Franchising has long been a popular business model in Canada, allowing entrepreneurs to expand their brands while offering individuals the opportunity to run their own businesses. However, with the ever-evolving business landscape and regulatory framework, it becomes crucial for franchisors to adapt and address emerging challenges. On June 23, 2023, a significant amendment to the Canadian “Competition Act” will come into effect, introducing a new criminal provision, and this will impact franchisors operating in Canada.

The amendment to the Competition Act will criminalize certain anti-competitive practices between unaffiliated employers, that may arise in franchising agreements. Franchisors could now be subject to criminal liability, punishable by up to 14 years of prison, or a fine imposed by court adjudication – or both – if they engage in specific prohibited activities.

Franchisors operating in Canada should seek legal counsel to review their franchisee agreements.  Particular focus should be on whether the franchisor mandates the franchisee to (a) not solicit or hire employees of other franchisees and/or the franchisor, and (b) if “conditions of employment” agreements exist.  The impact on franchisors follows.

Increased Liability: Franchisors should be hyper-vigilant in ensuring compliance with the Competition Act. The amendment expands the scope of criminal liability to individuals within an organization who are responsible for the commission of an offense, including franchisor executives and directors. Consequently, franchisors will bear increased responsibility for the actions of their employees and franchisees.

Franchise Agreements and Training: Franchisors should consider updating their franchise agreements and training materials to include explicit clauses and guidance on complying with the Competition Act. It is crucial to educate franchisees about the potential risks and consequences of engaging in anti-competitive practices.

Supplier Relationships: Franchisors often negotiate and manage relationships with suppliers on behalf of their franchisees. However, the new amendment requires franchisors to be even more cautious in their dealings with suppliers to avoid any perception of anti-competitive behavior. Franchisors should establish clear guidelines regarding pricing, procurement, and supplier relationships to ensure compliance with the Competition Act.

Enhanced Due Diligence: The criminal amendment places a greater emphasis on due diligence, requiring franchisors to conduct thorough investigations and risk assessments when entering into new relationships or making changes to existing ones. It is imperative to assess the competition law compliance of potential franchisees and ensure ongoing monitoring to identify any potential violations.

Training and Education: Franchisors should consider investing in comprehensive training programs to educate employees, executives, and franchisees about the updated provisions of the Competition Act. By fostering a culture of compliance, franchisors can minimize the risk of violations and demonstrate their commitment to ethical business practices.

The forthcoming criminal provision amendment to the Canadian Competition Act is set to have a substantial impact on franchisors operating in Canada. The increased liability, the need for updated agreements and training, closer scrutiny of supplier relationships, enhanced due diligence, and investment in training programs are all essential aspects that franchisors should address to ensure compliance.

It is crucial for franchisors to consult legal professionals with expertise in competition law to ensure a comprehensive understanding of the amendment and to develop appropriate strategies to remain compliant. By staying informed, proactive, and dedicated to ethical conduct, franchisors can continue to thrive and contribute to Canada’s vibrant franchising sector in a compliant and responsible manner.

Posted by: Rudy Troisi, L.P.I., President and CEO, Reliable Background Screening

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