Franchising disrupted: Are franchisees hidden employees?

Franchise operations across Canada are facing increasing scrutiny as courts and legislators reconsider the line between franchisee and employee.

It is commonly understood that franchisees operating within a franchise system are separate and distinct from employees working on behalf of their employers. Franchisees are typically independent contractors that conduct business on their own account. Common in many franchise agreements are express clauses setting out that franchisees are not the agents of franchisors and operate with full autonomy in running their day-to-day operations, making business decisions and assuming financial risk for their individual outlets.

Generally speaking, franchisees obtain a licence to use a franchisor’s trademarks and operating system in order to run their business. Franchisees bear all of the financial risks and rewards of the business but pay certain fees (i.e., royalty/licence fees) to the franchisor for their use of such trademarks and system.

On the other hand, employees receive remuneration from employers to complete specific jobs or tasks on the employer’s account. Although employees may share in the employer’s profit by way of commissions or other incentives like bonuses, they generally do not have any responsibility for the financial risks of the business.

Despite these distinctions, evolving trends in employment law blur the lines between who is considered an “employee” versus an “independent contractor.” This is important as independent contractors are not entitled to the same benefits or protections that employees or dependent contractors are, and generally do not receive minimum statutory entitlements such as vacation, overtime, statutory holidays, etc.

New presumption of employment status and gig workers

With respect to recent legislative amendments, the Canada Labour Code (CLC) was updated in 2024 to include a new presumption of employment status applying broadly to “a person who is paid remuneration by an employer,” as long as they were working within a federally regulated industry.^[1] The amendment shifts the traditional burden of proof away from the individual asserting employee status to the employer. The intention was to make it more difficult for employers to characterize workers as “independent contractors” as opposed to “employees” entitled to benefits and other protections.

Since this has already become the new default rule, except for managers, supervisors or certain others as prescribed, employers are prohibited from treating workers as non-employees in the first place. Although currently limited to federally regulated workplaces, the primary purpose of these federal amendments to the CLC was to provide greater protection for gig workers.

Put simply, gig workers are those who enter more casual work arrangements (i.e., short-term contracts or one-off tasks). Historically, most gig workers were employed by digital platform providers, including ride share and delivery services. These digital platforms almost always classified their workers as independent contractors in order to take advantage of highly flexible and usually low-paid labour.

Although Ontario has enacted new laws, which came into force on July 1, 2025, to better protect gig workers directly employed by digital platforms,^[2] critics say these new rules do not go far enough to help the majority of gig workers due to the narrow definition of digital platforms and the application to ride shares, deliveries, couriers or other prescribed services.

Similarly, in British Columbia, amendments made to existing employment legislation provides protections for “online platform workers” that are engaged in picking up and delivering online orders or transporting one or more passengers through a ride-hail online platform.^[3] Supporters of the legislation point to the new requirements in both provinces mandating that gig workers be paid minimum wage as a step in the right direction.

In any event, a legal analysis over worker classification boils down to the actual working relationship between the parties. Tribunals, labour boards and courts weigh various factors in the context of each case. The starting question is: What level of control does the employer exert over the employee’s work, schedule and location? Further, how one party describes the position in writing will only be a factor in determining the actual contractual status (i.e., employee or independent contractor/consultant). Simply put, regardless of whether or not the parties agree in writing that it is not one of employer/employee, the courts will apply traditional tests to determine the true nature of the relationship.

It remains to be seen whether additional provinces will follow suit as the number of gig workers grows across Canada, potentially creating even more disruptions and further blurring the lines between independent contractors and employees.

Guidance from Quebec: When franchisees look like employees

In Canadian case law, provinces with franchise legislation have consistently exempted employer-employee relationships from franchise treatment.^[4] This longstanding principle ensures that franchise structures remain distinct from employment arrangements.

Although Quebec does not have specific franchise legislation, various provisions in the Civil Code of Québec relating to private companies have been interpreted in the franchising context. Quebec has also produced a rich body of case law offering guidance on franchise operations and control.

For example, in Modern Cleaning Concept Inc. v. Comité paritaire de l’entretien d’édifices publics de la région de Québec,^[5] the Supreme Court of Canada (SCC) ruled that a franchisee was an employee under Quebec’s Decree Respecting the Maintenance Personnel of Public Buildings in the Quebec City Region (the Decree),^[6] a collective agreement governing cleaning services in public buildings. The Decree sets minimum wage for employees and allows the Comité to enforce compliance and bring claims on their behalf where the empowering Quebec statute, Act respecting collective agreement decrees,^[7] is violated.

The franchisor at issue, Modern Cleaning Concept (Modern), provided cleaning services in Quebec through a network of more than 400 franchises. Modern’s business model was to negotiate a master cleaning contract with its clients directly, guarantee the quality and provision of such services to the client and then assign those contracts to the local franchisee to complete. The franchisee, Francis Bourque, was an individual that had operated his own part-time cleaning business, Nettoyage Francis Bourque, with his spouse.

After becoming a franchisee, Mr. Bourque was assigned various cleaning contracts by Modern. However, Mr. Bourque decided to terminate the franchise agreement and operate independently due to alleged lack of profitability and flexibility to develop his own business.

Although the Court of Québec ruled that Mr. Bourque was not an employee but was an independent contractor, the decision was reversed on appeal. The Court of Appeal for Québec held that the true nature of the relationship between the parties was that of employer/employee and provided a list of factors that established Modern had tightly controlled Mr. Bourque’s operations to the point that he was not an independent contractor.

The Court of Appeal held that the trial judge made a palpable and overriding error by failing to properly apprehend the true nature of the tripartite contractual relationship between Modern, the client receiving cleaning services and Mr. Bourque. Unlike traditional franchise models, Modern remained liable to the client for the cleaning services, even though the contract had been assigned to Mr. Bourque to complete the work.

On further appeal, the SCC held, in accordance with the Court of Appeal, that the trial judge erred in the assessment of whether Mr. Bourque was an employee or an independent contractor. The SCC held that Modern had operated a distinct business model because the cleaning contracts were not fully assigned, as Modern had ongoing obligations to the client. As a result of the tripartite relationship, Mr. Bourque, unlike most traditional franchisees, did not have a direct, autonomous relationship with his clients that was independent from the franchisor.^[8]

This case demonstrates that, when franchisors retain significant operational control or contractual responsibility, courts may classify franchisees as employees, even where agreements suggest independent contractor status.

New Manitoba class action involving Shoppers Drug Mart

Further legal shifts could come by way of a proposed class action in Manitoba involving Shoppers Drug Mart, which has the potential to subvert franchisee-franchisor relationships across common law Canada.^[9]

The statement of claim filed in the Court of King’s Bench by TLB Pharmacy Ltd. and Tracy Bellyou alleges that Shoppers Drug Mart misclassified its former franchisees as independent contractors and terminated their “employment” without common law reasonable notice or pay in lieu thereof.^[10]

The proposed class members are all former franchisees, known as “associates” in Canada, excluding Quebec, who entered into an associate agreement to franchise a retail business with the defendants, Shoppers Drug Mart Inc. and Shoppers Drug Mart (London) Limited, and whose relationship was terminated by the defendants from 2006 to the date of certification.

The certification motion for the class action is expected to occur early in 2026. If certified, the class action could expose Shoppers Drug Mart, and potentially other franchisors, to significant liability, including damages for misclassification, notice and other employment-related entitlements.

What does this mean for franchisors operating in Canada now?

While it remains to be seen what new developments may occur in the franchising context, employment-like determinations and findings of vicarious liability in franchise relationships can have an adverse effect on the entire franchise industry, exposing franchisors to unexpected risk, liability and expenses.

Franchising, as a sector, has been built on the principle that employees cannot be franchisees. All franchising structures, pricing, networks and incentives rest on this well-settled principle and findings of employment only introduces uncertainty. A snowball effect could ripple across the industry going outside of the specific franchise system at issue. The diversity and availability of franchises, especially new, unique or non-traditional franchise opportunities, may diminish as franchisors become disincentivized through this business model.

Franchise and employment laws are constantly changing and evolving. It is important for both franchisees and franchisors to stay up to speed on recent case law and legislative amendments to ensure compliance.

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Jennifer Shayko is a partner at Aird & Berlis and Leader of the firm’s Franchising Group, where she provides comprehensive advice on all aspects of franchising. Her corporate advice is informed by her years of experience at a franchise litigation boutique and her time directing outside litigation counsel while in-house at Recipe Unlimited. This allows Jennifer to adeptly negotiate complex franchise matters across various industries, including food and beverage, hospitality, trucking and logistics, automotive, fashion and retail. Jennifer offers strategic counsel on regulatory compliance, contract negotiations, system expansions and franchise transactions. She is skilled in structuring area development agreements and master franchising arrangements in Canada and internationally.

Lorenzo Lisi is a partner at Aird & Berlis and Leader of the firm’s Workplace Law Group. He has practised exclusively in the area of labour and employment law for more than 30 years, representing employers on all areas touching labour and employment law, both provincially and federally. Lorenzo has developed a practical, business-oriented approach and has built a long list of loyal clients who depend on him for direct solutions, risk analysis and strategic advice. Cognizant of the time pressures and deadlines most employers experience in today’s workplace, he combines focused, calm and proactive advice with exceptional client service, while remaining approachable to all levels of the organization.

Emily Chow is an associate at Aird & Berlis and a member of the firm’s Corporate Group. She previously articled with the firm and is a recent graduate of Osgoode Hall Law School.