Franchisors Be Aware – Liability to Employees in Network

In response to the 7-Eleven wage scandal and other similar cases, the Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017 was passed on 5 September 2017 and amends the Fair Work Act 2009.

It is yet to be determined when the new laws will be in force as the amendments await Royal Assent. Nevertheless, it would be prudent for Franchisors and their holding companies to assess their operations immediately; to be legally compliant.

The amendments main aim is to protect; employees who are being underpaid or are being deprived of their relevant employment entitlements.

Summary of Amendments

Who is responsible?

Certain Franchisors and holding companies may now be responsible for underpayments and breaches of Fair Work Act entitlements by their Franchisees and subsidiaries;

Penalties

Severe penalties may be imposed for serious and systematic contraventions of work place laws;

Inspectors

The operational powers of the Fair Work Ombudsman have been strengthened and impose greater penalties for obstructing Fair Work inspectors;

Breaches

There are now substantially increased penalties for breaches in relation to employment records and pay-slips;

Reverse the onus back to the Employer

The onus is now on the employer to disprove any allegations of breaches in relation to employment records and pay-slips in court.

What does this mean for Franchisors

What most were hoping would not happen has happened and that is making Franchisors also liable for the actions of their Franchisees.

Franchisors can no longer hide behind corporate structuring and segregation of functions to avoid accessorial liability for involvement in Franchisee contraventions of relevant workplace laws.

The new laws will apply to Franchisors who have a significant degree of influence or control over the Franchisee entity’s affairs.

Under the recent amendments, such Franchisors and holding companies may be responsible for any breaches of civil remedy provisions by their Franchisees:

  • where they knew, or
  • reasonably should have known about the contraventions; and
  • failed to take reasonable steps to prevent them.

Civil remedy provisions which Franchisees must not contravene include those relating to minimum wage orders, award and enterprise agreement compliance, equal remuneration orders, methods of payment, guarantees of annual earnings and maintenance of employee records.

If a Franchisee contravenes the above civil remedy provisions ‘knowingly’ and as part of a ‘systematic pattern of conduct’ (for example, over a prolonged period or over multiple employees), such conduct will be termed a ‘serious contravention’ of the Fair Work Act. The maximum fine for a corporation that commits a ‘serious contravention’ of the Act has increased tenfold to over $600,000.

Where there has been a contravention of the Fair Work Act civil remedy provisions by a Franchisee, the Franchisor may be also ordered to pay the exploited employee a sum of money to compensate for the losses. In this instance, the Fair Work Act enables the Franchisor to pursue the contravening Franchisee in court to recover the amount paid.

What Franchisors need to do next

1. Immediately conduct due diligence to ensure any Franchisees and subsidiaries under their control are compliant with the Fair Work Act laws. During this process, Franchisors should pay particular attention to employees on permanent visas as these workers were a major target of workplace exploitation recently.

2. Ensure written materials detailing the Franchisee’s responsibilities in relation to industrial relations, and specifically the Fair Work Act, are up to date and accessible to all Franchisees;

3. Ensure that both new and existing Franchisees are educated on the Fair Work Act and the Franchisor’s expectations;

4. Establish independent compliance programs (including periodic audits) to identify Franchisee non-compliance with the Fair Work Act – and issue formal breach notices under the Franchise Agreement where non-compliance is identified;

5. Establish confidential reporting processes for Franchisee employees to be able to raise underpayment by the Franchisee directly with the Franchisor;

6. Encourage Franchisees to obtain independent advice in relation to their workplace obligations;

7. Consider engaging a Workplace Relations supplier which Franchisees must use to do their rostering, maintain staff records, prepare pay slips and the like;

8. Consider whether your Disclosure Document adequately discloses the likely wages payable by the Franchisee to its employees and update it as required. Now is an opportune time to review and update your Disclosure Document given the Code requirement to do so on annual basis by 31 October each year; and

9. Review the employment provisions within your Franchise Agreement to ensure that they are sufficiently robust to allow you to conduct audits of your Franchisee’s employment and workplace records.

What is clear now is that a Franchisor’s arm’s length approach will not be an acceptable defence going forward. The expectation is that Franchisors must do more to actively prevent breaches within their networks. If they fail to do so, they face the consequences of trial by media and potential action by the Fair Work Ombudsman under the accessorial liability provisions.

If you have any concerns about your compliance with the new laws, both operationally and legally, or if you wish to have your franchise documents reviewed and updated to ensure compliance with the new laws, contact Baybridge Lawyers now.

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Level 1, 109 Pitt Street NSW 2000 Australia
Level 1, 109 Pitt Street NSW 2000 Australia
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