Australia: Joint employment and accessorial liability – The next big issue for franchising?

Those with a keen eye have already observed a few early warning signs that a new bushfire is not far away. A couple of lightning strikes have ignited undergrowth which looked green, but was surprisingly dry. Prompt action by the Franchise Council of Australia has established control lines, but the embers remain and if the wind changes we could have a major bushfire on our hands.

The recent media focus on workplace compliance breaches by 7-Eleven franchisees was not the first lightning strike, as other major brands had already been the subject of isolated media attention. But the fanning of the blaze by the media and others was unexpected. Probably the biggest lesson learnt for the broader franchise sector was that the explanation that the breaches were by franchisees, not the brand itself, did not cut it. The uproar clearly demonstrated that the public and the media have little understanding of, or interest in, the distinction between franchisor and franchisee.

It would be easy to dismiss the 7-Eleven situation as a unique event, but that would ignore international trends. In the US there is a raging bushfire on essentially the same issues – that third parties such as franchisors should have greater responsibility for workplace compliance by employers such as franchisees. The US franchise sector has spent millions of dollars in representation and in funding court actions, but is being outspent on the issue by the trade union movement by a substantial multiple. The fundamental separation between franchisor and franchisee in the context of employment issues is under threat, with the General Counsel of the National Labor Relations Board (NLRB) commenting that "business formats have become more prescriptive, so it is no longer possible for franchisors to totally disavow any responsibility for employment matters."1

Academics are actively fuelling the bushfire, adopting new terminology of a "fissured workplace" to describe a situation where they say workplace policies are being subverted by having intermediated structures. Although labour hire companies were initially the primary target, the labour bodies have now targeted franchise systems such as McDonalds and Subway in a clear indicator of intent.

The NLRB has issued a new and expanded joint-employer test that could clearly catch some franchise systems, and the US Department of Labor has less publicly just issued a new Administrator's interpretation on joint-employer status under the Fair Labor Standards Act. The Administrator's interpretation, issued January 2016, adopts an expansive definition of joint employment - an employer may be jointly liable where the employee is economically dependent on the joint employer (ie: the franchisor). This is the case even when the franchisor exercises little or no control or supervision over the employees.

This interpretation goes beyond that advocated by the NLRB, which still requires control by the joint employer in relation to the setting of workplace terms and conditions. This interpretation, and indeed the NLRB test, are well beyond the current state of the law in Australia, where our Courts have to date dismissed joint employment at least at common law. However, it is currently possible for a franchisor or individual directors or managers of a franchisor to be an accessory to the franchisee employer's contraventions under the Fair Work Act in Australia. The US franchise sector is facing a major blaze head on, and that could be replicated in Australia.

In Australia the politicians and regulators have also become involved. The Senate Standing Committee on Education and Employment inquiry into the impact of Australia's temporary work visa programs on the Australian labour market and temporary work visa holders was substantially consumed by inquiries into the 7-Eleven situation. The resultant report by the Labor majority, "A National Disgrace: The Exploitation of Temporary Work Visa Holders" (the Report), made key recommendations that could, if implemented, directly impact franchise networks. In addition to proposing a review of the powers and resources of the Fair Work Ombudsman (FWO) and increasing the penalty regime under the Fair Work Act 2009 (Cth), the Report recommended that there be a review of the Franchising Code of Conduct to consider:

  • if there is scope to impose "some degree of responsibility" on franchisors for any breaches by their franchisees of workplace laws; and
  • including an amendment which would allow franchisors to terminate a franchise agreement without notice where there are "reasonable grounds for believing that serious contraventions of the Fair Work Act 2009 have occurred".

While the Report did not recommend joint employment legislation, preferring a review of powers and penalties with a view to imposing higher penalties for accessory liability and granting FWO greater enforcement and investigative powers, the resulting outcome for franchisors is similar.

The report was not unanimously accepted, with the Liberal minority denouncing the report.

Clearly, this issue and the debate are alive and well. Prudent Australian franchisors will start immediately reviewing their workplace arrangements, with a particular focus on the following:-

  • The extent to which they get involved in setting workplace terms and conditions that are used by franchisee employers, noting that some franchisors have actively encouraged franchisees to adopt their template workplace arrangements;
  • The extent to which they engage in settling or fighting employment disputes regarding employees of franchisees;
  • How "close to the line" are the current workplace terms and conditions, noting that employers are now being attacked in the media for pay arrangements and conditions that are lawful, but are considered unfair and the subject of intense social media campaigns;
  • The nature and extent of workplace relations training, advice and assistance they provide to franchisees;
  • Their ability to take action under the franchise agreement in the event of serious breaches by franchisee employees.

The Australian franchise sector has taken initial steps to conduct "controlled burns" to limit the risk of the expected bushfire conditions, such as supporting the development of an industry standard that frames the desired outcome – that franchisors and franchisees are not jointly liable, but that franchisors accept they have a training and support role and a responsibility to take action in the event of serious breach by franchisees. This initiative should be supported. However this new bushfire threat is potentially the biggest risk ever faced by Australian franchising, and it could well become a political issue in the next election as the Greens seek to target Labor supporters and Labor seeks to differentiate itself from the Coalition and counter campaigns based on trade union corruption allegations.

As the bushfire advertisements say, have a fire safety plan! The first steps are to carefully consider the role you want to play in franchisee workplace issues, form a view on the level of workplace risk and then develop a plan to give effect to your desired objectives. For assistance, or more information, contact Stuart Kollmorgen or Stephen Giles.

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