1049-99-R The United Food and Commercial Workers’ International Union, Local 175, Applicant v. Sobeys Ontario Division of Sobeys Capital Incorporated, 1349203 Ontario Inc. c.o.b. as Britannia IGA, 1359307 Ontario Inc. c.o.b. as Brimley Price Chopper, 1324516 Ontario Ltd. c.o.b. as Byng Price Chopper, 1356210 Ontario Limited c.o.b. as Creditview Price Chopper, 1349262 Ontario Limited c.o.b. as Dundas IGA, Gerrard IGA, 1356097 Ontario Limited c.o.b. as Leslie Price Chopper, 1356098 Ontario Limited c.o.b. as Rathburn Price Chopper, 1356094 Ontario Limited c.o.b. as Wentworth IGA, Responding Parties.

BEFORE: Christopher J. Albertyn, Vice-Chair.

APPEARANCES: Kelvin Kucey and Kate Chrysler for the applicant; John M. Wigle and Len Lupton for Dundas IGA; George Pollitt for Wentworth IGA; Stephen McArthur, Jodi M. Tarter, Peter Marturano and Alex Hamilton for Gerrard Price Copper and Creditview Price Chopper; W.J. Hayter and John Cioffi for Leslie Price Chopper; Donald D. White and Bob Miller for Byng Price Chopper; David L. Brisbin and Dave Armstrong for Britannia IGA; Enzo Magnatta for Brimley Price Chopper; Fred Hamilton and Terry Parnell for Sobeys.

DECISION OF THE BOARD; September 28, 2001

1The correct citations of the responding parties are as follows: Sobeys Ontario Division of Sobeys Capital Incorporated, 1349203 Ontario Inc. c.o.b. as Britannia IGA, 1359307 Ontario Inc. c.o.b. as Brimley Price Chopper, 1324516 Ontario Ltd. c.o.b. as Byng Price Chopper, 1356210 Ontario Limited c.o.b. as Creditview Price Chopper, 1349262 Ontario Limited c.o.b. as Dundas IGA, Gerrard IGA, 1356097 Ontario Limited c.o.b. as Leslie Price Chopper, 1356098 Ontario Limited c.o.b. as Rathburn Price Chopper, 1356094 Ontario Limited c.o.b. as Wentworth IGA. The style of cause is amended accordingly.

What this case is about

2This is an application for a related employer declaration pursuant to the provisions of section 1(4) of the Labour Relations Act, 1995 (“the Act”) and a sale of business declaration under section 69.

3The application arises from transactions between Sobeys, a large retailer, and the other responding parties. The other responding parties (‘the franchisees’) operate retail stores which were previously directly owned and managed by Sobeys. Their relationship with Sobeys is that of franchisor and franchisee.

4The applicant union (‘the union’) had bargaining rights for 14 of Sobeys’ retail outlets in a single collective agreement. Eight of the stores were franchised to the franchisees. (Originally Sobeys planned to franchise nine stores, but one did not proceed.) Each franchisee wrote to the union on May 31, 1999, before this application was launched, to acknowledge it was a successor of Sobeys, as contemplated in section 69 of the Act and that it was bound by the collective agreement concluded between the union and Sobeys. The franchisees accept the Board may make a declaration under section 69 to that effect.

5The union’s interest is to obtain a related employer declaration. It wants the franchisees to be bound, with Sobeys, in a single collective agreement, not in separate collective agreements which contain the terms of the current central agreement with Sobeys.

6Prior to the hearing of evidence, the responding parties made a request that the application be dismissed under Rule 46 for failing to disclose a prima facie case. A decision (‘the prima facie decision’) was issued on March 10, 2000 dismissing that request. However, the request and that decision have some continuing relevance. Paragraph 7 of the decision states:

The union’s factual allegations which advance its claim for a declaration under subsection 1(4) of the Act are the following: the work performed by the bargaining unit employees in the 9 stores is identical to what they did under Sobeys; the IGA and Price Chopper signs, which characterize the operations, are unchanged; Ms. Parnell, Sobeys’ Director of Human Resources of its Retail Operations, is a key individual in the operation of Sobeys and the franchisees; all aspects of each franchise operation (e.g. payroll, bookkeeping, purchasing, advertising, accounting and human resources) are monitored by Sobeys; labour relations and contractual negotiations are controlled and directed by a common management and group policy.

7Comparing the evidence presented at the hearing to these allegations, I draw the following conclusions. The work performed by the bargaining unit employees in the eight stores is substantially the same, if not identical, to what they did when employed by Sobeys. The IGA and Price Chopper signs are unchanged. Ms. Parnell is the Director of Human Resources in Sobeys; she has nothing to do with labour relations in the franchise operations. She is not a key individual for the franchisees. They control labour relations themselves and they conduct negotiations on their own. All financial aspects of the franchise operations are monitored by Sobeys. Depending upon the type of franchise operation, the degree of financial control over each franchisee by Sobeys varies.

8As stated in the prima facie decision, there was no allegation of intermingling between employees of the different franchisees. Nor was there any suggestion of any association or related business activity as between the different franchisees. No financial information is shared between them. Sobeys keeps a separate relationship with each of them. Hence the union’s case was built around the relationship between Sobeys and each franchisee severally. The only connection between each franchisee is through Sobeys.

9This case was largely contested on the nature and extent of Sobeys’ control over the operations of the franchisees’ businesses. The union contends the control is so extensive that each individual franchisee has no effective control over his or her business and no autonomy in bargaining with the union. The union says that the dependence of each franchisee on Sobeys is so substantial and extensive that any collective bargaining with a franchisee is meaningless if Sobeys is not also at the table.

10This application involved eleven days of hearing. There were eight witnesses. Of them, Mr. Dennis Lemay, the Executive Vice-President and Assistant General Manager of Sobeys Ontario, gave a comprehensive account of the financial and other arrangements between Sobeys and its various franchisees.

11For reasons of confidentiality, I did not permit the disclosure of the actual financial arrangement between each franchise and Sobeys. That information was provided to the union’s counsel on a confidential basis. The discussion of financial details was done on the basis of hypothetical figures.

The bargaining history between the union and Sobeys

12The union was recognized as the bargaining agent for the bargaining unit employees of 14 retail locations of Safeway Canada Limited. In 1996 Safeway’s business was acquired by the Oshawa Group Limited. During 1997 Oshawa Foods changed its name to Agora Food Merchants.

13The union entered into a collective agreement with Agora Food Merchants, Ontario Division, for 12 stores, for the period November 2, 1997 until July 7, 2001.

14Sobeys acquired the 12 locations as part of its purchase of Agora Food Merchants on December 1, 1998. In March 1999, Agora Food Merchants, Ontario Division changed its name to Sobeys Ontario Division. On May 2, 1999 The Oshawa Group Limited amalgamated with Sobeys Capital Incorporated to form Sobeys Capital Incorporated.

15On May 20, 1999 Sobeys advised the union that nine stores were being sold to franchisees (that transaction is the subject matter of this application), each of whom was prepared to continue the employment of all employees in the bargaining unit at its store and to honour the collective agreement at the store location concerned. One sale did not proceed.

16Sobeys sought to have the transfers from company-owed store to franchised store effected at about the same time. The aim was to make the transition as seamless as possible. In the end, it franchised all eight stores within the space of a month.

17All employees of the former corporate stores were laid-off by Sobeys and re-hired by the franchisees. They remained in the stores where they had been employed. The public was advised by flyer of the fact that the store had been franchised and of the identity of the franchisee who would be running the store. In most instances the previous store manager became the franchisee, with a new relationship with Sobeys: no longer an employee, now a commercial associate. (In some cases the franchisee was not the previous store manager). The banner (IGA or Price Chopper) remained the same. Sobeys arranged a ‘new franchisee week’ at the start of the new franchise. There were lower prices on goods and more specials than is customary. This was to give a boost to the new dealer. Sobeys bore the significant cost of the franchisee’s initial promotion (between $20,000 to $40,000 depending on the size of the store).

18The union has several collective agreements with franchisees of Sobeys. These agreements were presented as exhibits. They show the union has recognized various franchisees as separate employers. The union has not made an application in respect of those employers to suggest they and Sobeys are related employers pursuant to the provisions of section 1(4) of the Act.

The relationship between Sobeys and its franchisees

19This case concerns two of Sobeys’ banners: IGA and Price Chopper. Sobeys has 62 franchised stores in Ontario. The eight stores which are at issue in this case are indistinguishable from some of the franchised stores with which the union has an independent collective bargaining relationship, except that the eight were part of the corporate collective agreement between Sobeys and the union, which Sobeys inherited from Safeway. Sobeys’ aim is to operate as a food and grocery distribution business through franchised outlets. It will assume responsibility for a store only for the limited purpose of transferring it from one franchisee to another. It holds the store briefly for re-sale.

The motivation for franchising and the selection of franchisees

20Sobeys believes franchised operations are more successful than wholly owned stores. Sobeys has found that the commitment to the success of a store from franchisees who own their own businesses is generally greater than that shown by store managers. Franchisees take greater care over their businesses than do store managers working as Sobeys’ employees. Decisions are made more quickly and more effectively. A store manager may need approval from a superior before deciding something, a store owner can make that decision on the spot. Store owners tend to run less complicated operations. They seem to show greater eagerness to establish good client relationships with the community and the customers they serve than do store managers in the employ of the company. There is also more commitment to better financial results; more focus on cost-savings; more care and attention to detail. The incentive to succeed is greater among franchisees than among managers. They have more at stake. Franchisees tend to be more assiduous in their negotiations with service providers, repairers and trades people who perform work on the store than are store managers.

21Besides having better financial results, Sobeys’ work is simplified by having franchisees. The franchisees tend to manage the stores with less assistance and guidance from the company than do store managers. This means there are fewer demands on Sobeys’ management than if it ran the stores itself.

22Sobeys sees itself primarily as a wholesaler. Its principal revenue sources are from the sale of wholesale merchandise to its franchisees and from the franchise royalty fees it receives. That is the nature of its business. When it acquired a number of retail outlets in Ontario its aim was to convert those outlets into relatively independent customers of its wholesale business.

23When selecting franchisees Sobeys looks for retail experience, commitment and passion. It is less interested in the financial resources of the prospective franchisee than in their experience and sense of responsibility towards the enterprise. It wants individuals who are prepared to put their hearts into their business, work hard and frugally, and build their stores into successful operations. Sobeys looks for individuals who will be able to stand on their own feet, make decisions on their own and withstand the pressures of the risks and uncertainties which go with starting a new business, under conditions of substantial initial debt.

24Once Sobeys made the decision to franchise the various IGA and Price Chopper stores which are affected by this application, it looked to find suitable franchisees. It spoke first to those store managers it thought might make a success of their own business. It also advised its district managers that stores would become available for acquisition by a franchisee. The process was primarily internal, among members of Sobeys’ district and store management.

25Sobeys prefers to select those from inside its company because they tend to know the stores, the business, Sobeys’ way of doing business, the customers, the contacts a franchisee will need. Store managers are ideal candidates because they know the business of running a store. Past performance is a significant factor in the selection of franchisees. Sobeys’ management will take account of the financial results of the candidate: his/her labour management skills; control of costs and expenses; store administration; etc.

26There is no shortage of individuals who would like to get a franchise from Sobeys. Mr. Armstrong is a typical example. He is the franchise of the Britannia IGA, a responding party. He testified. He has been in the grocery industry for 26 years, becoming a store manager some 13 years ago. He was a store manager at the Britannia IGA for about 6 years before he acquired the franchise. Before being offered the franchise he had made clear to his District Manager that he was interested in acquiring his own store if a franchise became available. He had explained this desire to members of corporate management for a period of about 12 years before the opportunity presented itself to him. A franchise represents the opportunity of acquiring equity and moving from being a managerial employee to being one’s own boss with one’s own business and assets.

27Besides those who had been store managers, the background of some of the other franchisees was as follows: one came from outside the Sobeys’ organization; one had worked in Sobeys’ head office; one was a Sobeys’ Category Manager; one was a Sobeys’ District Manager; another was a franchisee of another Sobeys’ store.

The financial arrangements and agreements between Sobeys and the franchisees

28Sobeys effects the transfer of a store to a franchisee by transferring ownership of the inventory to the franchisee and having the franchisee sign a sublease agreement in respect of the store premises and a lease for the equipment in the store. Sobeys transfers ownership of substantial assets (chiefly the inventory) by providing a loan to make that possible, on the understanding that the franchisee will repay the loan over a fixed period. The other agreements concluded are to protect Sobeys’ interest in the unwished-for event that the franchisee defaults in the payment of the inventory loan. The franchise agreement itself is to ensure that the franchisee acts as a franchisee in relation to Sobeys, viz. he/she acquires his/her product and replacement inventory chiefly from Sobeys, he/she maintains the standards associated with Sobeys’ stores, etc.

29Although Sobeys gives its franchises to individuals, the individual acquires the franchise through a numbered company, which becomes the owner of the franchise. The individual franchisee (and his/her spouse) sign personal guarantees for the numbered company’s liability.

30As time passes, and with due compliance by the franchisee with the various agreements concluded with Sobeys, particularly payment of the debt for the initial inventory acquired, the franchisee will become less indebted to Sobeys and more independent financially. The franchisee will eventually pay off the inventory loan and the inventory will become wholly its property. That task will take between five and ten years. On average, a Category 3 franchisee – (the categories are explained below) – pays off its inventory debt within about 7 years of becoming a franchisee. The franchisee may purchase its own equipment and stop leasing from Sobeys. The franchisee may eventually acquire the head lease to the property in which the store is situated, and so cease being a sub-tenant of Sobeys. Sobeys’ aim is that each franchisee moves through these various stages until its relationship with the franchisee is that of wholesaler to retailer (with the franchisee being obliged to acquire most of its product from Sobeys and to maintain the standards which apply to Sobeys-franchised stores). Sobeys categorizes the different stages of franchisee on the spectrum from substantially indebted to substantially independent.

31Sobeys has three categories of franchisee:

Category 1:

The franchisee owns all of the inventory in the store. The franchisee owns the equipment in the store. The franchisee either owns the building in which the store is situated, or he/she holds the head lease. No money is owed to Sobeys, which has no financial risk in relation to the outlet. The agreements between the franchisee and Sobeys will include a Franchise Agreement and an Operating Agreement, and there may be some guarantees to cover the franchisee’s current account on inventory. Either Sobeys or the franchisee can terminate the Franchise Agreement on 60 days notice. The Franchise Agreement provides for the payment of a royalty on retail sales.

Approximately 30%-35% of the IGA stores fall into this category of franchisee. There are no Price Chopper franchisees in this category.

Category 2:

The franchisee has some liability to Sobeys for the inventory. The franchisee owns his/her own equipment in the store. Sobeys will have some security (e.g. a lien) for the balance owing for the purchase of the inventory. There will be some personal guarantees from the franchisee in respect of the balance due. Sobeys will hold the head lease, or (less likely) it may have a cross-lease with the franchisee (the franchisee leases the property to Sobeys, which in turn sublets it to the franchisee’s company). The agreements between the franchisee and Sobeys will include the Franchise Agreement, a Sublease Agreement, an Operating Agreement (if Sobeys has financed the franchisee’s purchase of the store equipment) and Personal Guarantees from the directors of the franchisee. The agreements are usually for the duration of Sobeys’ head lease.

Approximately 30%-35% of the IGA stores fall into this category of franchisee. There are no Price Chopper franchisees in this category.

Category 3:

This is commonly the starting point for franchisees. It is designed for low equity operators, those who enter a franchise arrangement with Sobeys with little initial capital of their own. Sobeys finances the franchisee, allowing him/her to set up in business. Sobeys assumes the financial risk of transferring its inventory to the new franchisee. The agreements concluded with the franchisee reflect Sobeys’ concern to see its financial exposure protected. Sobeys requires that the franchisee make a capital investment of his/her own, at least in the sum of $25,000. This shows commitment by the franchisee.

The franchisee acquires ownership of the inventory in the store from the first day of the franchise arrangement. The value of the inventory will depend upon the size of the store. On average it will be worth about $400,000. Sobeys finances half of the value of the inventory with a business loan. The other half is paid for by income through sales. The franchisee will invest, say, $25,000 which will be the initial working capital of the business. That investment must be unencumbered, and it must remain in the business. No franchise fee is payable for acquiring the franchise (there is, of course, a royalty on sales, as in any franchise arrangement). Sobeys, as franchisor, retains ownership of the store equipment (fridges, stoves, shelves, cash registers, etc.). It leases that equipment to the franchisee under an Equipment Lease. It retains its right to the head lease on the premises, and it sublets to the franchisee. The agreements concluded with a category 3 franchisee include the following: a Franchise Agreement (as for category 1 and 2 franchisees); a Sublease for the premises; an Equipment Lease; an Operating Agreement; a Loan or Security Agreement; personal guarantees and a collateral mortgage on the home of the franchisee (as security).

About 30%-35% of the IGA franchisees and all of the Price Chopper franchisees fall within Category 3.

32It seems the distinction among the different categories of franchisee is in the extent of Sobeys’ financial exposure. The core relationship, set out in the Franchise Agreement, the Operating Agreement and in the common marketing strategy, is the same for all three categories of franchisee. The categories differ depending upon the extent to which the franchisee is indebted to Sobeys. Category 1 franchisees have very little financial liability to Sobeys, hence there is considerably less control over them by Sobeys than applies to the other two categories of franchisee. As Sobeys’ financial exposure diminishes, so does its regulation of the financial affairs of the franchisee.

33The basic financial arrangement between Sobeys and the franchisee is that the franchisee purchases the value of the inventory. He/she is liable for the ‘trades payable’, the amounts due to suppliers by Sobeys. (Sobeys pays the supplier and bills the franchisee for the amount paid). Sobeys’ financing of the franchisee is for the cost value of the inventory less the trades payable figure. The business loan to the franchisee covers that difference. Sobeys gives a trades payable loan to the franchisee to cover the trades payable liability. Sobeys wishes to be sure there is sufficient cash flow in the business from the start of the franchise arrangement for the dealer (the franchisee) to meet his/her obligations to suppliers. No interest is payable on the trades payable loan. Interest is payable on the business loan. Sobeys also provides an advertising subsidy for the first year of operation. Sobeys’ real security is its lien over the inventory, the personal guarantees provided by the franchisee (and his/her spouse) and the mortgage over their family home.

34The Category 3 franchisee must take insurance in respect of the business and the premises. Sobeys is designated as the beneficiary.

35Sobeys includes the spouse/partner of the franchisee in the business arrangement because of its belief that a franchise is a family business. It requires, in its view, the commitment of the franchisee and his/her family.

36As part of the financial arrangement between Sobeys and the franchisee, Sobeys may agree to provide a general subsidy for a period of 53 weeks. The subsidy is calculated on the basis of a Pro Forma statement, which is intended to provide the franchisee with a pre-tax profit of 0.5% of projected sales. The parties anticipate that at the end of the 53 week period Sobeys may unilaterally retroactively adjust the subsidy up or down for ‘any variances due to competitive changes in the market or other unforeseen events which may affect sales and/or gross profit’. (This is taken from the Letter of Intent, described below).

37The Pro Forma is a critical document in the relationship between Sobeys and a Category 3 franchisee. It is prepared and reviewed on an annual basis, for each of the 5 years of the initial Category 3 franchise arrangement. (There is no annual review for Category 1 and 2 franchisees). The Pro Forma determines what Sobeys’ subsidy to the franchisee will be for the forthcoming year; variance determines what changes will be made to the subsidy. The Pro Forma may be adjusted if there is a more than 10% variance from its figures over the financial period it covered. If, for example, there is a good reason why greater expenditure was incurred under a specific heading of expense, which Sobeys and the franchisee had not anticipated when the Pro Forma was prepared, then an adjustment will be made to address that expenditure. If the cause of the expenditure was the inefficiency or ineptitude of the franchisee, then he/she will be obliged to absorb it. Sobeys’ aim, though, is that the franchisees succeed, not that they are caught out or made to regret their choice of becoming franchisees and making a personal investment in their business. If there is a good reason to vary the Pro Forma for the following year, that will be done. More will be said of the Pro Forma.

38The subsidy is provided because no profit is expected in a new store for several years of its initial operation. Sobeys evaluates the profitability of a store based upon the return over a period of time. If the profit to Sobeys at wholesale exceeds the loss at retail, and meets the return rates on its investment, it will continue the operation of the store, despite it running at a loss. Sobeys does not provide a subsidy if there is no retail loss. The subsidy is calculated in order to cover the projected operating loss of the business and generate a 0.5% profit as against retail sales if the franchisee complies with his/her Pro Forma. The calculation is to determine whether the gross profit, less operating expenses, less committed costs, less interest expenses will result in a loss. If so, the subsidy is the amount equal to that loss plus 0.5% of retail sales.

39The Pro Forma may provide for a wage transition subsidy, although this is not common. That subsidy arises where the wage levels in the store are unusually high at the time the franchisee takes on the business. It is sustained by agreement between Sobeys and the franchisee as part of the annual review of the Pro Forma.

40The Pro Forma gives the franchisee a clear weekly performance target – what sales should be generated, what costs incurred and what profit generated. It is a valuable guide. Each franchisee tries to exceed the weekly target, to have the store perform better than is projected in the Pro Forma.

41A franchisee can change his/her Pro Forma if circumstances change, provided the franchisee remains within budget. Mr. Hamilton, a franchisee, explained that he made an organizational change which he thinks improved the operation of his business. He appointed a dedicated store receiver. He assigned the expense of the new appointment pro rata to each department. The change did not affect the store’s budget. He then adjusted his Pro Forma to incorporate the change. In doing so he acted unilaterally, without reference to Sobeys.

42As stated, the Pro Forma aims to give the franchisee a 0.5% profit on retail sales. It is identified in the Pro Forma as a ‘bonus’. There is no guarantee of a profit, but if the franchisee maintains, or improves upon, the projections in the Pro Forma, a profit is achievable. Greater inefficiency than is reflected on the Pro Forma will result in a loss; greater efficiency will produce an improved profit. Sobeys gives no guarantee it will assist a franchisee who makes a loss. Whether it will do so, by introducing or increasing a subsidy, will depend upon the circumstances. If, in Sobeys’ assessment, the franchisee has performed well, yet circumstances have been such as to cause an unanticipated loss, it may choose to adjust its subsidy arrangement. If Sobeys concludes the loss is the consequence of poor management by the franchisee, it will likely not come to the assistance of the franchisee.

43The assignment of profit differs slightly depending upon whether a franchisee is an IGA or Price Chopper dealer. A Category 3 Price Chopper franchisee is required to assign 50% of any bonus towards reduction of the business loan from Sobeys. The remaining 50% may be used by the franchise in his/her discretion: either re-invested in the business or paid out as a dividend. The payment is made on an annual basis. This arrangement is not a profit sharing. It is a means of ensuring accelerated payment of the debt due by the franchisee to Sobeys. The net effect is the same for Category 3 IGA franchisees. They pay 80% of the excess in cash flow over sales to Sobeys towards settlement of the inventory loan. The aim of Sobeys and the franchisees is to have the inventory paid off as soon as possible.

44If a dealer performs below expectation and does not achieve the targets in the Pro Forma, Sobeys will discuss the matter with him/her. If there is no satisfactory explanation for the poor performance and it is clear to Sobeys that the dealer is not going to make a success of the business, Sobeys will buy out the franchise and find another franchisee. Sobeys’ intention is that a franchisee moves through the different categories over time, from Category 3 to 1, but if it becomes clear that a dealer will not succeed, a decision is made to find someone else. Intervention by Sobeys is rare, and even less likely for Category 2 and 1 franchisees.

45There was much attention in the hearing to the Pro Forma. Its object, from Sobeys’ perspective, is to improve the performance and profitability of the store. It is an inducement to success, not a goad to torment the franchisee.

46The process of becoming a franchisee starts with an initial Letter of Intent describing the essential terms of the franchise arrangement. That will be followed by a Letter of Transmittal, transferring the inventory from Sobeys to the franchisee, and the signature of the various agreements described above. There are separate Operating Agreements for IGA franchises and Price Chopper franchises. In addition to the agreements referred to, a franchise will conclude an Employee Assumption Agreement, under which the franchisee assumes responsibility and liability for the employment of the existing employees of the store; a Surety Agreement (signed by the franchisee and his or her spouse); a Payroll Agreement; a Franchise Management Accounting Agreement, in terms of which the franchisee agrees to use the retail accounting program offered to franchisees by Sobeys; and a General Conveyance Agreement which formalizes the Letter of Transmittal.

47Part of the arrangement between franchisee (dealer) and Sobeys is an electronic withdrawal system from the dealer’s bank account. Sobeys can make withdrawals directly. The withdrawals by Sobeys are made principally to pay for the merchandize acquired each week by the dealer from Sobeys’ warehouses. Sobeys also withdraws weekly, biweekly or monthly amounts for direct store vender payments, payroll, any maintenance expenses and rent for the premises. The dealer is notified once the withdrawal is made. Sobeys provides a reconciliation each week. The system is simpler for Sobeys and the dealer than having the dealer write cheques each week for the goods received. This arrangement applies also to the payments which a dealer must make to Sobeys-approved suppliers. The dealers do not have an account with the suppliers. The suppliers bill Sobeys and Sobeys draws payment for the delivery from the franchisee’s bank account. There is no mark-up or charge from Sobeys for this facility. There is a wholesale mark-up for goods supplied from Sobeys’ warehouses.

48The arrangement for the supply of merchandise is for the dealer to send an electronic order to Sobeys. The order goes directly from the store aisle to Sobeys’ distribution centre. Sobeys remits the order to the warehouse closest to the store, which then makes the delivery.

49The agreements give very substantial financial influence by Sobeys over the franchisees. Mr. Lemay explained why that is necessary. Sobeys has a considerable asset: a store, a long lease for the site on which the store is located, expensive equipment and inventory of significant value in the store, goodwill and an on-going business which it is passing into the ownership of a new franchisee. Under the various agreements, Sobeys sells the operating assets of the business to the franchisee ─ principally the inventory. There is no goodwill sold. The franchise agreement give the franchisee the right to use the brand name, and it provides the benefits of Sobeys’ wholesale distribution. The use of the premises and the equipment are part of the arrangement between Sobeys and the franchisee, under different agreements. The acquisition provides the means for the franchisee to make a success of the business, in order, over a period of time, that he or she may pay Sobeys for the value of the acquisition and yet maintain the business as a successful, profitable venture. The earlier in the process of transition (from a position of significant dependence to relative independence as a store owner), the more Sobeys requires security for the business it is selling. The structure of the relationship between Sobeys and each franchisee is that, over time, as debts are paid, the franchisee’s assets become less encumbered, and the range of action which the franchisee can undertake without Sobeys’ approval becomes greater. Eventually the relationship becomes one in which the franchisee has considerable autonomy in relation to Sobeys. As Mr. Lemay explained, the bigger Sobeys’ risk, the more security it requires. As the risk diminishes, so Sobeys’ security over the business and control over the franchisee diminishes.

50A franchisee may sell his/her business. Sobeys must approve the identity of the purchaser. If it does not approve of a purchaser found by the franchisee, it may step into the shoes of the prospective purchaser and acquire the business itself. It would then find a franchisee to replace the seller.

Business arrangements between Sobeys and Category 3 franchisees

51To start with, and for as long as the franchisee remains in Category 3, Sobeys has considerable say over the business of the franchisee. For example, it sets the maximum remuneration which the franchisee may personally take from the business (a particular percentage of sales). Mr. Lemay explains the need for such a provision. He says Sobeys needs to ensure that a franchisee does not take such disproportionately large drawings from the business as to undermine its operation. The control remains until all indebtedness to Sobeys under the Business Loan is settled.

52The franchisee must acquire 85% of its inventory purchases from Sobeys’ warehouses or Sobeys authorized suppliers and there are discounts for the franchisee if the figure is higher. The conditions of the franchise are set out under the heading, ‘Conditions’, contained in the Letter of Intent. They read:

i) For the entire term of the store’s franchise with Sobeys the Company will be required to subscribe to the Sobeys Retail Accounting Service (R.A.S.). The R.A.S. will provide financial statements for the last Saturday of every month (12 per year).

The charge for this service is $250 per week or $13,000 per annum excluding charges for payroll services and physical inventory counts. The Company will be required to conduct 4 physical inventories during its fiscal year at its own expense.

We have discussed the issue of financial statements with you, and you have agreed this is an essential requirement and understand it is imperative to have timely and accurate financial statements to properly run your business. It is imperative that you understand that should you fail to provide timely financial information required for the R.A.S., it would constitute grounds for your removal as an Associate from the location.

ii) The Company will be required to subscribe to the Retail Payroll Service (R.P.S.) for the entire term of the store’s franchise with Sobeys.

The current cost of this service is $2.50 per cheque (per employee), which includes remittance for all payroll deductions and W.C.B., E.H.T. and annual T4 preparation.

The Company will be required to provide Retail Payroll Service with 26 (twenty-six) presigned cheques on a continuous basis.

iii) Remuneration, including without limitation dividends, management fees, bonuses, benefits, drawings or other repayment of shareholder advances, and all salaries and wages and benefits paid to all store employees, including ………………. and his family members, will be restricted to an aggregate amount, during any financial year of the Associate, of not more than …………….% of the sales during that same financial year. No other withdrawals or payments will be permitted until all Indebtedness and all payments due under Sobeys Business Loan are paid in full.

iv) We have prepared the attached proforma statements and labour grid using information which you have reviewed. We trust this will assist you in your decision to take on this business opportunity. Please obtain the independent advice you require to make your own assessment to adopt this proposal with the understanding we do not warrant or represent the facts or assumptions on which they are based. We strongly advise you to consult your accountants and to obtain the advice you need.

v) All receipts will be deposited into your company bank account. On a once-a-week basis, an agreed upon amount of funds will be transferred from your company account to Sobeys account by way of an electronic funds debit. The criteria for determining the amount to be transferred is as follows:

Balance in your company’s bank account less committed operating cash requirements.

vi) In order to equalize the company’s cashflow, Sobeys will bill the following charges on a weekly basis: a) Realty Taxes; b) Business Taxes; c) Common Area; and d) other charges as necessary to assist the Company. At year-end, reconciliation will determine the exact amount owed.

vii) Personal guarantees of the shareholders including ………… of the Associate and its partners, with specific charge/mortgage, against their personal residence.

viii) Full purchase support of Sobeys products and services from its distribution centres. Also, we require full purchase support of products and services from Sobeys approved suppliers and Sobeys subsidiaries including Sobeys designated dairy. Your store must adhere to a 95% fidelity level in its purchases from Sobeys and Sobeys authorized suppliers. This includes contracts, insurance, employee benefit programmes and the Sobeys security service.

ix) Sobeys has the right to arbitrarily veto any sale of the business or of the shares of the Company.

x) The location will be required to operate seven (7) days per week.

Sobeys has the right at its discretion to convert this store to any Sobeys banner at its expense.

xi) Sobeys requires you to place your insurance through Sobeys recommended insurance broker, Hayhurst, Elias, Dudek (“HED”). Once this transaction is approved, would you please call Mr. Burton Smith of HED at (905) 279-0286 to arrange this coverage. We will provide him with information relating to the insurance coverage.

xii) We will ask you to agree to sign agreements permitting electronic transfer of funds directly from your company’s bank accounts to Sobeys.

xiii) The Company shall offer employment to all employees of the business from the closing date on the same employment conditions (i.e. remuneration, benefits and all other obligations as presently enjoyed by all such employees), with length of service of employees to be recognized by the Company.

From and after the closing date, the employment of a severance pay or future compensation of all employees shall be the sole responsibility of the Company. The Company agrees to indemnify and save Sobeys harmless from all such severance pay and compensation.

xiv) It is understood and agreed that the financial year of the Company will end on the first Saturday in May, during the whole term of the Franchise Agreement.

53Sobeys is entitled to require a franchise to change from being a Price Chopper to an IGA, or vice versa. Ms. Burns testified for the union. She was formerly an employee of a store in which the dealer, Mr. Marturano, was obliged by Sobeys, she said, to switch from an IGA to a Price Chopper. She suggested he made the change reluctantly. Mr. Marturano testified and explained that he was initially reticent about making the change, but his unhappiness was short-lived when he came to appreciate the necessity of making the change. He came to recognize that changes in the neighbourhood would affect the store. A new Loblaws was opening and it made sense to serve a different niche of the market; to change the store from an IGA to a Price Chopper. Throughout the process Mr. Marturano was consulted and the change occurred only once he had agreed to it. The change resulted in the bakery department being closed and the employees in that department being laid-off. Mr. Marturano complied with the seniority provisions of the collective agreement when carrying out the layoff. He spoke to his District Manager about the process. He obtained an updated seniority list from Sobeys’ payroll service which enabled him to make an accurate decision as to which employees had the least seniority and were liable to be laid-off.

The franchisee as proprietor

54The franchisee has significant obligations under the Operating Agreement. Among his/her obligations, in Paragraph 6.1(c), the franchisee, described as the ‘Key Man’, has the following obligation:

that the Key Man will devote the whole of his time and attention to the Business, as would a prudent businessman, and will be physically present in the Premises for at least 60% of the normal operating hours of the Business each day, with two (2) weeks of vacation per year during the first three (3) years of the Initial Term, and three (3) weeks of vacation per year thereafter. During his temporary absences the Business shall be under the direct, physical supervision of a competent, experienced and trained person acceptable to Sobeys;

This suggests a high degree of control by Sobeys over the life of the franchisee. In practice, the franchisee is unlikely to seek Sobeys’ approval for the franchisee’s replacement during his/her absence on vacation. Mr. Hamilton explained that he works about 50 hours a week on the business, at such times as he chooses in order to keep regular charge of his enterprise. Sobeys’ significant say over the life of the dealer and his/her income ends once the franchisee has paid off his/her inventory debt.

55Franchisees with no prior experience of running a store are usually subject to Sobeys’ Ownership Assistance Plan (its ‘OAP’). The OAP stipulates, among other things (e.g. the business loan), that Sobeys provide a store manager to work with the new dealer for a period of about 6 weeks. The new franchisee is able to get advice and guidance from the visiting manager each day during the period of orientation. The Plan enables the new franchisee to acquire quickly the skills and knowledge needed to run the store properly.

56Mr. Marturano explained what occurred when he decided, for personal reasons, after a relatively short period as a franchisee, to give us his franchise. He had to sell his shares himself. His lawyer handled the sale transactions. He approached Sobeys who found a purchaser for him. Sobeys was willing to release Mr. Marturano from his liabilities and guarantees when the new purchaser was found. His deposit on his original purchase was returned to him. He made no profit on the sale.

Stock

57There are benefits to a franchisee of a closer relationship with Sobeys than is provided for in the various agreements. As I have said, a franchisee (or dealer) is obliged to buy 85% of his/her stock from Sobeys or Sobeys-approved suppliers. If a franchisee acquires 95% from Sobeys (or its suppliers), the franchisee gets a fidelity rebate. That rebate improves the profitability of the store. The arrangement with Sobeys allows the dealer to buy certain perishable commodities from local suppliers: dairy products, eggs, strawberries, baked goods, etc. Sobeys encourages such local purchases by the franchisee because it tends to improve the relationship between the dealer and local businesses.

58Within certain limits set by Sobeys, the dealer decides what products to stock in his/her store. The franchisee can decide to have some specialty products to maintain local customer loyalty. Generally a dealer will delegate the purchasing of product to his/her department managers. The dealer is obliged though to stock any items which Sobeys is advertising in its flyers. Incentives by suppliers are negotiated at a national level with Sobeys and some of that incentive may be passed to the retailers to cover the cost of selling those items at a lower price. Mr. Armstrong and Mr. Hamilton explained they was not obliged to accept any product sent to them by Sobeys. Sobeys regularly sends a list of new product listings and de-listings and the franchisee can decide what products he/she wishes to stock. Mr. Armstrong told of an example when he had been sent a product and he decided he did not want it. He advised the Sobeys’ Area Manager and the product was removed. Mr. Armstrong explained that, as a store manager, he would not have had that discretion.

59The Category Managers within Sobeys decide upon the product range which will be supplied to Sobeys’ franchised stores. They decide which new lines of product to purchase and which to discontinue. The desire of a single dealer to keep a product is not sufficient to maintain it on Sobeys’ product list. An owner-operator can request a product to be listed, which the Category Manager will consider. As stated, dealers may obtain local products from local suppliers which they consider to be of value to their businesses. This applies particularly to fresh produce.

60Sobeys advises the franchisees each week of the recommended retail prices for their merchandize. The franchisees are not obliged to follow those recommendations, unless the products are advertised as featured items. The dealers may not sell at prices above the featured price. Sobeys’ recommended price is entered into the computer system of each zone and into the scanners at the store tills, but the dealer may manually override the price in the computer, if he/she chooses. Dealers frequently do, especially for perishable items because of the risk of product loss. Mr. Armstrong explained that, based on Sobeys’ guidelines, he gives his managers a weekly sales target for each department and he varies prices in order to assist the manager to achieve his/her target.

61The general practice is that franchisees follow Sobeys’ recommended prices. They will make some minor adjustments here and there to move a particular product, or to benefit from high demand for an item, but in general common sense appreciation of the market requires them to stick reasonably close to the Sobeys’ recommended price.

62Sobeys makes use of price checkers. They periodically review the prices of competitors. Sobeys’ IGA works by zones: zone 1 describes a highly competitive environment; zone 2, somewhat less, and so on to zone 4 where a store has very little competition. As a service to dealers, Sobeys advises of price checking results so the dealers can make adjustments to their prices, if they choose. Mr. Hamilton explained that, as a franchisee, he also does his own price checking, sending an employee to review the prices of local competitors. He makes price adjustments on the basis of the information he receives. He does this for his own benefit, not on any initiative of Sobeys.

63Each dealer has some influence over Sobeys’ prices. Dealers inform Sobeys each month of prices being charged by the local competitors. That information is taken into account by the price checkers acting for Sobeys.

64The dealer has some control over how the product will be displayed. If Sobeys is promoting a particular product (an ‘everyday low price’ item) it may require that product to be on front end display in the store. Sobeys provides a planogram which informs the dealer where to display the merchandise. The franchisee is obliged to follow Sobeys’ shelf line-up, but the franchisee has control over the products displayed outside of the aisles, in the perimeters.

Equipment

65When a Category 3 franchisee commences business most of the equipment in the store (shelving, food bunkers, freezers) will belong to Sobeys and be leased to the franchisee. (Franchisees have an option as to whether they wish to lease Sobeys’ scanning or checkpoint equipment or acquire it elsewhere). Sobeys wants to be sure the equipment is properly maintained and serviced. If the dealer determines that significant changes to the equipment are needed, he/she will need to obtain Sobeys’ approval for those changes. Minor changes can be made without Sobeys’ approval.

66Repairs of equipment are normally done by Sobeys-approved contractors, although a franchisee may select his/her own contractor for service and maintenance of the equipment provided Sobeys is satisfied the contractor is reputable, and approves.

Service Quality

67Under Paragraph 6.1(e) of the Operating Agreement the franchisee has obligations to maintain and operate the business in ‘an orderly and business like manner with the fullest adherence to Sobeys’ standards of cleanliness and quality of product and service’. Under Paragraph 6.1(f) the franchisee must renovate and redecorate the store as Sobeys might require from time to time to meet Sobeys’ ‘recommended image’ for its franchisees. This obligation meets Sobeys’ requirement that a consistent standard is maintained among all of Sobeys’ franchisees.

68The Operating Agreement between Sobeys and the franchisee will stipulate the hours and days on which the store will be open. The arrangement is subject to change if there is good reason to do so. Mr. Armstrong explained he found it made business sense to close his store an hour earlier on a Saturday evening, which he then did. He informed his District Manager of the change.

69Mr. Armstrong explained that he had not been blocked on any occasion by Sobeys when he advised that he intended to implement an organizational change which he thought would benefit his business.

Liaison

70Sobeys maintains a liaison with each franchisee, particularly the Category 3 franchisees. A Sobeys’ District Manager will be responsible for each franchisee. He/she will offer assistance to the franchisee, check on the state of the store, comment upon matters which he/she thinks deserve comment. The District Manager will seek to assist the franchisee to expand market share, and will give such advice as he/she can. The District Manager will have a say over store decisions which might affect the banner; the dealer will decide on all matters which are purely store based. Problems are not frequent because the interests of the District Manager and the dealer are largely the same: both want to see the franchisee succeed in the business; both want market share to increase; both want the profitability of the enterprise to improve. In Mr. Lemay’s description, Sobeys’ role towards the franchisee is more suggestive than directive. That, in his view, is what distinguishes the relationship of the District Manager with the franchisees as compared with the store managers of the corporate stores.

71Sobeys has departmental specialists for meat, grocery, produce, deli-bakery, store front end. They visit each store about once a month and give advice and comment to the dealer and his/her departmental managers.

72If a dealer runs into a problem, e.g. over-ordering a particular product, he/she can approach his/her District Manager to transfer the merchandise to another store or to take it back to the Sobeys’ warehouse. (This does not occur often).

73Sobeys’ IGA management meets periodically with a consultative group of franchisees who are able to raise issues of concern to them, items such as service provision by Sobeys, delivery, promotions, etc. There is no equivalent Price Chopper liaison. Mostly, though, issues which a franchisee might want Sobeys to deal with are raised directly by the franchisee with his/her District Manager.

74There is a Retailers’ Association among IGA franchisees, which meets infrequently. It performs a consultative role with Sobeys on behalf of the IGA franchisees.

Labour Relations and Employment

75The Pro Forma is based on existing ratios and gives a projected productivity analysis. It contains targets for expenditure and income. It stipulates what sales target each store department (e.g. grocery, dairy, frozen food, etc.) should generate; what should be the sales per labour hour (the SPLH); how that should be divided between full-time and part-time hours; and the ratio of wages to sales. The actual decision as to the ratio of full-time to part-time employees is the franchisee’s, just as is the decision concerning the number of employees, but that ratio and number will be included within the Pro Forma. The SPLH is a productivity tool, which enables the dealer to have a benchmark against which to measure his/her labour costs in relation to sales. In Mr. Lemay’s assessment a very efficient dealer can always have his/her business perform better than is set out in the Pro Forma.

76The contractual arrangements between Sobeys and each Category 3 franchisee stipulate that a franchisee cannot increase its payroll costs without Sobeys’ approval. This suggests a franchisee cannot negotiate wages with the union without Sobeys’ approval. The evidence of Sobeys’ witnesses and of the franchisees contradicts this. They make clear that the franchisee has full authority to negotiate terms and conditions of employment with the union and to decide what wages should be paid under the collective agreement. Any adjustment to wages and working conditions will result in an alteration to the Pro Forma.

77Ms. Chrysler, a union representative, testified of negotiations which occurred in 1992-93. Mr. Mendelson, a representative of Sobeys’ predecessor, Oshawa Foods, assisted a franchisee in the negotiations. This evidence was not contested, save that there is some suggestion there were two franchisees involved, the first being placed into receivership, the second taking over and Mr. Mendelson assisting with the transition. It appears too that he was involved in only a limited aspect. There was no evidence to suggest that a franchisee has been assisted by Sobeys or its predecessor since then. Mr. Mendelson’s involvement seems to have been an isolated occurrence which does not detract from the fact that collective bargaining is the responsibility of the franchisee. Sobeys’ influence over the negotiations is restricted to its role in setting the budget for the franchisee in the annual negotiation of the Pro Forma.

78The union has several collective agreements with individual franchisees. These were bargained without Sobeys’ involvement. No applications have been made by the union to have those stores declared related employers with Sobeys pursuant to the provisions of section 1(4) of the Act.

79Labour relations and employee relations are the responsibility of the franchisee. If an individual employee is not performing and needs counselling or discipline, that is a problem which the franchisee will deal with him/herself. All supervision of staff falls under the exclusive control of the franchisee. The dealer or franchisee will decide such matters as staffing levels, whether or not to lay-off an employee, what shifts and hours of work the staff will work, the ratio of full-time to part-time employees, vacation schedules, WSIB claims, etc. Sobeys takes an interest in these matters on an annual basis only during the review of the Pro Forma, as it does in what salary the dealer will pay him/herself. It does so only because it wishes to be satisfied the dealer will meet his/her financial obligations.

80If, for example, as a result of labour relations decisions made by the dealer, the business is subjected to a strike or other financial loss, that will be the responsibility of the franchisee concerned. Sobeys will not guarantee to subsidize a franchisee for losses sustained as a result of a strike or other industrial action.

81Paragraph 6.1(g) of the Operating Agreement requires a franchisee ‘to advise Sobeys promptly of all grievances and demands made by employees pursuant to a collective agreement’. This provision appears not to be adhered to in practice. All disciplinary and performance decisions are taken by the franchisee and seem to be taken without reference to Sobeys. Mr. Armstrong made clear that he was ultimately responsible for who was hired and who disciplined or fired. Generally he delegated the hiring decisions to his department managers. He made the decision as to who should be fired. He deals with all union grievances himself and he makes the decision on behalf of the franchisee (his numbered company). He does not refer to Sobeys for advice, nor does he notify Sobeys of any grievances. Mr. Armstrong explained that when he was the store manager in the Britannia IGA he would refer grievances to the corporate office of Oshawa or Agora Foods (Sobeys’ predecessors). In that capacity he would have had no input into how the grievance was handled.

82Mr. Armstrong explained that he deals regularly with the union’s stewards in his store, one representing the part-time employees, the other the full-time. Paragraph 6.1(g) requires the franchisee to notify Sobeys within 24 hours of knowing of a union attempt to seek a new collective agreement. The witnesses for Sobeys and the franchisees made clear that this provision is honoured more in the breach than in the observance. It seems clear that collective bargaining is to be done by the franchisee without aid, assistance or involvement by Sobeys.

83Mr. Hamilton, a franchisee, tells of his assistant meeting regularly with the Health and Safety Committee within his store. The matters dealt with there are decided without reference to Sobeys, as are workers’ compensation claims.

84The franchisee will decide what benefits are payable to employees in the employ of his/her business. Generally the benefits will be stipulated in the collective agreement which the dealer has inherited from Sobeys (as part of the sale of the business from Sobeys to the franchisee), but the franchisee may agree to provide such other benefits as may be negotiated by him/her with the union. Sobeys has a benefit plan for its own employees, which all of the Category 3 franchisees subscribe to. The scale of the plan is such that Sobeys (and its dealers) get a group discount. The franchisees are not obliged to belong to the plan, but, with the reduced premiums under the Sobeys’ plan, it is uneconomical for a single franchisee to find equivalent coverage elsewhere.

85It seems that, as a transitional arrangement, employees on long term disability benefits at the time a store passed from Sobeys to a franchisee continued to receive those benefits from Sobeys’ scheme. The franchisee was obliged to keep the employee’s position vacant pending his/her return to work. Employees who go on LTD after the transition are the responsibility of the franchisee.

86The dealer controls the appointment of his/her managers in the store. The number of managers and what they are paid will likely be stipulated in the Pro Forma, but who they are and their other terms of employment will be determined by the franchisee.

87Labour and employee relations differ significantly from what existed when the franchised stores were part of Sobeys’ corporate structure. Then every grievance was referred to Sobeys’ head office, to Ms. Terry Parnell, the Director of Human Resources. She was responsible to deal with all of the grievances received from employees and the union. As she explained in evidence, now all grievances the franchisees receive are dealt with by them, without reference to her. The individual franchisees are responsible for their own human resources policies and procedures and for their own labour relations. She explained that a franchisee will occasionally phone her for some advice. She might give advice, but she makes clear the decision to be made is the franchisee’s own, and Sobeys has no liability for any decision taken by the franchisee.

88Sobeys provides a payroll service which franchisees use, under their agreements with Sobeys.

Other services

89The dealer decides which lawyers and accountants the business will use. Typically the franchisee will not consult Sobeys on those appointments. At the start of the process of become a franchisee, Sobeys recommends that the prospective franchisee obtain his/her own legal counsel and accountant. That was done in all cases by the responding party franchisees. They had their own lawyers negotiate their contracts with Sobeys.

90Category 3 franchisees are obliged to use Sobeys’ accounting services, for which a fee is paid. This gives Sobeys access to the franchisees’ accounting records.

91The franchisee pays a weekly charge for advertising to Sobeys. Advertising is done primarily through flyers to households. The franchisee can have some input into the content. A franchisee has a discretion to put advertisements into his/her local newspaper and he/she may decide to sponsor specific local events as a means of keeping the store in the public eye. Sobeys’ approval is not needed unless the dealer’s initiative is likely to have an impact upon other franchisees or on the Sobeys’ banner. In that event the franchisee is likely to work with Sobeys in formulating his/her local marketing strategy.

92If a franchisee wishes to renovate his/her store, Sobeys has an engineering service department which will assist the dealer, giving advice as to cost, layout, etc. Sobeys personnel guide a new franchisee as to the layout and appearance of the store when the franchisee takes over the operation. As long as the store fits the general expectation of the public entering an IGA or Price Chopper store, the dealer determines its appearance. Price Chopper stores tend to be organized and presented in a similar manner; IGA stores differ to some extent, depending upon their relative size. For example, if a franchisee decided to introduce a deli, he/she can do so, without Sobeys’ approval (unless capital cost is involved, in which event Sobeys will likely need to be consulted). The franchisee must remain within the corporate concept for the banner under which he/she operates.

93A franchisee may use Sobeys’ recommended contractors for cleaning, repairs and maintenance, or it may appoint its own contractors. Franchise employees wear standard uniforms, which are acquired by the franchisee through a Sobeys’ supplier.

Overview

94Each franchisee took legal advice from counsel of his/her choosing before becoming a franchisee. Each acquired an independent understanding of the obligations he/she was undertaking as franchisee.

95A Category 3 franchisee is in the early stages of building equity in his/her business. The first years of his/her business are taken up with paying off the liability to Sobeys for purchase of the business’s major asset, its inventory. The benefits of ownership and business growth are really to be appreciated once the franchisee is able to move into Categories 2 or 1.

96The franchisee runs his/her store as his/her own. As Mr. Armstrong explained, he decides when he wants to take his vacation and for how long and what arrangements will be made in his absence. He decides how long and how much he will work. He is obliged to keep his store open for the days and hours prescribed in his Operating Agreement with Sobeys (subject to an entitlement to close the store if it makes business sense), but how he manages the store, what and how he delegates to his managers, what incentives he gives his employees, is his business. He determines what money he will draw from the business for his personal benefit, subject, as a Category 3 franchisee, to the limit imposed in his Pro Forma. He will be accountable for these decisions when his Pro Forma is reviewed annually with Sobeys, but the decisions are his to make.

97Mr. Hamilton told of the changes he had brought about in his store when he took over as franchisee. He revamped the store by rearranging the shelf line-ups, introducing new tables in the produce department and re-lamping the store with new lighting. The costs of these initial changes to the store were borne by Sobeys, following representations from him. He has sought to generate a more positive attitude towards sales and customers among the staff. He eliminated the night shift which was, in his view, unproductive. He decided to buy a new fleet of shopping carts. It was not included in his Pro Forma so Sobeys would not cover the cost. Sobeys agreed to make the payment on his behalf and he refunded the amount through an additional charge to his equipment lease.

98The franchisee is able to make a profit from the business. The profit margin in the retail grocery business is small, about 1%. A reasonable return requires a high turnover. Nonetheless, a franchisee has the expectation of making a profit. If the business is run efficiently, with careful planning, the franchisee can not only achieve the target in the Pro Forma, he/she can also improve upon the sales per labour hour projected in the Pro Forma. In other words, by efficient work assignment, the avoidance of waste (particularly on perishables), reductions in shrinkage (theft and pilfering), shielding (positioning low price items with more expensive, related items), cleanliness, good service to the customers, and other such techniques, a franchisee can generate greater sales with less labour hours than are prescribed in the Pro Forma.

99Sobeys exercises considerable regulation over a franchisee by use of the Pro Forma. As the union’s counsel sought to show when cross-examining Mr. Lemay, the limitations in the Pro Forma can affect the range of a franchisee’s collective bargaining capacity. He/she can negotiate any deal he/she considers suitable for the business, but that deal is effectively constrained by the terms of the Pro Forma negotiated with Sobeys. Sobeys makes no distinction in its various Pro Forma documents with franchisees as to whether they are unionized or not, but, regardless of that factor, it makes allowance for inflation in the projection of the labour costs of each franchisee’s business. Nonetheless, a franchisee runs the risk of not being adequately financed if he/she elects to make a more expensive deal with a union than is provided in the Pro Forma.

100There was evidence of some conflict between a group of franchisees and Sobeys. There was litigation between a group of them and Sobeys concerning past rebates. That group collectively refused to sign a revised franchise agreement. The conflict was ultimately resolved. The incident shows a degree of independence and separation from Sobeys.

101Self-perception is not critical in these matters. However it is plain from the evidence of the franchisees who testified that they have a genuine commitment towards the success of their businesses. They see what they have done as making a substantial personal investment in the hope of building significant equity for themselves over a period of time. Spouses took separate legal counsel when they signed the guarantees and when the arrangements were entered into with Sobeys. There was no sham to the transfer of ownership. As Mr. Armstrong said, he is committed to his business for the rest of his working life and that is what he has told his employees. Those franchisees who testified made clear they had wanted their own businesses for some time and they are determined to make a success of the opportunity they have.

102The conclusions I reach as regards Sobeys’ relationship with the various Category 3 franchisees are that Sobeys exercises no direct control over their labour relations. It does exercise two types of control, though, over the franchisees. The first is financial. It has taken a risk to finance the operations of the Category 3 franchisees and it wants its loans to be repaid. The control it exercises is that of a creditor. Its debtor, the franchisee, must succeed in business if his/her liability is to be settled in due course. Its second type of control is that of a franchisor in relation to a franchisee. Sobeys wants its franchised stores to have a common, consistently good reputation so that they are well supported. The public should be able to expect the same level of service from all of its franchisees. There must be consistent quality in customer service. Through the two forms of control ─ as creditor and as franchisor ─ Sobeys has considerable influence over the finances of each franchisee’s business. Through that control it has an indirect influence over the franchisees’ labour relations. But that influence is no different than a bank would have over a debtor business to which it had extended a considerable overdraft facility. The bank may well impose conditions on the business’s expenditure, like Sobeys does in the Pro Forma arrangements it reaches with the various franchisees.

103Franchisees exercise influence over the efficiencies of their stores. Their organizational and other skills make the difference between a successful and an unsuccessful business.

Argument and Decision

104The union takes the position that nothing of substance has changed from the time when the stores were part of Sobeys’ corporate structure and the present in which individual franchisees operate the stores. The transition was seamless. The employees were the same, the managers were the same. In general, the store manager was converted into a franchisee. Sobeys continued its substantial control over the store, albeit through a different persona, a franchise rather than corporate ownership.

105The difficulty for the union in this case is that it accepts that Category 1 and 2 franchisees and Sobeys are not related employers. The union has collective agreements with several Category 1 and 2 franchisees, and with some Category 3 franchisees. The union recognizes category 1 and 2 dealers as distinct legal and labour relations entities from Sobeys. It suggests, though, that Category 3 franchisees should be treated differently. The extent of Sobeys’ control over them is so great, it says, that they are to all intents and purposes one employer with Sobeys.

106Sobeys’ case, and that of the other responding parties, is that Category 3 franchisees differ from the other categories of franchisee only in respect of their indebtedness, and the financial security which Sobeys requires to ensure due payment of the debt. In other respects their relationship with Sobeys is no different from that of the less indebted category 1 and 2 franchisees.

107The union is able to point to numerous features of the relationship between Sobeys and the franchisees which suggest a high degree of control. Sobeys sets the maximum retail price at which certain merchandise can be sold to a franchisee’s customers and it sets the wholesale price which the franchisee must pay for the merchandise. From this, the union suggests, Sobeys has considerable control over the franchisee’s profit margin. It controls too the Category 3 franchisee’s salary and income, how much he/she can take out of the business. It controls how much vacation he/she may take in any year. It stipulates the hours during which the franchisee’s store must be open each day and each week. It regulates that a fixed portion of the franchisee’s profit must be assigned to reduce the franchisee’s outstanding business loan. It influences how much stock must be purchased by the franchisee and directs where such purchases must be made. It suggests how the franchisee’s store should be laid out and where the merchandise should be displayed. The franchisees are answerable to the various District Managers and to the Sobeys’ specialists who regularly visit the stores to ensure Sobeys’ standards are maintained. Sobeys has unrestricted access to the franchisees’ books of account and other information. The franchisees are required to subscribe to Sobeys’ payroll service.

108The union suggests Mr. Marturano’s departure – selling his franchise with little difficulty and no financial loss or gain – indicates there is no real risk of loss. If getting out of a franchise agreement, with all of its attendant obligations, is so simple, then, in the union’s submission, the arrangement is really a sham and the franchisee is nothing more than a glorified store manager. In union counsel’s words, the franchisee takes over a ‘turn key’ operation.

109Mr. Marturano’s exit as a franchisee appears to have been handled generously by Sobeys. But when he left he was operating his store above the Pro Forma requirements and he stood to gain some profit. He had personal reasons for leaving which were accepted by Sobeys. He had previously been a District Manager within Sobeys. A replacement franchisee was found relatively easily. In these circumstances it was not unreasonable, nor unbusinesslike, for Sobeys to have released Mr. Marturano from his obligations. Sobeys’ doing so does not suggest their relationship was less than being at arm’s length.

110In the union’s submission, the financial control over a franchisee by Sobeys is so substantial, through the Pro Forma, that the only expense which a franchisee may realistically control is wages. In other respects, the union says, there is virtually no discretion for a franchisee. If hours are reduced (in order to make a saving on wages) then the franchisee will not meet Sobeys’ standards – there will be inadequate product rotation, insufficient attention to cleanliness and other details which require the staff’s attention. If hours are increased to increase turnover (and so generate more income) then the franchisee will find himself/herself over budget. The only flexibility, says the union, is in wages. To make a profit and improve upon the projections in the Pro Forma, the franchisee will be obliged to push down wages. This submission was answered in evidence by Mr. Lemay. He made clear that a profit was achievable by efficient management, without forcing down wages. In his view reducing wages might be counter-productive, resulting in greater inefficiency and loss than would otherwise be the case.

111The risk of loss and the prospect of profit for the franchisee are real. There is no guarantee by Sobeys to cover losses, nor any guarantee of a profit. The Pro Forma aims to achieve a profit for the franchisee, but there is no guarantee one will result. The circumstances of Mr. Marturano’s sale of his franchise interest to a new franchisee does not detract from the fact that the investment made by each franchisee is for a significant amount of money and involves genuine commitment. They perceive themselves as taking on the challenge of establishing a successful business of their own. The franchisees see themselves as building an asset of their own. They perceive their businesses, indebted though they are to Sobeys, as growing equity.

112Section 1(4) of the Act aims to address the situation of an employer conducting economic activity through more than one entity. The Board will look beyond the legal form of the different entities to determine whether, in fact, the same employer controls the economic activity which is being corporately undertaken. Bargaining rights should not be frustrated or undermined as a consequence of an organizational restructuring.

113Section 1(4) comes into play if three conditions are met: there is more than one corporation (as here); the entities concerned carry on associated or related activities (as here); and those activities are carried out under common control or direction: Diamond Taxicab Association (Toronto) Limited, et al [1995] O.L.R.D. No. 2501; [1995] OLRB Rep. June 753, ¶51. The union argues this third element is present; the responding parties say not. The union points out that ‘even where the corporate vehicles may have separate spheres of control in which they are each their own masters, the functional interdependence of separately controlled activities may lead to a conclusion of common control or direction over the activities as a whole’: Diamond Taxicab Association (Toronto) Limited, et al, at ¶60.

114Bargaining rights attach to a definable commercial activity rather than to the legal vehicles involved. As stated in Brant Erecting and Hoisting [1980] OLRB Rep. July 945, ‘legal form is not permitted to dictate or fragment a collective bargaining structure; nor will alterations in legal form undermine established bargaining rights’.

115Section 1(4) is designed to preserve or protect a union’s bargaining rights from artificial erosion; to create or preserve viable bargaining structures; and to ensure direct dealing between a bargaining agent and the entity with real economic power over employees: Etobicoke Public Library Board [1989] OLRB Rep. Sept. 935.

116There are two cases, which the parties referred to, that are particularly germane to this case. They are: Penmarkay Foods Limited [1984] OLRB Rep. Sept. 1214 (“Penmarkay Foods”) and RPKC Holdings Corporation [1986] OLRB Rep. June 828 (“RPKC Holdings”). Both concerned franchise arrangements in the retail industry. In both cases the Board granted the section 1(4) declarations which the union sought. The facts in the two cases have significant similarities with those in this case. In Penmarkay Foods, like here, the franchisee conceded there was a sale of business, but, with the franchisor, denied any entitlement by the union to a section 1(4) declaration. As in that case, there is a high degree of functional integration between the franchisees and Sobeys. The Pro Forma arrangement gives a significant degree of control to Sobeys over the business of the franchisee, as was the case in Penmarkay Foods (¶¶48-52) and as was contained in the franchise agreement in RPKC Holdings (¶72, ¶101).

117The applicability of section 1(4) to franchise arrangements must be determined on a case by case basis. There is no general presumption that a section 1(4) declaration is appropriate, nor the reverse. Each case must be considered on its own facts: RPKC Holdings, at ¶103.

118There are some important differences though. In Penmarkay Foods there had been no franchise arrangements previously. (Here, as we know, Sobeys has a long history of franchising its operation). In Penmarkay Foods the Board found that the employer ‘sought to escape both the union’s bargaining rights and its collective agreement’ (¶30). In RPKC Holdings the decertification of the union was a clear objective of the franchise arrangement (¶37, ¶42, ¶106, ¶112). In both cases there was a finding that the implementation of the franchise program was tainted by anti-union motivation. In Penmarkay Foods the employer/franchisor was faced, under its collective agreement with the union, with the prospect of having each new store bound into the central agreement (¶13). The franchisor appears to have wanted to find a unilateral way out of that obligation (¶33). The newly franchised store had no employees and none of the franchisor’s formerly laid off employees were hired (¶16). (The same is true in RPKC Holdings (¶61)). In Penmarkay Foods the franchisor clearly aimed to reduce wages in the various franchised operation by breaking up the central bargaining arrangement. The pro forma arrangement with the franchisee was premised upon the union in that case being decertified. So too in RPKC Holdings (¶¶36, 37, 42). In Penmarkay Foods there was some doubt as to whether the franchise relationship was a genuine franchise at all. It appeared to be something of a ruse to evade the union’s bargaining rights. For example, the franchisee invested none of his own money when he became the franchisee (¶20). The franchisee appeared to be more an agent of the franchisor than a genuine entrepreneur taking a risk to establish a business of his own. The rental payable to the franchisor was to rise dramatically from $7,000 to $64,000 from the first to the second year. It seems the wage savings anticipated by the projected decertification of the union were to be passed to the franchisor through dramatically increased rent.

119There is no evidence of that sort of manipulation in this case. There is no suggestion here of any mischief, any ploy to avoid centralized, corporate-wide bargaining with the union, no hint of a plan to drive down wages, no suggestion of any ulterior labour relations motive. The evidence is overwhelming that the sole purpose of the switch to a franchise operation is because Sobeys has found it to be significantly more successful from a purely financial and business perspective. Small entrepreneurs working for themselves have proved to be significantly more efficient than store managers.

120There are also differences in the financial and labour relations arrangements as between Sobeys and its Category 3 franchisees and those which obtained in RPKC Holdings. (See in this regard ¶102 of RPKC Holdings, in which the facts are quite different from those here).

121In both Penmarkay Foods and RPKC Holdings there was a deliberate effort not to apply the then existing collective agreements to the employees in the franchised stores. That has not occurred in this case. Here each franchisee has agreed to be bound by the terms of the Sobeys’ collective agreement. I recognize that section 1(4) does not require a finding of anti-union animus (as was present in Penmarkay Foods and RPKC Holdings) and that the section is primarily applied ‘to bona fide business transactions which incidentally undermine or frustrate established statutory rights’ (Brant Erecting and Hoisting, above, at 948). Nonetheless, an important distinguishing feature between this case and those in Penmarkay Foods and RPKC Holdings is the absence here of any anti-union animus.

122The difficulty with the union’s submissions is that many of the limiting factors which bear upon a franchisee are common to all grocery retailers. They operate within tight profit margins. The expectation of profit in the industry is only 1% of turnover. Tight control over inventory, efficient management of staff and product, maintaining customer confidence, retaining competitiveness – these are all features of the retail business. They are as true for the franchisee as for any independent store operator. Hence, many of the apparent features of control by Sobeys over the franchisees are really factors which are intrinsic to the retail grocery and fresh produce business. Sobeys’ insistence upon various performance standards is designed to ensure competitiveness among the franchisees. The standards are as much indications of successful business practices by the franchisees, as they are indications of control by Sobeys.

123There is a second level of limitations which is also not indicative of Sobeys’ control, but arises necessarily from any franchise arrangement. Many of the limitations upon a dealer, which the union’s counsel was able to bring out in cross-examination (e.g. corporate pricing of merchandize, common advertising, a common range of products available to customers) are intrinsic to any franchise operation. The advantages of a large chain include: providing substantial buying power, which gives leverage in negotiating prices and terms of sale with suppliers; giving familiarity, consistency and reliability to customers who like the comfort of knowing what standard of service and product to expect. Much of the argument of the union to suggest common control and direction by Sobeys over the franchisees is the natural and necessary consequence of the franchisees being part of a franchised chain of stores. The similarity between the different stores is a necessary consequence of their projecting the same image to the public. It may suggest common control and direction by the franchisor, but that is not a necessary consequence of the uniformity of operations.

124The union relied upon White Spot Limited BCLRB No. B191/95 (decision of May 25, 1995). At ¶49 the B.C. Labour Relations Board said that the following questions should be asked, when examining a franchise arrangement, to determine whether the franchisee is under the common control and direction of the franchisor:

1. Does the franchisor have input into how the franchisee operates either directly or indirectly?

2. Does the franchisee have input either directly or indirectly into how the franchisor operates?

3. What is the nature, if any, of the ongoing inter-corporate connection?

4. Does the franchisor assist the franchisee in obtaining business?

5. Does the business of the franchisee and franchisor operate interdependently or independently?

6. Does the franchisor take an active role in how the franchisee operates its business?

The answer to each of questions 1, 2, 4 and 6 in this case is ‘yes’, and the answer to questions 3 and 5 is that there is a considerable ongoing interconnection and interdependence. Hence, on the B.C. Board’s test, there is much to suggest that the Category 3 franchisees are under the common control and direction of Sobeys.

125There is significance though in the distinction between Category 1 and 2 franchisees and Category 3 franchisees. Category 3 fees are on route to becoming Category 2 franchisees, who are on route to becoming Category 1 franchisees. There are genuine financial reasons for the difference in control over the operations of the different categories of franchisee. The tight control over Category 3 franchisees is because of Sobeys’ financial exposure in those franchise arrangements. There is less control over Category 2 franchisees because Sobeys’ financial exposure is less; and still less in respect of Category 1 franchisees. The union accepts that Category 1 and 2 franchisees are not under the common control and direction of Sobeys. They operate separate businesses within a commercial vehicle which is mutually advantageous. Category 3 franchisees are more difficult to characterize. Ostensibly they are under considerable scrutiny and direction by Sobeys, but that scrutiny and direction are principally to protect Sobeys’ loans. Sobeys’ control is not different from what would apply if a bank were to have funded the investment which enabled the franchisee to obtain the franchise. This is apparent from the qualifications to many of the franchisees’ obligations. They are qualified with the words, ‘until the loan is repaid in full’. The intention of Sobeys and the Category 3 franchisees is that the franchisees will settle their debt to Sobeys, at which point the relationship will change to one that is more at arm’s length.

126The situation must be judged though on its present facts, not on the intention of Sobeys and the franchisees as to what their relationship will eventually be. Despite many of the indicia of independence on the part of the Category 3 franchisees (engagement of their own lawyers and accountants; real, personal economic commitment to the business by them and their spouses; genuine control over the organization of their stores; self-regulation of labour and employment relations; the risk of loss and the prospect of profit), Sobeys’ close observation of the finances of the Category 3 franchisees and its periodic involvement and regulation of the day to day operation of each such franchisee suggests that Sobeys exercises significant influence over the Category 3 franchisees’ businesses.

127In Walters Lithographing [1971] OLRB Rep. July 406 the Board suggested the following criteria to determine whether there is common direction and control:

• common ownership or financial control;

• common management;

• interrelationship of operations;

• representation to the public as a single, integrated enterprise; and

• centralized control of labour relations.

128Of these criteria, the first does not strictly apply. There is not common ownership. The financial control exercised by Sobeys over each Category 3 franchisee is considerable, but it is as creditor, not as investor, that Sobeys’ control is exercised. There is no common management. There is a high degree of integration of operations: Sobeys supplies the products, the franchisees sell the products from locations which are separate from Sobeys itself. The public sees a single, integrated enterprise. There is no centralized control of labour relations. Relevant considerations for a finding of common control and direction are the following (see Sack, Mitchell, Price, Ontario Labour Relations Board Law and Practice, [reference] at §6.90): common premises (absent in this case); common equipment (absent here); common sales staff (absent here); interchange of employees (absent); common facilities (largely absent); common telephone (absent); common supervision (absent); common solicitors (absent); common directors and officers (absent); common labour relations and personnel policies (absent); similar work performed by employees of the different entities (absent); common and interrelated sales techniques (present here); functional integration and interdependence of operations (present here); common cheques issued to all employees (absent, although use of common payroll service); common office (absent); common bookkeeping service (absent), common accounting facilities (present); the presence of signs indicating associated existence (present through common franchise banners). ‘Mere financial dependency is not sufficient. The common control and direction must be managerial in nature’: Ontario Legal Aid Plan [1989] OLRB Rep. Aug. 862; [1990] OLRB Rep. Jan. 118 (Div. Ct.), [1991] OLRB Rep. Nov. 1327 (C.A.). In these case there is clearly financial dependency of the Category 3 franchisees on Sobeys; there is no direct managerial control by Sobeys over the operation of each Category 3 franchisee’s store.

129Not all of the elements referred to in Walters Lithographing are present in this case. Some are missing. However, in light of the conclusion I ultimately come to in this matter, I need not decide whether there is common control and direction exercised by Sobeys over the Category 3 franchisees. For the purposes of the remainder of this decision I will assume (without finding) that to be so.

130This leads to the next question. Assuming a finding that the elements necessary for the exercise of the Board’s discretion under section 1(4) are present, should that discretion be exercised?

131Although the franchisor’s motive for creating franchise structures is not determinative of a section 1(4) application, if the franchising is merely a device to avoid centralized, corporate collective bargaining that strongly suggests the likelihood of bargaining rights being artificially eroded as a result. That was the conclusion reached in Penmarkay Foods and RPKC Holdings. As stated previously, there is no suggestion in this case of any improper motive on Sobeys’ part. There is nothing in the planning or execution of the franchise agreements with the Category 3 franchisees which creates the apprehension that Sobeys might be seeking to weaken the union’s effectiveness as the bargaining agent of the various stores’ employees or that that will be the result.

132The union seeks to protect its bargaining structure with Sobeys and the existing terms and conditions of employment contained in its corporate Sobeys’ collective agreement. Those endeavours are based on the allegation that the union’s bargaining rights are threatened by the devolution of part of Sobeys’ business to the franchisees. Section 1(4) is designed to protect bargaining rights, not necessarily bargaining structures, nor actual terms and conditions of employment. Furthermore, section 1(4) does not necessarily protect the form of bargaining rights which a union possesses; it protects the substance of the bargaining rights. Only if the loss of the form of bargaining effectively erodes a union’s existing bargaining rights, or if the new form is not a viable structure, will the Board act to protect it. Section 1(4) is not a mechanism to retain centralized bargaining over local or plant bargaining; or vice-versa. It is a statutory mechanism to protect the entitlement to bargain collectively on behalf of a group of employees. It does not guarantee a particular bargaining structure (e.g. at corporate, as opposed to store level), nor does it guarantee a particular bargaining result (particular terms and conditions of employment). The purposes of section 1(4) are to protect bargaining rights from artificial erosion; to create or preserve viable bargaining structures (if the alternatives are not viable); and to ensure direct dealings between the union concerned and the employer bargaining agent entity which has real economic power over the employees. It is this latter element which the union focuses on.

133Union counsel referred to the decision of the B.C. Labour Relations Board in White Spot Limited, above, in which a franchise arrangement was found to constitute one employer for the purposes of the B.C. Labour Relations Code. The BC Board said (at ¶55): ‘We find that protecting the collective bargaining structure established between these parties is a goal contemplated by the Code and one which constitutes a labour relations purpose under the provisions of section 38 [of the BC Code]’. A section 1(4) declaration will likely be made to prevent the alteration of the form of collective bargaining (e.g. from corporate-wide bargaining to store-based bargaining) if the latter form undermines established bargaining rights. But such a declaration will not be made merely to maintain an established bargaining structure. The Board may have a preference for larger bargaining structures when determining bargaining units in a certification context, but, notwithstanding the Board’s comment in Penmarkay Foods (at ¶56), the Board’s bargaining unit preference is not a consideration when the Board exercises its discretion under section 1(4) – it is concerned with protecting bargaining rights, not the preferability of a particular bargaining structure. This is not a case where there has been an erosion of bargaining rights. Those employees who were covered by the Sobeys’ collective agreement are still covered by collective agreements.

134Similarly, the BC Board found (at ¶57) that the ‘protection of collective bargaining rights attained through negotiating a single collective agreement’, e.g. employee’s rights of transfer and recall on layoff, is an even more important labour relations purpose which should trigger a related employer declaration. The Board applies section 1(4) differently. It will not make a section 1(4) declaration merely to maintain superior terms and conditions of employment. It will preserve bargaining rights, not the content of any collective bargaining arrangement.

135The union would prefer the centralized corporate bargaining structure and the benefits it brings (e.g. corporate wide bumping across the different stores covered by the agreement in the event of a layoff). But it does not suggest that being required to bargain at the individual store level renders its bargaining rights meaningless. In fact it has itself been bargaining with separate franchisees of Sobeys for a considerable period of time. There have been successive collective agreements. There has not been a suggestion that those collective bargaining relationships are not viable because Sobeys is not a party at the bargaining table. This marks a difference from the facts in Diamond Taxicab Association (Toronto) Limited, et al.

136The alteration of the bargaining structure which occurred as a result of Sobeys’ decision to franchise out the Category 3 stores did not erode the union’s bargaining rights. It transferred them from a multi-store context to a single store arrangement, a no less viable structure. Although Sobeys has considerable influence over each Category 3 franchisee, each franchisee has the economic capacity to negotiate its own collective agreement. It is not dependent upon Sobeys when doing so, despite the Pro Forma arrangements to which a franchisee is obligated. The Pro Forma is a base against which the performance of the dealer can be measured. It is not itself a mechanism of control – it is a target and guide for the franchisee. The union has recognized the capacity of individual franchisees to negotiate collective bargaining issues in its numerous agreements with other franchisees, which are drawn from each of the three categories of franchisee.

137If the Category 3 franchisees who are the responding parties to this application are declared to be a related employer with Sobeys under section 1(4), then they would be treated differently from other Category 3 franchisees who have independent collective bargaining relationships with the union. That would be anomalous and the result should be avoided.

138What distinguishes the Category 3 franchisees from the category 1 and 2 franchisees is in the extent of their indebtedness to Sobeys. If certain Category 3 franchisees were declared to be one employer with Sobeys, then, once their debt to Sobeys was settled and they became category 2 franchisees, and later category 1 franchisees, they would cease to be one employer and the declaration would be inappropriate. For them to be one employer with Sobeys when they become category 2 and 1 franchisees would create an anomaly. Enterprises which are significantly independent of Sobeys would be unreasonably combined. This consideration also counts against the Board making a declaration pursuant to section 1(4).

139In these circumstances I do not exercise the Board’s discretion under section 1(4) of the Act. The application under section 1(4) is dismissed.

140The individual store responding parties have acknowledged that they are successors of Sobeys for all purposes under the Act when they assumed responsibility for the collective agreement negotiated between the union and Sobeys. The section 69 is therefore granted.

“Christopher J. Albertyn”

for the Board