should be sure to retain counsel that is experienced in franchise law to ensure compliance with local, provincial, national, and international laws.

• Preparing Franchise Documentation

Prior to franchising your concept, you will need to ensure that all of the necessary documentation is in place. This includes a franchise disclosure document (depending on where you will be franchising) and a franchise agreement and numerous additional agreements that form part of the relationship. Franchise documentation should be prepared by your counsel, with significant input from you.

The preparation of franchise documentation encompasses various business decisions that are crucial for establishing a successful system. For example, you will need to make decisions in regard to:

• • Franchise Fees and Payments. You must determine what fees will be payable by your franchisees and in what amounts. Your franchisees must be able to sustain these payments while also being able to service their financing costs, make a living, and realize a return on their investment.

• • Term and Renewal. You need to provide a long enough term and renewal term(s) for your franchisees to be able to make a return on their initial investment.

• • Premises and Land Control. You need to decide who will hold the leases. This involves determining both what amount of potential liability you are willing to take on, and how much control you want to have over your franchisees’ premises.

• • Territory and Market Exclusivity. You will need to determine what kind and what size of geographic territory or market, if any, your franchisees will have the exclusive right to operate in and how third-party delivery system will work for your concept.

• • Brand Usage and Social Media. You will need to define the parameters for using your brand name, trademarks, logos, and intellectual property. You should be sure to consider social media’s role within your franchisees’ businesses. Social media platforms offer significant marketing potential, brand promotion, customer engagement, and reputation management. Control over social media varies, and establishing guidelines and strategies is vital to ensure consistent brand messaging and reputation protection.

Franchising can be a powerful strategy for the expansion of a successful concept, but it requires careful consideration and preparation. By assessing the viability of your concept, embracing the responsibilities of a franchisor, and understanding the franchising process, you can make an informed decision and set the stage for a successful franchise system.

At Sotos LLP, we have been designing successful restaurant franchise systems for over 40 years. If you are contemplating franchising or wish to discuss your current system, please contact Lauren Parker at lparker@sotos.ca or Allan Dick at adjdick@sotos.ca.

The post Should You Be Franchising Your Restaurant Business? appeared first on Sotos LLP.

1. The consuming public likes the offering;
2. Optimal locations have been secured; and
3. The franchisees are the right franchisees for the system.

This article focuses on the last factor.

Typically speaking, restaurant franchisors, like all franchisors, promote their systems to prospective franchisees principally on the basis that their systems are attractive business investments. In so doing, they seek to bring in financially viable prospects to help grow their brand. Likewise, a major factor in any prospective franchisee’s decision to invest in a particular system is the anticipated return on their investment.

While these are important considerations, as a result of this focus, what is sometimes overlooked by both sides during the sales process is whether, apart from meeting the franchisor’s financial requirements, a prospective franchisee has what it takes to be a successful operator in that particular system. This does a disservice both to franchisors and to prospective franchisees.

That is, once the franchise is granted, and assuming a good location is secured, the success or failure of the franchise will generally come down to how the franchisee operates their business. When a good operator is selected, they will generate positive returns for both the franchisee and the franchisor, enhance the brand’s reputation within its community and build cohesiveness within the system. Conversely, when a poor operator joins the system, they will typically be unprofitable, they may test the limits of the system and, through substandard operations, spoil the brand’s reputation amongst consumers and prospective franchisees.

Given this, when evaluating prospective franchisees, franchisors must look to more than just the typical qualification criteria of the prospect’s financial means to purchase a unit, whether the prospect has time to operate the restaurant and whether they can pass the franchisor’s training program.

Consider the following six questions when selecting your next franchisee.

1. What does it mean to properly qualify a franchisee financially?

Whether a prospective franchisee can purchase a restaurant with a small business loan should not be considered the qualifying financial baseline for purchasing a franchise. Rather, prospective franchisees should have significant available cash capital to sustain losses for at least the initial 12 months, notwithstanding the common provision in franchise agreements that they have resources to cover 3 months of operating costs.

Against that backdrop, it is critical that franchisors appreciate the harm that may be caused to their system when a franchisee struggles to operate financially. First, these operators are the first to cut costs, buy outside of the system, cut staffing levels or hours of operation, complain about profitability, and deflect their attention away from the basics of operating a good restaurant as designed by the system to try to avoid the costs of system compliance.

2. Is the prospective franchisee customer and employee driven?

Good restaurant franchising assumes the public likes the offering. It is the franchisee’s responsibility to execute the system, which means hiring, training and retaining the best staff, and understanding the best employment practices. Similarly, they need to be customer-friendly and actually enjoy interacting with their customers. Training franchisees in these aspects of the business is no substitute for seeing proof of these characteristics in a prospective franchisee’s application.  Have they successfully hired, trained and managed staff in the past? Have they had experience in sales and customer service?  Do they love these aspects of the business?

3. Has the prospective franchisee developed an exciting local store marketing plan?

Regardless of a franchisor’s marketing initiatives, most small local businesses thrive when their owners are part of the community they serve and have smart marketing plans to attract that community. A franchisee, and not the franchisor, should be the expert in the local market to be served by the business. Given this, prospective franchisees should be encouraged to develop and present detailed and thoughtful local marketing plans and proposed budgets, together with a demonstration of their personal commitment to the community, during the qualification period.

4. Does the prospective franchisee possess the same qualities as existing successful franchisees?

Franchisors, with or without the use of available third-party resources, must be able to identify the key qualities of their most successful franchisees and administer testing to prospects to measure how they stack up to the system’s gold standards of franchisee success.  Such testing should be a feature of every franchisor’s qualification process.

For example, one universally valued quality amongst franchisees is ambition. They must be driven to grow their businesses and be driven to invest in more units. Although space limitations prevent a discussion here of the challenges with multi-unit franchising and whether limits should apply to how large a franchisee should be permitted to grow, having successful multi-unit franchisees should be the goal of every system.  It is therefore, critical for a franchisor to know a prospective franchisee’s ambitions for purchasing a franchise and to assess their ability to achieve those goals.  Psychological assessment tools are available to assist with the analysis.

5. Does the prospective franchisee understand that operating a restaurant is hard?

The qualification process must reveal whether the prospect has a real understanding of what it takes to operate a restaurant and how that can impact their life and the lives of their family members. For example, most franchise agreements require a franchisee to devote their “full time and attention” to the business. In the usual case, that requires both operational management and management oversight on all other aspects of the business. While managers can be trained to perform these functions, franchised restaurant management works best when it is conducted hands-on by the owner. Moreover, given that franchisees incur significant fees that they would not otherwise incur if they were independent (e.g. royalties), these additional costs impact a franchisee’s ability to hire managers. Because of this, franchisees must be personally dedicated to the business and have the support of their families. These qualifications can be assessed in a properly designed and executed interview process.

6. Does the prospective franchisee understand the respective roles of the franchisor and franchisee?

This is an overlooked aspect of the selection process. Franchisors and franchisees perform different roles in a successful franchise system. Many prospective franchisees do not know, appreciate, and most importantly, accept these differences.

Franchisees’ primary roles are to execute at a high level the franchisor’s system. From time to time, there is a place for franchisors to tap into their franchisees’ experience and obtain the franchisees’ input to help improve the system. Lessons from the trenches can always be learned. On a day-to-day basis, however, it is the franchisee’s responsibility to trust in and execute the system it chose to join to the best of its ability and to work cooperatively with the franchisor in that regard. To that end, lawyers and business advisors who work for prospective franchisees to provide professional advice in the course of the prospect making the decision to invest in a franchise should be providing their clients with this understanding and helping them to assess whether the role of a franchisee is something they are willing and well-suited to perform. Rarely, however, is this done.  Because many restaurant franchise systems provide little room for franchisees to be “entrepreneurial”, it is critical that a franchisor be able to assess accurately whether a prospective franchisee is better suited to own or operate its own business rather than to own and operate a franchised business.

Selecting the wrong franchisee can be seriously detrimental to a franchise system.  Poor franchisees take up a disproportionate amount of management time. They are more likely to try to get out of their agreements or to advance claims against their franchisor. In provinces, like Ontario, where there are franchise disclosure laws, the identity and contact number for each franchisee is listed in the disclosure document. Given this, if other prospects decide to call existing franchisees during the sale process to learn more about the system, they may well get in touch with a poor performing franchisee who might be inclined to speak ill of the franchisor and the brand. Poor franchisees will also generate negative online reviews which have consequences for the entire system. In addition, when an otherwise good location is operated by a poor franchisee, this can lead to the permanent poor performance of the location even when it is subsequently taken over by a new franchisee.

It is hoped that from this discussion, franchisors will look past a prospective franchisee’s mere ability to purchase a unit and do the work necessary to determine if the prospect is a good candidate to be a key piece in the short, medium and long-term success of the franchise system.

Allan Dick, Sotos LLP

At Sotos LLP, we assist restauranteurs in determining whether to franchise their systems and provide aspiring franchisors with the guidance necessary to establish their systems and lead them through their various stages of development and maturity.  We also assist franchisors in every aspect of their sales processes.The author can be reached at adjdick@sotos.ca or 416-805-8989.

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Overview of Canada’s Single-use Plastic Prohibition Regulations:

Effective December 20, 2022, the Government of Canada has banned the manufacture and import for sale of single-use plastics (“SUP”), including plastic grocery bags, cutlery, stir sticks, and straws through the Single-use Plastics Prohibition Regulations (“Regulations”)[1]. In addition to the items mentioned above, foodservice wares made from hard-to-recycle plastics are also banned effective December 22, 2022, while a ban on the manufacture and import of plastic ring carriers (think six-packs of your favourite beverages) will come into effect in June, 2023.[2]

The Regulations come in advance of Canada welcoming the world to the 15^th Conference of the Parties (COP15) to the United Nations Convention on Biological Diversity, and are a step in the Canadian Government reaffirming its steadfast commitment to addressing plastic pollution and protecting biodiversity in Canada, and around the world. According to the Government, “Over the next decade, this world-leading ban on harmful single-use plastics will result in the estimated elimination of over 1.3 million tonnes of hard-to-recycle plastic waste and more than 22,000 tonnes of plastic pollution, which is equivalent to over one million full garbage bags.”[3] These measures will put Canada among the world’s leaders in the fight against plastic pollution and will help them to meet their commitments to the Ocean Plastics Charter.

Franchised and non-franchised businesses in the retail, grocery and restaurant industry sectors will be required to adjust their customer offerings to adhere to the ban, including by switching to more natural, biodegradable and/or reusable alternatives, such as paper or reusable shopping bags, wooden utensils, paper straws, and fully-recyclable or biodegradable food packaging materials.

Exceptions to the Ban:

Exceptions to the Regulations allow flexible SUP to remain available for people in Canada who require it for medical or accessibility reasons.[4] This includes for use at home, in social settings, or in healthcare settings, such as hospitals and long-term care facilities. SUP items that are not flexible will be prohibited in all circumstances.

More specifically:[5]

• The manufacture and import of SUP flexible straws is allowed;
• Retailers can sell SUP flexible straws in packages of 20 or more, as long as they are not on public display and are only provided if requested;
• Individuals can give SUP flexible straws to others in a family or social setting;
• Care institutions can provide SUP flexible straws to their patients or residents; and
• A business may sell SUP flexible straws in packages of 20 or more to another business.

Additional exceptions are available for waste and bags for containing waste, as well as “products in transit.” Whether a SUP product is considered “in transit” is determined based on the final shipping destination of the product.

Ban will be effective in December 2023

Bans on both the sale and the  manufacture, import, and sale for export of SUP will not begin until December 20^th , 2023. This gives manufacturers and retailers alike time to adjust their offerings and processes. However the government is not currently planning to offer subsidies or other financial assistance to offset the costs of changing from SUP like plastic cutlery to wooden cutlery or even new materials starting to enter the market, like edible cutlery made of cereals.

Stores may also still sell their existing SUP until December of 2023, but that does not mean stores should not start planning for the future now.[6] For example, in 2021, McDonalds eliminated plastic stir sticks, straws and cutlery in more than 1,400 restaurants across Canada, replacing them with wooden alternatives, which saved an estimated 840 tonnes of plastic from landfills annually. Additionally, Sobeys eliminated SUP bags at its checkout counters in 2020, and Walmart followed suit in April, 2022. Finally, Loblaws recently announced it will ban plastic bags by spring 2023.[7]

Store owners need to begin the transition away from SUP by, firstly, assessing how much SUP they currently have stocked, and then evaluating the best way to proceed; whether that be by continuing to normally sell the products until the end of 2023, exporting the products to a jurisdiction where they are not banned, or deciding they can fit into one of the government exceptions. In conjunction with this exercise, plans to gain access to new, approved products will also need to be implemented. Oliver Bourbeau, the vice-president of federal affairs at Restaurants Canada, said there are already supply chain issues at play, mentioning that one restaurant chain with dozens of restaurants in Ontario and Quebec is so far only receiving half of its orders for non-plastic takeout containers.[8]

Due to such supply chain issues, and the substantial expected operational changes that compliance with the Regulations will entail, the costs will likely be high for stores to adopt compliant product policies. In the franchise context, this means that franchisors and franchisees will need to come to an agreement on who will actually bear the costs of changing supply policies in order to maintain viable unit-level economics.

Key Takeaways:

There are a few key takeaways and steps franchised and non-franchised store owners need to take or keep in mind regarding the ban of SUP by the Government of Canada:

1. All store owners should carefully read the Government of Canada’s technical guidelines on what counts as SUP and what falls under the above exceptions. The guidelines can be found here: https://www.canada.ca/en/environment-climate-change/services/managing-reducing-waste/reduce-plastic-waste/single-use-plastic-technical-guidance.html
2. An assessment of inventory should be done, to ascertain compliance of current inventory with the future rules, to give owners an idea of how much SUP inventory they have to sell, export, etc., and to determine how extensive and expensive the changes will be.
3. Retailers should create a workable plan for December, 2023 now. This means speaking with potential suppliers, assessing costs, and in the franchise context, coming to an arrangement with franchisees on how new, potentially large costs will be shared.

If you have any questions about the new prohibitions ore any other regulatory matters affecting your business, please contact Peter Viitre at pviitre@sotos.ca. At Sotos LLP, our lawyers advise businesses in the restaurant and hospitality industry and we look forward to being of assistance to you.

[1] Single-use Plastics Prohibition Regulations 2022-138. Online: https://laws-lois.justice.gc.ca/PDF/SOR-2022-138.pdf
[2] “Change is here: Canada’s ban on certain harmful single-use plastics starts to take effect this month” Government of Canada. December 17, 2022.  Online: https://www.canada.ca/en/environment-climate-change/news/2022/12/change-is-here-canadas-ban-on-certain-harmful-single-use-plastics-starts-to-take-effect-this-month.html
[3] Ibid
[4] “Fact sheet: Exceptions for single- use plastic flexible straws” Government of Canada. Online: https://www.canada.ca/en/environment-climate-change/services/managing-reducing-waste/reduce-plastic-waste/exceptions-flexible-straws-factsheet.html
[5] Ibid.
[6] Supra, note 2.
[7] Mia Rabson, “Government will ban some single-use plastics over the next 18 months” The Canadian Press June 20^th 2022. Online: https://www.cbc.ca/news/politics/plastics-ban-countdown-1.6494379
[8] Ibid.

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• Nearly two-thirds of hospitality businesses (64.0%) anticipate labour shortages to be an obstacle over the next three months;
• Businesses in this sector were also most likely (24.6%) to expect their number of vacant positions to increase over the next three months, nearly triple the proportion of all businesses (8.8%) that expected the same;
• The number of staff vacancies rose 37.2% (+42,900) in March 2022 for a total of 158,100 vacant positions across Canada. The job vacancy rate in this sector was 12.8% in March 2022, the highest rate across all sectors for the 11th consecutive month.

The Ristorante a Mano Decision

Against that backdrop, a recent tax decision released by the Federal Court of Appeal could make matters worse by requiring businesses to include tips as part of an employee’s pensionable and insurable earnings under the Canada Pension Plan (“CPP”) and Employment Insurance Act (“EIA”), respectively.

The relevant facts of Ristorante a Mano Ltd. v. Canada (Minister of National Revenue) are likely familiar to most restaurant owners:

• Ristorante a Mano operates a restaurant in Halifax and employs servers to provide table service to its customers;
• Those customers sometimes pay tips in cash, which the servers are free to keep without advising the business;
• More typically, customers pay their restaurant bills, including the tip, using electronic payment;
• Through arrangements with the business, the servers receive a portion of the electronic tips paid by the customers they served (the “Due Back Amount”);
• The Due Back Amount was calculated using a formula. Notably, where a server received cash in satisfaction of a customer’s restaurant bill during their shift, the server could retain part of that cash payment as part of the Due Back Amount.

The business did not consider any part of the electronic tips received by servers to be pensionable salary and wages for purposes of the CPP, or insurable earnings for purposes of the EIA. As a result, from 2015 to 2017, the business did not take into account any portion of the electronic tips when computing its liability to make payments under that legislation.

The CRA assessed the business on the basis that a portion of the servers’ electronic tips for the 2015 to 2017 period (the Due Back Amounts actually paid by the business) should have been taken into account.

The business was unsuccessful in its challenge of the CRA’s decision and its appeal to the Tax Court of Canada. The Federal Court of Appeal similarly dismissed the business’s appeal. The Court found that because the electronic tips were initially received by the business and thereafter paid out to the servers (as distinct, for example, from the cash tips and other cash which was received directly by the servers and set-off against the Due Back Amount), this additional administrative step brought the Due Back Amounts paid to servers within the ambit of the legislation. The proportion of the Due Back Amounts paid to servers was thus considered contributory salary and wages for purposes of the CPP and insurable earnings for purposes of the EIA. These amounts therefore must be included on the employees’ T4s.

The Impact of Ristorante a Mano on Business Owners

Following Ristorante a Mano, if your business receives gratuities directly through electronic payment and then transfers any proportion of those gratuities to your staff, those payments will be caught by the CPP and the EIA and must be accounted for as required by that legislation.

Sotos LLP provides counsel and guidance to restaurant owners on all aspects of their business operations. For questions about the application of the Canada Pension Plan or the Employment Insurance Act on your business, contact Daniel Hamson, senior associate at Sotos LLP and member of the firm’s restaurant services sector.

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Against that backdrop, while the use of written employment contracts has never been the norm for the restaurant industry, it is argued here that these businesses can utilize these contracts to help address various of the unique labour challenges now faced by the industry.  For businesses that already use written employment contracts, it is recommended that those contracts be reviewed to address their current enforceability as a result of recent court decisions.

Basic principles and considerations applicable to employment contracts

Before discussing the specific content of written employment contracts, it is useful to review some basic principles and considerations applicable to all employment contracts:

1. in order for these contracts to be valid, they must be entered into before the employee starts their employment;
2. if an employee does not have a contract, one can be presented to them for required acceptance at the time of any proposed promotion or proposed new benefit, such as a raise in pay, or bonus;
3. if an employee does have an employment contract, depending on its terms, a new one can be presented to them for required acceptance at the time of any proposed promotion or proposed new benefit;
4. employees are not required to obtain legal advice before entering into an agreement; however, as a best practice, they should be encouraged to do so, or at least given a reasonable opportunity to do so;
5. in some provinces, (such as Ontario) employees cannot be bound to post-termination non-competition covenants. In Ontario, this restriction generally applies to all non-senior executive positions;
6. many employers use employment contracts to limit the amount of common law notice they must give to an employee when they want to terminate the employee for reasons other than for cause. The industry has typically not resorted to written contracts as this is usually not a serious concern for restaurateurs. To that end, most employees are not employed long enough by the same employer for this to matter much; employees who are let go can easily mitigate their damages in markets such as this, and the amounts in issue are not particularly significant for most employers. Nevertheless, many written employment contracts which have been in use contain termination provisions that the courts have invalidated.  These provisions need to be reviewed and updated where possible. More about this below.

Employment contracts provide flexibility

The fundamental benefit of an employment contract is to give the employer flexibility in how the employee can be employed. By way of a few typical scenarios demonstrating the need for such flexibility, in many restaurants these days, managers are increasingly needed to work the floor, the bar, and the kitchen. Without provision for this flexibility in an employment contract, a manager might claim to be constructively dismissed if, for example, they are required to fill the role of a dishwasher for any extended period of time. Similar concerns may arise for an employer with various locations that require its employees to work at different locations as directed by the employer. To the extent this possibility was not set out in an employment contract, depending on the degree of hardship involved in attending multiple business sites, an employee may have grounds to resist such direction. As another common example, consider also the need for the ability to vary or increase an employee’s scheduled working hours, or location where they work, with little notice to respond to issues arising from staff shortages.

The content of employment contracts

While a review of the full range of potential content in a written employment contract for use in the restaurant industry is beyond the scope of this article, the following list touches on a number of key provisions for consideration by an employer when drafting such agreements:

1. Bonuses/ profit-sharing – A written employment contract can address with much certainty how any bonus or profit-sharing entitlement will work. For example, it is not uncommon for the discretionary nature of any bonuses to be described in language which protects the employer and which also makes such bonuses payable only if the employee is employed at the time the benefit is stated to be payable.
2. Compliance with vaccination policies – A written employment contract can specify whether and to what extent the employee is required to comply with vaccination policies and what may or may not be required in the case of any illness or symptomatology. Whether contained in a written employment agreement or not, it is important that you obtain advice on your vaccination policies as there are human rights and accommodation issues that arise that should be addressed when formulating such policies.  Much has been written on the topic and there are divergent views.
3. Restrictive post-termination covenants – Although non-competition agreements for non-senior executives are invalid in Ontario and in many cases in other provinces, there are measures an employer can take to obtain related protections in the circumstance of a departing employee. For example, an employer can be specific as to which intellectual property it is entitled to protect and how it will do so. Those lawful protections are best set out in an employment contract, the fact of which also serves as evidence of the employer’s genuine interest in protecting its property.
4. Modification to benefits – Businesses may also want the flexibility to modify any benefits they may provide to their employees. The right to change or cancel benefits is a matter which can be included in a written employment agreement.
5. Layoff provisions – A written employment contract can also contain an express right of the employer to lay an employee off for a limited period of time without the layoff being considered a constructive dismissal at law. This is a very important consideration given the experience during the pandemic where employers were required to ask employees not to come in from time to time and for lengthy periods. Fortunately, the government also addressed this issue by regulation to support employers during the pandemic, but a properly worded contract can avoid the problem.
6. Notice requirements – A written employment contract can set out how much notice the employee may have to give if they want to quit. Subject to the minimum requirements provided for, in provincial employment standards legislation, the contract can also specify the required notice that the employer must give in a without-cause termination situation.  The parties can also agree on the circumstances in which the contract will be determined to be “frustrated” or terminated as a matter of law, for example, if the employee is unable to work for a certain extended period due to any prolonged health issues. Courts do tend to be extremely rigorous in their analysis of these provisions such that any deficiency will tend to invalidate them in favour of the employee.  The likelihood of such provisions surviving a challenge is increased if notice is not limited to minimum employment standards requirements but rather includes something more, even if less than common law notice.
7. Termination provisions – A written employment agreement is particularly useful in defining what constitutes cause for dismissal which would allow the employer to terminate the employee’s employment without any notice or pay in lieu of notice, such as in the instance of fraud, theft, or deception. Based on recent authority, dismissal for cause is viewed strictly by courts and will not be enforced unless the conduct is extremely serious as reflected by these examples.
8. Severability – A written employment contract should contain a provision that allows any provision which may be found to be unenforceable severable from the balance of the contract so that the balance remains enforceable.

An alternative to employment contracts and independent contractor agreements

As an alternative to requiring the employee to sign an employment contract, before their employment begins, an employee can instead approve a description of their prospective role which is broadly drafted to address certain of the issues identified above.  For the employer who may want to avoid the formality of a more detailed contract, this is a minimum best practice.

If a prospective worker is in fact an independent contractor and not an employee, and the business wants to ensure that the person is categorized as such, a written independent contractor agreement rather than an employment contract is strongly recommended.

There are many critical differences between employees and independent contractors, which can affect the content of a business’s written independent contractor agreement. As a few examples of these differences, independent contractors are not entitled to the various rights and protections contained in provincial employment standards legislation, such as in respect of termination rights, rights to disconnect, vacation pay, etc. It is also noted that a business is not required to withhold and remit for income tax payable by a worker or to comply with other government-required deductions where that worker is an independent contractor (as opposed to with employees).  The taxing authorities, however, will look at the substance of the arrangement to determine if employment taxation applies regardless of the way the parties have described their agreement. A mischaracterization can be costly to a business if monies are found due to the government. To that end, and without being exhaustive, critical indicia of an employment versus an independent contractor relationship include the business’s control (or lack thereof) over hours worked, the worker’s right or inability to work for multiple businesses, the full-time nature of the work, and the ability to exercise control over and provide direction to the worker.  In addition to taxing authorities, other government agencies such as labour boards and workers’ compensation can scrutinize these arrangements and decide the matter on the basis of substance over form.  Legal advice should be obtained before characterizing a relationship as that of an independent contractor.

Further incentives to utilize written employment contracts

In addition to the foregoing benefits of utilizing written employment contracts, these contracts are easy to prepare and can be drafted in a general template form applicable to every position within the restaurant, from the general manager position down to various part-time worker roles.

However, it is crucial to note that any template that was not drafted by a human resources/employment law specialist in 2022 may contain unenforceable provisions or, at worst, may be unenforceable in its totality. For example, as noted above, an employment contract that contains an unenforceable non-competition provision, but which fails to also contain a “severability” clause, may not be enforceable at all.  For businesses with employment contracts like this, it is important that they seek legal advice to determine what strategies are available to them to address this potential concern. To avoid this and other pitfalls, it is best not to use an old form of the employment contract but to obtain advice on preparing a current form reflecting up-to-date industry best practices. Furthermore, it is also highly recommended that existing employment contracts be reviewed regularly by legal professionals to ensure they remain in compliance with the law.  Courts regularly issue employment decisions, some of which can materially change the responsibilities of employers and impact the enforceability of contracts or contractual provisions.

In addition to drafting written employment contracts in response to new legal decisions and employment standards legislation, there are numerous other pieces of legislation that impact employers’ obligations to employees, including those relating to worker’s compensation, occupational health and safety matters, and human rights. Whether or not a business is preparing new employment contracts or updating existing contracts, it is always advisable for employers to proactively undertake periodic reviews of their obligations or have access to resources that update them on what they need to know when managing any sized workforce. For example, we have come across a number of Ontario restaurants that inadvertently missed recent legislative amendments which require them to make their washroom facilities available to those participating in the gig economy, such as third-party delivery drivers. With that in mind, it is recommended that employers review the Future of Work Report which can be found at www.Ontario.ca/document/future-work-Ontario to get a glimpse at where future government regulation may occur.

Allan Dick, Sotos LLP

At Sotos LLP, we assist many franchisors and other businesses in the food service and hospitality industry in handling and advising on employment-related matters affecting them and their systems.  If you have any questions relating to your workforce, please contact the author at  adjdick@sotos.ca or 416-805-8989.

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The six items being banned by the Regulations include: (1) checkout bags, (2) cutlery, (3) foodservice ware made from or containing problematic plastics that are hard to recycle, (4) ring carriers, (5) stir sticks, and (6) straws (with some exceptions, see below).

Business owners should be aware of the following key dates:

• The prohibition on the manufacture and import of checkout bags, cutlery, foodservice ware, straws (not packaged with a beverage container), and stir sticks will come into effect as of December 20, 2022.
• The prohibition on the sale of checkout bags, cutlery, foodservice ware, straws (not packaged with a beverage container), and stir sticks will be effective as of December 20, 2023. This will grant businesses 1 year to deplete existing stock.
• A ban on ring carrier manufacturing and import will be effective as of June 20, 2023.
• A ban on the sale of ring carriers and straws packaged with beverage containers (e.g. juice boxes) will come into effect as of June 20, 2024.
• A ban on the export of all six items by December 20, 2025. Note that banning exports was added to the final regulation, as it was not included in the government’s original proposal.

The Regulations include a number of exceptions to the ban, which exceptions include:

• Single-use straws for accessibility: The Regulations permit hospitals, medical facilities and long-term care facilities to sell single-use plastic flexible straws to patients or residents.
• Waste and bags for containing waste: The Regulations do not apply to plastic manufactured items that are waste, nor to items that are intended to hold waste (and do not meet the definition of single-use checkout bags).
• Products in transit: The Regulations do not apply to plastic manufactured items that are transiting through Canada. Whether a single-use plastic product is considered “in transit” is determined based on the final shipping destination of the product.

The announcement concludes almost 2 years of consultations with provincial and municipal governments, industry and individual Canadians. The public consultation process included a Science Assessment of Plastic Pollution, a discussion paper on an integrated management approach to plastic products, and a draft regulation.

During the press conference announcing the publication of the Regulations, Minister Guilbeault stated that Canada is not opposed to restricting additional items in the future. He also acknowledged that the plastic pollution problem cannot be solved through bans alone and that other actions are necessary to reach the government’s goal of zero plastic waste by 2030.

The Regulations are part of a larger movement, as outlined in Canada’s Zero Plastic Waste Agenda, which includes developing targets, standards and further regulations aimed at eliminating plastic pollution in Canada in the years to come.[2]  Businesses should continue to evolve to meet new requirements and find alternatives to single-use plastics being produced, sold or used in their operations, including researching, testing and comparing alternative products and contacting existing suppliers to determine if they have suitable product offering capabilities.   Lastly, businesses should refer to the government’s guidance document, which is intended to help businesses and organizations adapt to the proposed requirements and outlines important considerations for businesses navigating alternative products or systems. [3]  Business owners should familiarize themselves with this guide to ensure that their business decisions are aligned with the new Regulations and industry best practices.

At Sotos LLP, our team of industry experts has provided strategic advice to business owners in the development of best practices that respond to and address issues arising from the ever-evolving legal landscape for over 40 years.

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.

Read part I and II of this article. 

[1] https://www.canada.ca/en/environment-climate-change/news/2022/06/government-of-canada-delivers-on-commitment-to-ban-harmful-single-use-plastics.html
[2] https://www.canada.ca/en/environment-climate-change/services/managing-reducing-waste/reduce-plastic-waste/canada-action.html
[3] https://www.canada.ca/en/environment-climate-change/services/managing-reducing-waste/consultations/proposed-single-use-plastics-prohibition-regulations-consultation-document.html

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