By Liisa Kaarid, Sotos LLP

Every Canadian franchisor should be aware of changes to Canada’s Competition Act (“Act”), that will take effect on June 23, 2023. The changes make certain agreements between employers a criminal offence. Given the extremely serious consequences of a violation, franchisors should take immediate steps to bring their systems into compliance before the deadline.

1. What are the Changes? 

In the past, the offence of “criminal conspiracy” applied only to agreements between competitors relating to business outputs. This makes intuitive sense: the law should protect consumers, by making it a serious criminal offence for business competitors to conspire with one another on the prices of their goods, the allocation of markets, or the amount of goods to be sold in the marketplace. 

Now, however, the offence has been expanded significantly, covering agreements between unaffiliated employers relating to business inputs (i.e. the hiring of their employees and the work conditions offered). 

Specifically, a new subsection has been added to the Act, making it an indictable offence for unaffiliated employers to agree: 

• on wage rates or other “terms and conditions of employment” (“Wage-fixing agreements”) (emphasis added); or 

• to not solicit or hire each other’s employees (“Nopoach agreements”)

Importantly, the term “Wage-fixing agreements” is misleading, because the prohibition under this heading is far broader than wages alone; it applies not only to salaries and wages, but to “other terms and conditions of employment,” too. The Competition Bureau (“Bureau”) has therefore stated in its Draft Guidelines (as defined below) that its enforcement will cover any “terms and conditions that could affect a person’s decision to enter into or stay in an employment contract”, such as job descriptions, working hours, locations, reimbursements and non-compete clauses.

 The new provisions are widely attributed to the adverse publicity sparked by certain grocery chains’ simultaneous cancellation of COVID “hero pay” bonuses in 2020. Significantly, though, the prohibition will apply to any two employers, regardless of whether they compete with one another.

As a result, rules applicable to criminal conspiracy will now also apply to Wage-fixing and No-poach agreements between franchisors and franchisees. There is no need to show an anticompetitive effect in order to convict, because the crime is the agreement itself. There is no need for the agreement to be in writing (it could be an oral or informal understanding) and the court is specifically permitted to make a finding based on circumstantial evidence alone.

The changes to the Act were passed into law on June 23, 2022, but a one-year transition period was given before the new rules come into effect.

2. What are the Penalties? 

The penalties on conviction are severe: imprisonment for up to 14 years, a fine in the court’s discretion, or both. Before the amendments, the maximum fine for criminal conspiracy was $25 million per offence, but that cap has been removed.

Employers may also face lawsuits for damages, because the Act gives a private right of action to recover damages caused by breaches of its criminal provisions. This means that employees could sue the violating employer if they believe they suffered as a result of a wage-fixing or no-poach agreement. In situations where many complainants share the same type of loss, there is also a risk of civil class actions, which could drastically multiply the damages involved.

 These legal implications are in addition to the time and effort consumed in defending against prosecution, let alone conviction, and the reputational costs suffered by businesses that become, tainted with criminal conspiracy allegations.

3. Are there Exceptions or Defences?

 Yes, but we don’t yet have clarity on how they will be applied. As discussed in part 4 below, some of the exceptions and defences are addressed in Draft Guidelines issued by the Bureau in January. However, the Draft Guidelines have not been finalized – and they could benefit from changes requested on behalf of the franchise industry. Furthermore, even once finalized, they will not be binding.4

In all cases, given the extremely serious repercussions, care and legal guidance are warranted before relying on an exception or defence.

Existing Agreements: The Draft Guidelines state that the new provisions will not be enforced against agreements entered into before June 23, 2023, but that they will apply to conduct that reaffirms or implements older agreements. As such, franchisors must (i) purge all offending provisions from their contracts by June 23, 2023; and (ii) identify and eliminate processes (i.e. conduct) that could be seen as reaffirming old agreements after that date

Affiliated Employers: The offence applies only to agreements between unaffiliated employers. This means that employers related via share ownership can make such agreements. In most systems, however, franchisors and franchisees are not corporate affiliates; they are independently and separately owned. As such, franchisors generally cannot rely on the affiliation exception.

Collective Bargaining: The Act also states that its provisions do not apply to arrangements between two or more employers pertaining to collective bargaining with their employees respecting salary, wages or conditions of employment. Therefore, multiple employers under one collective agreement would be free to confer. However, other activities relating to bargaining with unions should be closely assessed with legal counsel. For example, some grocery chain collective agreements only bind the franchisee store owners and not the franchisor. In such cases, it would be extremely risky for the franchisor to participate in the bargaining process, as such involvement may now attract criminal liability.

One-Way No-Poach Agreements: The Draft Guidelines indicate that it is acceptable if only one party agrees to not poach another’s employees, because the offence applies to reciprocal agreements not to poach “each other’s” employees. However, if separate arrangements result in mutual agreements, that could result in Bureau enforcement. In franchise systems, for example, the network effect of many franchise agreements with nonpoach provisions may run afoul of the Act. Therefore, care is required to review and eliminate offending provisions from franchise packages. At a minimum, it would be prudent to: (i) eliminate two-way agreements between franchisor and franchisee not to poach each others’ staff (if any); and (ii) remove language whereby a franchisee undertakes not to poach other franchisees’ employees.

Ancillary Restraints: The Act provides an ancillary restraints defence if the Wage-fixing or No-poach agreement is:

• ancillary to a separate and otherwise lawful agreement between the employers; and

• directly related to and reasonably necessary for that separate agreement.

The possible application of this defence to franchise arrangements is discussed below. As a spoiler alert, the scope of application is not yet clear; improved guidance from the Bureau would be most beneficial.

4. How Will/Should the Offence be Enforced against Franchise Arrangements? 

The Bureau is the law enforcement agency that enforces the Act. On January 18, 2023, the Bureau published a draft Enforcement guidance on wage-fixing and no poaching agreements (“Draft Guidelines), explaining its approach to enforcement and inviting submissions until March 3, 2023.

Many parties made submissions on behalf of the franchise industry, including Sotos LLP and the CFA on behalf its members, but as at the time of writing this article the guidelines have not been finalized.

From a franchise perspective, it would be very helpful if the Bureau would consider those submissions and make key clarifications to the final guidelines. We strongly recommend that improvements include the following.

Recommendation #1: Confirm that the Ancillary Restraints Defence Will apply to Franchise Arrangements

To collectively deliver the quality and recognizable experience of a franchise system, the franchisor must set out requirements to be met by its franchisees. Some of those terms may directly affect the franchisee’s employees, such as mandatory uniforms, employee training requirements, obligations to comply with manuals, confidentiality and non-compete obligations for key employees, and specific responsibilities or job descriptions for certain roles. Other common provisions may also have indirect impact on employees, such as the location where goods and services of the franchised business must be provided, and operating hours. Finally, as part of a franchisor’s ongoing services to franchisees, it may also assist with unit budget development (including expenditures on wages and employee benefits) and coordinating pooled benefit plans for franchisees and their employees. All of these factors could fall within the wide definition of “Wage-fixing agreements” enunciated by the Bureau in the Draft Guidelines.

However, these requirements and activities are fully in keeping with the legitimate interests of all parties, to ensure that franchised brands operate to a consistently high quality; that franchise system operations are efficient; and that customers receive what they expect at acceptable rates. 

With this justification, franchise terms affecting franchisees’ employees should be specifically recognized as ancillary to lawful franchise agreements, and thus not subject to criminal enforcement, unless they are clearly broader than necessary or the franchise arrangement is a sham. The Draft Guidelines already carve out certain agreements that are ancillary to “merger transactions, joint ventures [and] strategic alliances”.5 Franchise arrangements should be added to this list. This argument is bolstered by the fact that the Bureau has already issued other guidelines that specifically refer to franchise arrangements as being amongst transactions that are subject to a differentiated approach.

Recommendation #2: Confirm that Agreements between Franchisees to Compensate each other for Poached Employees is not a No-poach Agreement

It would be reasonable for franchisee-employers to agree with one another that, where one franchisee hires the employee of another franchisee, the new employer will compensate the former employer for costs incurred on franchisor-training of the replacement employee. This would not be an additional payment or penalty of any kind for the new employer. If it had not poached a trained employee it would have needed to pay such training costs anyway. The same amount would simply be paid to the previous employer for training a replacement, rather than to the franchisor for training a new employee. Given that such compensation would not be an additional expenditure for the poaching employer, it would not discourage hiring. Such a payment would not violate the new provisions of the Act, or their purpose.

The Draft Guidelines contain an example scenario relating to no-poaching in franchise agreements. That example should be clarified, to state that an agreement to pay such compensation would be acceptable

5. What Should Franchisors do Now? 

As we await the next version of the Bureau’s guidelines, and in view of the looming deadline for implementation of the new provisions, franchisors should:

 • Ensure that all contracts to be entered into with other employers (regardless of whether they are competitors) after June 23, 2023 are compliant with the new provisions. This includes reviewing and eliminating improper in-term and post-term non-solicitation clauses in franchise agreements. 

• Examine your information-sharing practices – and change them as necessary. Any sharing of wage, bonus or other employment-related information (including in franchise systems, trade associations and buying groups), or steps taken to monitor each other’s employment practices, could be circumstantial evidence of a criminal agreement. 

• Ensure that conduct after June 23rd does not reaffirm or implement older, non-compliant Wage-fixing or Nopoach agreements.

 • Have an effective compliance program. Thoughtful policies and training will help ensure that franchisor staff – and the franchisees – know the rules and abide by them. 

Franchisors should take advantage of the grace period and take all necessary steps to avoid criminal liability.

ABOUT THE AUTHOR 
With a deep understanding of the nuances of Canadian law and extensive experience guiding clients through complex legal matters, Sotos LLP is well-positioned to help franchisors navigate the changing regulatory landscape and implement the necessary changes to their agreements, policies, and procedures to comply with new regulations. Liisa Kaarid is a partner at Sotos LLP. Liisa is widely recognized for her work and has been consistently acknowledged by top industry publications such as Best Lawyers in Canada, Canadian Legal LEXPERT Directory, Who’s Who Legal Canada, Who’s Who Legal Global, and Legal Eagles. She was Exclusive Winner of the 2022 Lexology Client Choice Award for Franchising in Canada. Please contact Liisa Kaarid at 416.572.7315.