In the recent case of France v Kumon, 2014 ONSC 5890 ("Kumon"), the Superior Court of Justice found that a franchisor was required to provide a longstanding franchisee with 18 months termination notice on the basis that the relationship was akin to an employment situation. Despite the alignment of the franchise relationship to the employment context, the Court squarely held that the franchisee was not an employee and that the franchisor was not a fiduciary.
The bold statement by the Court affirms what many franchisor-friendly commentators have espoused for years and reinforces one of the hallmarks of the franchising business model: franchisees are independent contractors, not employees. The decision is released amidst the recent jurisprudential confusion regarding the employee/independent contractor dichotomy.
In Kumon, the plaintiff franchisee brought an action against the defendant franchisor claiming damages for wrongful termination. The defendant, Kumon, is the franchisor of the world's largest provider of after-school math and reading programs. The plaintiff, Bobbie France, operated a Kumon franchise from 1991 until her termination. In 2009, Kumon gave Ms. France 12 months notice and in December 2010, the franchise was terminated.
Kumon brought a summary judgment motion claiming it had the right to terminate the franchisee. The Court agreed that Kumon was entitled to terminate yet found that the 12-month notice period was inadequate. The action was dismissed subject to further submissions on the reasonableness of the notice period.
In supplementary reasoning on the notice period issue, the Court disagreed with Kumon that the franchise relationship was akin to a commercial relationship in the distributorship context; rather, the franchise situation was more in line with an employer-employee relationship. While these authors suggest that franchising is more closely akin to distributor relationships, the key aspect of this decision is that it is a pronouncement by the Ontario Superior Court that it is not an employment relationship.
Notwithstanding the alignment of the franchise relationship to the employment context, the Court was quick to note that franchisees were independent contractors and not employees of the franchisor. The Court stated that there "must be some discount for the fact that a franchisee is still an independent contractor, and must bear much of the risk associated with being an independent contractor" and continued that "while a franchisee is closer to an employee than to a distributor with significant commercial power, a franchisee is still not an employee – and a franchisor is not a fiduciary."
The decision is helpful for franchisors feeling the aftershock of changes that question the nature of the franchisor-franchisee relationship in both the US and Canada. Traditionally, franchisors have not been treated as employers of their franchisees so long as they do not cross a certain line of control and involvement in their franchisee's operation. Recent developments in both US and Canadian jurisprudence have confused whether a franchisee, or an employee of a franchisee, is an employee of the franchisor or an independent contractor. The confusion on whether the franchisor and franchisee are joint employers sets a dangerous precedent with serious implications for franchisors, including the potential for franchisors to be held vicariously liable for the actions of their franchisees and their franchisees' employees.
The statement of the Court affirms the longstanding common law position that franchisors will not be treated as employers of franchisees, so long as they do not exert significant control over franchisees. Franchisors are reminded to continue to be conscientious of crossing the line of control and involvement so not to expose themselves to liability as an employer of the franchisee.
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