Australia: New laws for franchisors: encouraging Fair Work Act and award compliance

We've written previously about the issues of underpayment and employment law compliance which have come to light at 7-Eleven ( Franchisee underpayments and the supply chain and 7-Eleven and award and immigration compliance) and investigations in other franchises such as Caltex and Dominos. Now, the Federal Government is proposing legislation to attack the problem at a higher level, by making the franchisor liable for the sins of the franchisee in some circumstances.

The proposed legislation implements the Coalition's election promise to take strong action to curb the exploitation of workers on limited visas or without a visa at all in franchises such as 7-Eleven. The Bill is before Parliament, and you would expect it to pass, as the ALP and the minor parties in the Senate are likely to be in favour.

The purpose of the legislation is to overcome the enforcement problem implicit in the franchise model: each franchisee is running, and is responsible for, its own business, and is a legal entity separate from the franchisor and its related companies. So, an offence occurring in the operation of a franchisee's business will be its legal responsibility, but not the legal responsibility of the franchisor. Of course, from a media perspective, the distinction is often ignored, and the headline will be the franchise name, not the name of the individual franchisee but legally, the entities, and therefore the respective legal situations, are distinct.

While the Fair Work Ombudsman has become increasingly bold, and successful, in seeking penalties from parties beyond the immediate legal entity (such as directors and officers and other advisers "knowingly involved" in contraventions), it is still difficult in a legal sense (an exception rather than the rule) to fix liability on corporate entities higher up the franchise chain. When Yogurberry was held liable for knowingly being involved in infractions at a franchisee's store in November last year, and fined $146,000, that was a significant step, and could happen again as the law stands. However, the Federal Government's proposed legislation will put a stronger basis under this sort of claim, and make it a top-of-mind issue for franchisors, rather than a relatively unlikely legal risk.

The new legislation, the Fair Work Amendment (Protecting Vulnerable Workers) Bill will make a franchisor liable for underpayments by franchisees or subsidiaries, when they knew, or ought to have known, of the contravention, and failed to take reasonable steps to prevent it. The changes will also increase penalties 10-fold (up to $108,000 for individuals and $540,000 for companies) for "serious contraventions."

Unpacking that:

  • liability would not arise because of one rogue manager, and the conduct of a franchisor company would need to be considered overall;
  • there does not need to be any express direction for a franchisor to be liable: tacit or implicit condoning of dodgy pay practices in franchisees' businesses would be enough – for example, business models which only work (eg produce a return for the franchisee) if the franchisee pays under award;
  • mere suspicion is not enough, but actual knowledge of infringements (or who or how much is underpaid and exactly how) will not be necessary: if there are reasonable grounds for the franchisor to suspect pay irregularities, such as a pattern of complaints, or knowledge of inadequate record keeping, and it turns a blind eye, that would be enough for a conviction;
  • demonstrable due diligence, proof of having taken reasonable steps to avoid breaches by franchisees, would avoid liability;
  • franchisors can be liable for the underpaid wages, as well as penalties, but do have the right to recover the wage component from the errant franchisee (if the franchisee is worth suing!);
  • officers and employees of franchisor entities could also be individually liable if knowingly involved in infringements; and,
  • the increased penalties will not apply to inadvertent and non-systematic oversights: the "serious contravention" category is aimed at employers deliberately failing to keep proper records, issue payslips and so on, in order to cover up underpayments and disguise wrongdoing: markers of this would be multiple infringements, all at the same time or over a long period, affecting multiple employees.

It follows from these points that it will not be enough to have contractual provisions requiring compliance with workplace laws, and leave it at that. The smart franchisor will have due diligence systems in place to monitor franchisee compliance, and use them, taking action where the rules are broken.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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