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Q&A with Frank Zaid: Legal issues and food-service franchises

Waste diversion legislation

Toronto‚Äôs Municipal Code‚ÄĒ629 requires restaurants and other retail establishments to ensure washroom facilities for customers are accessible and proper signage is provided.
Toronto‚Äôs Municipal Code‚ÄĒ629 requires restaurants and other retail establishments to ensure washroom facilities for customers are accessible and proper signage is provided.

Several provinces have enacted legislation dealing with the diversion of waste. The first was Ontario in 2002 with its Waste Diversion Act. Since then, other provinces, including British Columbia, Saskatchewan, Manitoba, and Quebec have followed suit. The subject is also under constant review in most municipalities and provinces as the costs of waste disposal continue to rise significantly.

Ontario‚Äôs legislation is the most comprehensive and specifically refers to franchisors. It requires companies that are ‚Äėstewards‚Äô of designated waste to share in funding 50 per cent of the province‚Äôs blue box program. These stewards include organizations and companies that are located in Ontario and brand owners, first importers, and franchisors that supply the designated materials into Ontario‚Äôs residential market.

One of the regulated types of waste is packaging. Since many food-service franchise systems produce packaging, the legislation may apply to them, depending on the source and the quantity of the waste materials.

For the purpose of the blue box program, a brand owner is an organization or company that holds the registered trademark associated with the designated materials. If the brand or trademark is unregistered, then the steward is the organization or company that owns the intellectual property (IP) rights to that brand or trademark.

A franchisor is similar to a brand owner, since it owns, holds, or licenses a trademark, a brand, or IP rights. Unlike a brand owner, however, a franchisor is the responsible steward for all designated printed materials and packaging that are supplied by its franchise system throughout Ontario, whether or not its head office is located within the province.

The program features minimum thresholds to relieve the administrative burden for small businesses. One of these, based on gross annual revenues, determines when a steward‚ÄĒincluding its affiliates and subsidiaries‚ÄĒmust collect and report data to the provincial government and when the steward must pay annual fees.

There are specific rules for franchised businesses, using the definitions in Ontario’s Arthur Wishart (Franchise Disclosure, 2000) Act. A franchisor within Ontario (a) is designated the steward for all franchisees in the province and (b) must report all packaging and printed paper it generates in the province for all franchises and corporate-owned stores in the province.

If the franchisor does not supply all‚ÄĒor substantially all‚ÄĒof such goods to distribution centres and/or franchisee operated stores, then the franchisees are designated stewards. This may be the case when they solely license the right to use a trademark, brand name, proprietary formulation, or ingredients. Most franchisors, however, do not meet this exemption and must indeed report and pay fees on behalf of all corporate and franchised locations.

Many franchise systems in the food-service category easily exceed the minimum threshold, in which case, the issue is whether the franchisor (a) absorbs all of the fees or (b) applies some form of fee-sharing arrangement with its franchisees based on revenues. Franchisees need to understand if and how they will have to help make such payments. There may also be administrative or overhead charges levied by the franchisor for carrying out its legislative responsibilities as a steward.

There are a number of legal issues specific to running a restaurant, some of which have particular importance to franchises.
There are a number of legal issues specific to running a restaurant, some of which have particular importance to franchises.

The Waste Diversion Transition Act, 2016, governs the operation of existing waste diversion programs until the designated wastes that are subject to those programs are transitioned to a new producer responsibility regime under the Resource Recovery and Circular Economy Act, 2016. This legislation enables the wind-up of the existing waste diversion programs and the industry funding organizations that operate these programs. The Resource Productivity and Recovery Authority is responsible for the oversight of existing programs.

Joint employer status

One of the most controversial areas of legislative concern to franchisors and franchisees today is the possibility of joint employer status.

In 2015, the National Labor Relations Board in the U.S. suggested franchisors may be liable as joint employers of their franchisees’ staff. That finding triggered widespread concern in the franchise community in Canada as the then-Ontario government instituted a comprehensive review of employment legislation, including joint employer relationships. The review recommended changes to Ontario’s employment legislation to deal with joint employer relationships but the legislation ultimately passed (Bill 148), as a result of submissions made by the franchise community, did not contain such changes, leaving in place a case-by-case approach.

Almost one year after Bill 148 came into force, the new Ontario Progressive Conservative government introduced Bill 47, the Making Ontario Open for Business Act, 2018, which repealed many of the changes that were introduced by Bill 148. Bill 47 passed third reading and received royal assent on November 21, 2018. The main amendments which are now fully in force as of January 1, 2019 relate to minimum wages, scheduling rules, leaves of absence, contractor misclassification, and equal pay for equal work, but nothing that directly relates to franchise businesses.

The need for diligence

The aforementioned are just a few major areas of legislation that affect food-service franchise systems in Canada. There are many others, such as those relating to signage, liquor licenses, gift cards, privacy, affinity programs, and ‚Äėspam‚Äô e-mail communications, to name a few.

Suffice it to say, food-service businesses are among the most highly regulated franchises in the country. For the franchisee, this means a great degree of diligence is needed, both at the outset and during the term of the franchise agreement, to stay on top of legislation and understand its effects.

Author’s note: In the course of preparing this article, I learned of the passing of Ron Joyce, the first Tim Hortons Donuts franchisee and ultimate co-founder and owner of the company. He built the company into a Canadian icon and one of the country’s most successful food-service franchisor. I had the pleasure of knowing Ron and working with Tim Hortons Donuts for many years during which I learned a great deal about franchising from this experience. Ron was personally extremely philanthropic and the Tim Hortons Children’s Camps and the Tim Hortons Children’s Foundation he established continue this tradition. I dedicate this article in his memory to honour Ron’s incredible contribution to Canadian franchising.

Frank Zaid was a leading franchise lawyer for 40 years, was involved with more than 400 franchise systems and appeared as an expert witness in various franchise disputes. Today, he is a franchise mediator, arbitrator, and private franchise system ombudsman with ADR Chambers in Toronto; operates his own business, Frank Zaid FRAN legal Support Services; and is a principal with Total Franchise Solutions, a franchise consulting firm. For more information, contact him at (416) 322-8300 or via e-mail at fzaid@frankzaid.com.

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