By Cassandra Da Re
A franchise is a business opportunity defined by three key elements: (a) the right for the franchisee to engage in business in association with the franchisor’s trademarks (e.g. by using its brand name); (b) payments by the franchisee to the franchisor for the aforementioned right, such as the franchise fee, royalties and advertising fees; and (c) the right for the franchisor to exert a significant degree of control over or offer significant assistance to the franchisee’s business.
This third element raises the question of how franchisors can exert significant control or offer significant assistance. The answer can be found by looking into a franchisor’s ‘playbook,’ i.e. the operations manual that contains a variety of policies, procedures, specifications, standards, step-by-step instructions, guides, methods and training tools. It is these components that, in the aggregate, make up the foundation of the franchise system.
The operations manual is often a collection of guidelines and policies on many matters relating to the franchised business, which may include: a code of conduct; lists of authorized products and services, as well as of approved and designated suppliers; brand standards; accounting and billing methods and procedures; general operating procedures; recipes for food product preparation; specifications for computer hardware and software, decor, staff uniforms, signage, development and construction; rules for customer service, advertising and social media; territory designations; pricing and rules for refunds and exchanges; hours of operation; inventory ordering, delivery and shipping.
While all six of the Canadian provinces that have enacted franchise legislation so far (including, as of February 1, 2017, British Columbia) include a requirement for the franchisor to disclose material facts to the prospective franchisee, only New Brunswick, Manitoba and British Columbia have regulations that specifically require the franchisor to include in its disclosure document either (a) the operations manual’s table of contents or (b) a statement indicating where the prospective franchisee may review the manual.
The regulations in Manitoba and British Columbia go further. They state if the franchisor does not provide an operations manual to the franchisee, then the disclosure document must include a statement to this effect.
While only three provinces specifically prescribe disclosure of the operations manual’s contents, it has become common practice across the franchising sector—regardless of jurisdiction—for franchisors to include a copy of the table of contents as an exhibit in their disclosure document.
Other areas of law and potential liability
The purpose of the operations manual is multi-fold: to specify quality-control mechanisms and criteria, to provide a training and reference tool, to set out the brand standards associated with the franchise and to educate the franchisee about the system in general.
In all of these ways, the manual helps inform the franchisee’s day-to-day operations of the franchised business. Given the aforementioned definition of what constitutes a franchise, the franchisee will likely expect the franchisor to provide assistance and/or exert a certain level of control over the franchised business.
Yet, in light of recent developments in case law in the U.S. and Canada that have addressed the issue of whether or not a franchisor can be considered the ‘joint employer’ of the franchisee’s staff, there is certainly a risk of the franchisor exerting too much control or offering too much assistance via its operations manual. By way of example, in specifying how many employees must be active at certain times of day, providing scheduling software that must be used to organize those employees’ timetables and prescribing the roles and responsibilities associated with each staff position, the franchisor is exerting control and offering assistance in such a way that it could be found to be acting as a joint employer, which could result in substantial liability.
From the franchisee’s perspective, an overly prescriptive operations manual may prove too unwieldy to navigate effectively and, as a result, the franchisee may one day find he/she is inadvertently off-side of the franchise agreement for reasons of non-compliance with the manual.