Australia: Liability of franchisors for contraventions of workplace laws

Following the release of the Fair Work Ombudsman's (FWO) report of its Inquiry into 7-Eleven in April 2016, and recent media attention, there are a number of lessons for franchisors in relation to their franchise arrangements and the employment practices of franchisees.

Background

The FWO conducted an Inquiry into allegations of underpayment of wages and falsification of employment records across the franchisee network of 7-Eleven Australia Pty Ltd.  The Inquiry found a large number of instances of non-compliance with the Fair Work Act 2009 (FW Act), manipulation of records to disguise underpayments and other deliberate practices to underpay employees.

The Inquiry considered that 7-Eleven's approach to workplace matters, while ostensibly promoting compliance, "did not adequately detect or address deliberate non-compliance and as a consequence compounded it".

While the individual franchises are the employers of labour, the investigation raises questions as to how the level of control exercised by the franchisor can impact on the franchisees compliance with labour laws.

Control measures by 7-Eleven

A franchise structure will often include an upfront fee at set up, ongoing fees calculated as an amount or percentage of turnover and an additional percentage of turnover to cover marketing costs.  7-Eleven has a less typical arrangement.  Instead of an ongoing fee, 7-Eleven was paid 57% of the gross profit by franchisees.  However, 7-Eleven covers costs not typically borne by franchisors, such as rent and utilities. As wages make up the most significant expense for franchisees within this model, controlling labour costs was the primary mechanism to franchisees to reduce their costs and increase profit. 

The Inquiry found that a high level of control by 7-Eleven in the franchise relationship is demonstrated in the comprehensive training and support to franchisees, such as:

  • engaging an external employee relations service, to assist franchisees in relation to award wages, unfair dismissal and enterprise bargaining;
  • providing a payroll service to franchisees;
  • providing of a manual to all franchisees covering employment law requirements, including wages, pay slips and superannuation;
  • providing new franchisees with a training course which covers employment obligations; and
  • regular store audits.

FWO was of the view that 7-Eleven could terminate a franchise agreement if franchisees fail to meet their employment obligations.  However, where a breach is rectified, the ability to terminate is less clear.

In our view, the high level of control exercised by the franchisor can have two effects, depending on the nature of the business:

  • less flexibility for franchisees to achieve profit can lead to underpayment of wages; and
  • where the high level of involvement leads to actual knowledge of breaches, the franchisor may face accessorial liability under the FW Act.

Responsibility of franchisors – accessorial liability

Section 550 of the FW Act provides for accessorial liability in respect of a person who is 'knowingly involved in' a contravention of a civil remedy provision.  That person is taken to have contravened that provision and is exposed to penalties and other orders flowing from that contravention. In order to establish accessorial liability of the franchisor for award underpayments, it would be necessary to establish that the accessory knew that an employee had entitlements under an award, and the employer did not meet those entitlements. 

Employees of 7-Eleven and providers of HR and payroll support may have access to information which would establish accessorial liability, but the FWO could not show that they were 'involved in' the conduct, or had the requisite knowledge of the essential facts of the identified contraventions of the FW Act alleged against a specific franchisee.

FWO recommendations

The FWO made a number of recommendations including the following:

  • enhanced governance arrangements, including business and financial training of franchisees and review of the operating model;
  • Implementation of biometric time recording and CCTV for employees and franchisees to  monitor working hours and compliance with workplace laws;
  • engagement of an external party to audit compliance with workplace laws;
  • implementation of 'employee hotline'; and
  • establishment of a 'guarantee' reserve fund to cover underpayments which franchisees fail to rectify.

While these appear to be sound measures and help reduce non-compliance, these measures would place substantial obligations on the franchisor and create further levels of control, thereby affecting the franchise relationship and increasing the potential for accessorial liability where 7-Eleven becomes aware of breaches.

Changes to franchise arrangements

In response to the Inquiry, 7-Eleven is implementing a number of changes to its franchise arrangements to reduce the opportunities or incentives to underpay employees.  These include:

  • providing a minimum gross income guarantee to stores of $310 000 per annum (previously $120 000) to reduce the likelihood of underpayments to increase profitability;
  • requiring franchisees to abide by payroll service requirements;
  • making breaches of payroll services a material breach of the agreement (thereby allowing termination of the agreement);
  • providing for biometric attendance records; and
  • requiring franchisees to record their own hours of work.

7-Eleven continues to work with the FWO and to address its franchise arrangements in order to address non-compliance with workplace laws by individual franchisees and to ensure its practices encourage ethical employment practices.

Lessons for franchisors

Franchise arrangements

In light of the Inquiry, there has been focus on the role of franchise codes in deterring unethical behaviour.  7-Eleven has stated that the franchise codes had "not kept pace with the changing face of the Industry generally and change is required to ensure they provide clear and appropriate deterrence and sanction mechanisms that drive ethical behaviour".  7-Eleven has acknowledged that this is a co-operative effort between the company and the FWO.

Franchisors need to be aware of the potential for franchisees to breach workplace laws as a result of the franchise relationship.  An examination of the level of control exercised by the franchisor and whether this creates the opportunity or imperative for breaches should be examined.

Role of workplace regulators

Franchisors should be aware of the role of regulators including the FWO, as this will affect their relationship with franchisees and their reputation and The FWO continues to seek civil penalties against franchisees for breaches of workplace laws.  For instance on 29 April 2016, the Federal Circuit Court found that a 7-Eleven franchise had breached workplace laws, including underpaying two employees an amount of $49,425 failing to keep proper records and falsifying records.  Penalties of $214,000 were imposed and the franchisee was ordered to engage external auditors of its employment practices and to undertake training in this area.

The FWO has broad powers of investigation, to ensure compliance with workplace laws.  These include powers to enter premises, to obtain time and wage records, and to interview people with consent.  However, the FWO does not have compulsory powers to interview individuals.

The FWO can conduct ongoing compliance campaigns and prepare public reports into its investigations, as in this case.  Where breaches of workplace laws are found, the FWO can institute proceedings seeking civil penalties where there are breaches of those laws.

The high level of control by franchisors, such as control of plant, equipment, working hours and processes may also give rise to work, health and safety obligations on the part of the franchisor.

Steps for franchisors

In order to reduce exposure, franchisors should:

  • review franchise arrangements, particularly around levels of control;
  • review governance structures to reduce opportunities for contraventions of workplace laws;
  • consider whether the franchise agreement can be terminated for breach of workplace laws, even where rectified; and
  • be aware of the role and powers of regulators including the FWO and work, health and safety regulators.

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.

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