On June 23, 2022, significant changes were made to the Competition Act (Canada), two of which have a direct impact on many franchise agreements.
These changes consist of the addition of the following two new criminal offences to section 45 of the Competition Act (Canada):
(1.1) Every person who is an employer commits an offence who, with another employer who is not affiliated with that person, conspires, agrees or arranges
(a) to fix, maintain, decrease or control salaries, wages or terms and conditions of employment; or
(b) to not solicit or hire each other’s employees.
The penalty for these offences is found in subsection (2) of the same section which reads as follows:
(2) Every person who commits an offence under subsection (1) or (1.1) is guilty of an indictable offence and liable on conviction to imprisonment for a term not exceeding 14 years or to a fine in the discretion of the court, or to both.
It is important to note that there is no maximum fine that can be imposed by a court for the commission of any of these offences.
In addition, delinquent individuals and businesses may also face civil proceedings, including class actions, brought by or on behalf of those harmed by an agreement that violates the Competition Act (Canada).
Such an offence can obviously also have a negative impact on the reputation of any offender.
These changes have a significant impact on all franchise agreements containing any provisions prohibiting or restricting the hiring by the franchisor or the franchisee of employees of the other or of employees of another franchisee, as well as on all agreements giving the franchisor the right to “fix, maintain, decrease or control salaries, wages or terms and conditions of employment” of employees of a franchisee.
Indeed, for the purposes of this new section 45(1.1) of the Competition Act (Canada), a franchisee who has employees is an employer who is not affiliated (within the meaning of the Act) with the franchisor.
It is also important to note that evidence of a prohibited agreement may be based on circumstantial evidence. Thus, it will not be sufficient for a franchisor to simply remove from its franchise agreement the provisions containing any of these offences. It will also be necessary for the franchisor to ensure, in fact and in the other documents used by the franchisor (primarily its operations manual), that it is not in violation of these new sections.
The Competition Act (Canada) permits a defence to these offences where the agreement prohibited by section 45(1.1) “is ancillary to a broader or separate agreement or arrangement that includes the same parties” and “is directly related to, and reasonably necessary for giving effect to, the objective of that broader or separate agreement or arrangement”. However, to this day, there is no interpretation of this defence.
Fortunately, although these new sections of the Competition Act (Canada) were enacted in June 2022, their coming into force has been delayed by one year. They will therefore come into force on June 23, 2023.
It is therefore important for all franchisors to review their franchise agreement(s) and their other contracts and documents (including their operations manual) by this date to avoid committing the criminal act provided for in these new sections.
We invite you to contact any of the authors of this bulletin with any questions you may have. We will be pleased to answer you promptly.