Canada’s Competition Act underwent significant renovations last year with the federal government passing several amendments to modernize competition laws which had gone generally untouched since 2008 (see our post summarizing recent Competition Act changes here). As of June 23rd, 2023, many of the amendments will officially come into effect, including changes which could significantly impact franchisors/franchisees.
Notable to franchisees/franchisors are the amendments to the criminal conspiracy offence at section 45. The updated section officially prohibits no-poaching or wage-fixing clauses, amongst other contractual stipulations, that would otherwise allow employers to restrict an employee’s job mobility.
The new language states: “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.”
How will this impact franchisees/franchisors?
While section 45 does not specifically target franchisees/franchisors, it does target clauses commonly used in franchise agreements. Franchise agreements, and other related documents, have a history of prohibiting or restricting hiring by franchisors/franchisees of employees of one or the other, or of employees of another franchisee. Franchise agreements can grant the right to the franchisor to fix wages or terms and conditions of employment for franchisee employees. Moving forward, franchisees/franchisors will be expected to:
- Stop entering into agreements to restrict the hiring or solicitation of each other’s employees, or to fix, maintain, decrease or control the salaries, wages or terms and conditions of employment of their employees. Since the initial amendments announced last year, the Competition Bureau has confirmed that the no-poaching clause is limited to mutually beneficial instances where employers agree not to poach one another’s employees. Instances where only one party agrees not to poach another’s employees will not be an offence.
- Edit or re-draft their existing franchise agreements and other contracts and documents to remove any provisions that violate section 45(1.1) of the Competition Act. Since the initial amendments, the Competition Bureau has confirmed that this rule will only apply to new agreements entered into on or after June 23rd, 2023. However, parties which continue to engage in practices in violation of subsection 45 (1.1), even if the agreement was made before June 23rd, will be in violation.
- Stop engaging in any conduct or communication that could be construed as evidence of non-poaching, wage-fixing, or similar prohibited agreements, as the Competition Act allows such instances to be used as circumstantial evidence to help prove violations of section 45. Notably, employers can be found liable even if non-poaching and/or wage-fixing agreements were entirely informal.
- Provide sufficient language in operations manuals and other documents which reinforces that it is not in violation of these new sections.
Failure to appropriately address and make these changes can result in criminal charges. The Competition Act outlines the consequences, stating in section 45: “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.” There is no maximum fine.
Is there a way around the new restrictions?
Franchisees/franchisors may be able to rely on a defense to the offence if they can show that the agreement prohibited by section 45(1.1) is ancillary to a broader or separate agreement or arrangement that is itself compliant, and 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. In other words, for this defence to succeed, the evidence has to demonstrate on a balance of probabilities that the non-poaching arrangement was a necessary part of a larger agreement that does not violate the Competition Act.
What should franchisees/franchisors do to prevent liability?
To maintain the legal health of your franchise, and prevent any criminal liability, best practices ahead of June 23rd, 2023, include:
- Reviewing all existing franchise agreements and corporate documents (such as an operations manual) to identify and remove any provisions that violate the new sections.
- Avoiding entering into any new agreements or arrangements that contain any prohibited provisions or that could be construed as circumstantial evidence of a prohibited agreement.
- Seeking legal advice. Franchisees/Franchisors should have legal counsel review existing/proposed agreements and arrangements to identify instances of provisions that violate the new sections or could be construed as such. Legal counsel should also review and assess if these agreements meet the criteria for the ancillary defense.
As of June 23rd, 2023, franchisees/franchisors, or legal counsel representing them, should be monitoring developments and interpretations of the new sections of the Competition Act to understand how they will work in practice and to adjust business operations accordingly. The Competition Bureau continues to clarify and refine the details of its amendments.
With the enforcement date for section 45 quickly approaching, it is imperative that business owners and executives take all necessary precautions to remain in compliance with Canada’s new and improved Competition Act.
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The information provided in this article is not intended to be legal advice. Many factors unknown to us may affect the applicability of this content to your particular circumstances.