Australia: What is the role of the franchisor in franchisee workplace compliance?

Until recently most franchisors would have responded to this question with a fairly definite answer that essentially distanced the franchisor from any significant role or responsibility. That is not an unreasonable response – it is in fact exactly how the law currently views the situation. But the wind is changing, and it is likely that franchisors will soon be expected to take an enhanced role in ensuring workplace law compliance in franchise networks.

As the law currently stands all responsibility for workplace law compliance rests with the employer. In the context of the typical franchise relationship that will be the franchisee. A franchisor will only have responsibility if the franchisor chooses to involve itself in workplace matters. The Fair Work Act 2009 (Cth) (the Act) currently contains a provision1 that an individual who has aided, abetted, counselled, procured, induced, conspired with others or been in any way knowingly concerned in the contravention is held responsible for the contravention. The bolded word, "knowingly", will protect a franchisor unless they have been specifically involved in the breach.

However recent statements from the Fair Work Ombudsman (FWO) and others point to a changing landscape, particularly in the context of proposals by the Government, the Opposition and the Greens for legislation to make franchisors liable in specific circumstances. The Australian Financial Review recently published an article based on a speech to the Franchise Council of Australia (FCA) NSW Chapter by Steve Ronson from the FWO entitled Franchise CEOs give Fair Work Ombudsman the cold shoulder2. This quite aggressive approach was unexpected, as the FCA had been collaborating with the FWO, but had told FWO that they felt the compliance deeds they were wanting franchisors to sign went too far.

In the speech3 Ronson said he was "disappointed" with franchisor cooperation, and expected franchisors to change their attitude "about the investment required into ensuring compliance." He also went on to say that because a franchisor benefits from the labour of the franchisee's employees the franchisor has "a moral and ethical obligation to ensure a worker's entitlements are met", and "legally and morally a franchisor cannot hide behind or outsource its responsibility to ensure lawful remuneration."

One can take legitimate issue with Ronson's opinion about moral and ethical responsibility, and his statements about the existing legal responsibility of franchisors are clearly wrong. But they do indicate that the regulator has a very firm stance on these matters, and is likely to make those views known to Government in the context of the proposed legislation to extend the existing accessorial liability provisions of the Act.

What is an industry solution likely to contain?

If the FCA, the FWO and other stakeholders reach a consensus on reform requirements, it may be possible to avoid prescriptive legislation, although legislation to enact penalties and enhance the investigative powers of FWO will still be required.

Frandata Australia has produced a draft Workplace Transparency Standard which is based on the compliance deeds advocated for by the FWO, but without the mandatory reporting and audit requirements. It has strong industry support, but to date the FWO has been reluctant to embrace this initiative, and has continued to persist with its compliance deeds. However recent meetings between FWO and the FCA seem more encouraging.

Unfortunately there does not seem to be a good understanding of the various different types of franchise models, with politicians and regulators assuming that in all cases the franchisor has strong controls over franchisees, and has the resources to monitor and manage franchisee compliance. It is also a source of frustration for franchise systems that they are being targeted, when they know their compliance levels will be higher than their non-franchised competitors.

Any industry solution must be consistent with the Government's public statements, which is likely to mean providing more clarity to the legislative changes. The Government has said legislation will be aimed at "franchisors and parent companies that fail to deal with exploitation by the franchisees", so there is no direct plan to make franchisors specifically or jointly liable as employers. The policy statement4 notes that the Act will be amended to make franchisors and parent companies liable for breaches of the Act by their franchisees and subsidiaries in situations where they should reasonably have been aware of the breaches and could reasonably have taken action to prevent them from occurring.

However the policy statement goes on to say that "franchisors who have taken reasonable steps to educate their franchisees, who are separate and independent businesses, about their workplace obligations and have assurance processes in place, will not be captured by these new provisions."

Applying logic to these various positions an industry solution should probably focus on designing an industry standard assurance program. Looking at parallels with the Competition and Consumer Act 2010 (Cth) (CCA), CCA compliance programs are designed having regard to the industry standard concerning compliance programs, AS-3806. It would seem this standard provides a useful framework for an "assurance program".

We think an industry solution constructed around AS-3806 as a comprehensive compliance program could well end up either as an industry solution, or as an industry response to amending legislation. In other words if a franchisor has in place a compliance program that satisfies AS-3806, it satisfies the requirement for an appropriate "assurance program" as articulated in the Government's policy statement. Further detail as to franchisor obligations would need to be provided, perhaps by a document such as the Frandata Workplace Transparency Standard.

What should franchisors do in the meantime?

There are some specific indicators of matters that merit consideration and examination based on our experience and FWO expectations. A checklist for franchisors is set out below:

  1. Review the franchise business model to ensure it is financially viable at franchisee level, and no argument can be raised about franchisees having no alternative but to break the law. After internal review, consider having an external firm validate the findings so public reference can be made to an independent review by a franchise industry expert.
  2. Assess what representations may have been made to franchisees about revenue, expenses, profitability etc:
    1. check disclosure document to see what, if anything, the franchisor has been saying about revenue, costs and workplace wages;
    2. review any financial models provided to prospective franchisees; and
    3. speak to field mangers to confirm what, if anything, they say/have said to franchisees in relation to these matters.
  1. Review the franchise network for "warning signs" such as:
    1. Excess of costs over revenue. This requires calculation of the average costs per hour of labour on an optimised roster, then staff numbers per shift, to yield average weekly operating costs.
    2. Assess the total costs of a typical franchisee, including labour cost. Then check whether there are franchisees not earning sufficient gross revenue to cover these costs.
    3. Are there "ghost employees" – relatives of the franchisee listed on rosters who never seem to be seen in the business?
    4. How many employees are international students?
    5. Does the extent of any "unpaid training" appear excessive?
  1. Be seen to be working collaboratively with franchisees, not deserting them. The FWO and media do not like to see franchisors trying to make scapegoats of franchisees. Have an alternative program to termination or exit for franchisees who seem disinclined to do the right thing in future. Simply seeking to terminate franchisees that have breached their obligations is high risk in terms of adverse publicity and reputational damage to the franchise brand.
  2. Be aware of terminating for fraud or without providing an opportunity to remedy, or in circumstances of financial distress. In such circumstances, there may be additional risks such as:
    1. Unconscionable conduct;
    2. Lack of good faith;
    3. Misleading or deceptive conduct;
    4. Aiding and abetting breaches;

Issuing a notice of breach reduces these risks, gives time to remedy and facilitates more creative remedial solutions.

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