The Ontario Labour Board has found that Canada Bread’s drivers, who were principals of franchisee corporations that contracted with Canada Bread for the right to deliver products along designated routes, are dependent contractors and capable of being certified into bargaining units.
In Canada Bread Company Limited1, the Ontario Labour Relations Board (OLRB) heard five applications for certification filed by locals of the International Brotherhood of Teamsters (the Union) for delivery drivers (Drivers) of Canada Bread Company Limited’s (Canada Bread) products to retail resellers out of specific depots operated by Canada Bread. The OLRB had previously ordered certification votes, which were sealed pending the disposition of a dispute over the status of the Drivers.
The issue before the OLRB was whether the Drivers were dependant contractors, and therefore employees of Canada Bread under the Labour Relations Act and thus capable of being unionized, or whether they were principals of franchises that operated small businesses and thus incapable of being unionized. The decision will have ramifications for the franchise industry in Ontario.
The OLRB determined that the Drivers were dependent contractors, and therefore were Canada Bread employees. This finding was based on the application of a number of criteria, including the significant control exerted by Canada Bread over the Drivers, particularly with respect to pricing, access to customers, and integration into Canada Bread’s business, which led to the conclusion that the work performed by the Drivers more closely resembled an employment arrangement than an independent contractor arrangement. The OLRB, however, did carve out an exception for Drivers who employed ‘helpers’ who allowed them to meaningfully expand the scope of their business, rather than just to allow the Driver to fulfil their baseline obligations to Canada Bread.
Takeaways For Franchisors
The impact of the Canada Bread decision is significant for franchisors who operate systems in Ontario that involve a distribution model with tight operational controls. Despite the existence of a contractual franchise relationship, the OLRB may find that the ostensible franchisees are dependent contractors for the purposes of union certification, which could theoretically lead to increased willingness for courts to find liability in other legal contexts. This would be a dramatic change for the franchise industry in Ontario. At this juncture, it is entirely unclear how the province’s labour relations regime would interact with the parties’ statutory obligations under the Ontario’s franchise disclosure regime and franchise law in general. Franchisors that believe they may be facing unionization issues should seek advice from their legal counsel.
There are a couple of key general takeaways for franchisors operating similar franchise systems to Canada Bread in Ontario that may wish to protect themselves from a similar OLRB application.
The Background: Characteristics of the Canada Bread Franchise System
Canada Bread is a large-scale manufacturer of baked goods. The goods are prepared at various bakeries and shipped to distribution depots where they are picked up by Drivers who deliver the products to retail customers, many of whom are predetermined by Canada Bread. Canada Bread’s franchise system required Drivers to incorporate franchise corporations that are party to franchise agreements with Canada Bread. Individual Drivers are characterized as principals to the franchisee.
The OLRB undertook a detailed review of Canada Bread’s franchise system and made the following observations and conclusions:
The Parties’ Legal Arguments
The central focus of the parties’ legal arguments was whether Drivers were independent businesses, or almost entirely dependent on Canada Bread for maintaining their business on an ongoing basis. Significant evidence dealt with the importance of entrepreneurism and business ownership to the Canada Bread franchise system.
The Drivers agreed that they could seek to increase sales by way of building new, or strengthening existing, customer relationships, but also indicated that their capacity to do so was limited due to strict price product controls. The Drivers agreed that they had an interest in other Drivers competently performing their obligations in order to retain reputation and the market value of their routes.
The Drivers submitted that Canada Bread had “significant and pervasive control” over them, as demonstrated by the exclusive supply arrangement, control over volume of products to be delivered and methods of servicing clients, control over access to customers and to delegation of customers, and regular monitoring of performance. They also pointed to the impact of Canada Bread’s unilateral decisions to change routes on the market value of a franchise. They argued that it was clear that Drivers generally only work for, and are entirely dependent on, Canada Bread. They argued that the possibility for private sales of routes existed in a small and essentially “closed” market of a fixed number of existing Drivers, given that there were a fixed number of routes and route operators at any given time.
Canada Bread argued that the Drivers made substantial investments in their businesses and assumed significant risks of loss, and generally hired their own employees. It argued that the Drivers fully understood themselves to be the principals of franchise corporations bound to franchise agreements, which outline a business – not an employment – relationship. Drivers confirmed that they “owned” their own, separate businesses, but the OLRB placed little importance on that distinction.
Canada Bread particularly relied on Drivers’ hiring of helpers and consequent status as employers. They conceded that the Drivers were somewhat dependent on Canada Bread, but argued that it was a business, and not an employment, dependency, typical of any arrangement where a licensee is permitted to sell and distribute the products of another party. Alternatively, they argued all franchise relationships involve a degree of dependency, and since the AWA applied to the parties, they could not be employees. Finally, they argued that there was a relatively open market for the Drivers’ routes, and marketability was driven by Drivers’ own efforts.
The OLRB’s Decision
The OLRB surveyed existing decisions dealing with similar legal questions and in considering the continuum from an employee to an independent contractor, determined that the Drivers were dependant contractors. However, it carved out Drivers who employ full time helpers.
The OLRB indicated that the line between an entrepreneur and a dependant contractor may be a thin one. In such cases, in concluding someone is a dependent contractor, relevant considerations are their economic dependence and an obligation to perform duties for another person. The 11 criteria set out in Algonquin Tavern3 should be considered, but are not a mechanical checklist.
The criteria are:
(i) the use of or right to use substitutes;
Here, factors (iv), (v), (vi), (viii), and (xi) most favoured the conclusion the Drivers were dependent contractors. Factors (i), (ii), and (ix) favoured the finding of an independent contractor relationship. The other factors were neutral.
Most significantly, the OLRB found that Drivers were not able to meaningfully sell their services, or Canada Bread products, to the market. They had no control over pricing or over their customer lists, nor could they reject certain national, chain accounts. Drivers’ work was not sufficiently specialized to mark them off as independent contractors; rather, their work resembled that of employees subject to a contract.
Of significance, Canada Bread reserved its right to strip out certain grocery accounts considered prized customers, from the Drivers’ routes at its sole discretion under the ADM model, which could materially affect the Drivers’ business.
While the OLRB was given pause by criterion (xi), given that the Drivers could obtain additional market value and engage in private transfers of their routes, it referred to case law where similar arrangements did not preclude a finding of a dependent contractor relationship. For example, drivers in other industries had been found to be dependent contractors, and the OLRB likened this ability to that of a financial services worker who built a book of business that created a fungible value in their employment, convertible to personal value. This criterion was not enough to outweigh the numerous criteria weighing in favour of the Drivers’ status as dependent contractors. The OLRB found that the Drivers “can exercise some entrepreneurial initiative but there are material constraints on their doing so ... similar to that of commission-earning sales persons...”
Ultimately, the OLRB held that only criterion (i) would outweigh the finding of a dependant contractor relationship. The OLRB hewed to distinctions made out in previous cases and found that where a helper merely permitted the individual to make ends meet, the individual was still a dependent contractor. However, where the individual had a full time helper who essentially performed the same route requirements, and functioned to increase the scale and scope of business, the individual was not an dependent contractor and could not be unionized. This distinction was categorized as a helpful “bright line” test. However, the OLRB did not meaningfully address the fact that Canada Bread clearly conferred the right to use substitutes, and exempted only those franchisees that actually did use them. Presumably, this issue will be raised in any appeal.
The OLRB specifically noted that the mere fact that a company professes to follow the AWA, or even that the AWA does in fact apply, does not mean franchisees cannot be dependent contractors.
In the result, the ballots cast in the applications for certification were ordered to be opened and counted once the Drivers who employed one or more full time helpers were excluded.
Canada Bread is a reminder that even where a business has long considered itself to be operating a franchise system, and has been contracting with franchisees by way of franchise agreements and governing itself in strict accordance with applicable franchise legislation, it may still be vulnerable to its franchisees being considered to be dependent contractors. With that finding comes potential liability and vulnerability to unionization.
According to the OLRB, whether or not a franchisee is considered to actually be a dependant contractor will depend on the application of the Algonquin Tavern criteria. A franchisor must keep in mind that, even where some factors favour an independent contractor relationship, a dependent contractor relationship, with the attendant employment-related responsibilities, may still be found.
Ultimately, the question boils down to whether it can be said that the franchisees exert control over their work, which includes factors such as customer lists, access to customers, routes, pricing, and general ability to market their own business to increase its value. Even where a franchisee can set its own hours, or attract new customers, where that ability is hamstrung by requirements of the franchise system, it may not be sufficient to avoid characterization as a dependant employee. Where they can hire their own employees, this may only classify them as independent contractors where those employees essentially performed similar roles to their own, in order to expand their business rather than simply to manage it.
In order for franchisors to ensure that their franchisees will not be characterized as dependent contractors in a similar situation, they should be prepared to demonstrate that their franchisees have the flexibility to exert control over their own businesses, particularly with respect to pricing and access to the market for new customers, and that the franchisees render specialized services and have the right to hire or use substitutes in the operation of their business. As Canada Bread demonstrates, the latter criterion creates a “bright line” test that may crucially act as a silver bullet, at least in respect of some franchisees, even where the other criteria favour an employment relationship. Accordingly, concerned franchisors should consider ensuring that franchisees at the very least have the right to employ substitutes, even though they may not have control over whether franchisees do in fact cross this bright line.