- within Corporate/Commercial Law topic(s)
- with Senior Company Executives, HR and Finance and Tax Executives
- in United States
- with readers working within the Automotive, Business & Consumer Services and Media & Information industries
Introduction
The Fair Work Legislation Amendment (Closing Loopholes) Act 2023 and the Fair Work Legislation Amendment (Closing Loopholes No. 2) Act 2024 represent significant changes to Australian employment law. For franchisors, the reforms deepen an already intricate web of regulatory risk. This article examines how these changes impact franchisors across Australia, with particular focus on sectors most vulnerable to these regulatory changes.
The same tests that are used to determine whether an arrangement is one of 'independent contractor' can be applied to determine if it is a true 'independent' relationship between franchisor and franchisee.
Redefining Employment Through Section 15AA
The introduction of section 15AA into the Fair Work Act represents a deliberate reversal of the High Court's decisions in CFMMEU v Personnel Contracting Pty Ltd [2022] HCA 1 and ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2.
From 26 August 2024, determining whether someone is an employee requires examining the "real substance, practical reality and true nature of the relationship", considering the totality of the relationship not merely the contractual labels parties have chosen.
The Parliamentary Bills Digest explains that section 15AA is to "reinstate the 'multi-factorial' test applied by courts and tribunals to determine if a worker is an employee or independent contractor prior to the High Court decisions" outlined above.
Section 15AA and Its Implications for Franchisors
The reforms carry important implications for franchisors whose systems involve unusually high levels of operational oversight. The same tests that are used to determine whether an arrangement is one of 'independent contractor' can be applied to determine if it is a true 'independent' relationship between franchisor and franchisee.
The real key is to examine the relationship to decipher if there is true commercial autonomy. Even where control is exercised to preserve quality and brand standards, if franchisees have limited commercial discretion, the relationship could be characterised as employment irrespective of the contract's wording.
Questions to ask yourself are:
- What is the level of control that the franchisor has over pricing and revenue streams?
- How is work or customers allocated?
- What is the oversight over the direction and supervision of daily operations?
- Can a franchisee advertise, accept independent work, or operate another business, are they economically tied to one income stream?
- What degree of control is there over supply chain purchases?
- What degree of control is there over the franchisee ability to grow their business?
- Are payments structured more like wages (per job or per shift) than business revenue?
- Is the franchisee's income fixed or guaranteed, rather than linked to profit and loss?
- Does the franchisee bear any genuine financial risk, for example, covering their own costs or managing variable demand?
No one answer to these questions will be the 'silver bullet' to toppling over a franchise system, but stepping back and viewing the relationship as a whole with these questions in mind will help you understand what the reality of the situation may be, rather than the contractual label.
Sector-Specific Vulnerabilities
While every franchise system must be examined through the lens of commercial autonomy versus operational control, certain sectors are inherently more exposed under section 15AA. The vulnerability arises not from bad intent, but from the very structure of the business model, where control, standardisation, and brand protection are essential to service delivery.
1. Mobile and On-Demand Services
Cleaning, lawn care, maintenance, and car detailing networks often rely on centralised booking platforms and fixed pricing. Where franchisees do not source their own clients or set their own rates, the model can begin to resemble a rostered work system. Even if framed as efficiency, the absence of pricing or client autonomy is a key vulnerability.
2. Logistics and Delivery Systems
Courier and parcel delivery franchises face heightened risk where routes, schedules, or performance metrics are dictated by head office. The greater the reliance on an app or dispatch software to allocate work, the closer the relationship comes to the gig-economy model that the reforms seek to capture.
3. Food and Quick-Service Outlets (QSR)
Smaller food or coffee franchises with tightly controlled menus, suppliers, and pricing may be exposed where franchisees are effectively paid a set return for operating the site, rather than generating profit from trading. Uniformity in brand presentation is expected, but when financial outcomes are predetermined, commercial independence becomes questionable.
4. Home Care and NDIS Service Franchises
In home-care systems, franchisors often control scheduling, compliance, and client management to meet regulatory standards. That degree of operational direction, while necessary for quality assurance, can also limit franchisee discretion and mirror the dynamics of employment.
5. Digital and Platform-Based Micro-Franchises
Emerging "work-from-home" or digital marketing franchises can blur lines where income depends entirely on centrally generated leads or sales conversions. If franchisees are paid per transaction or per shift, and lack scope to develop their own client base, they risk being seen as dependent contractors.
6. Low-Investment or Lifestyle Franchises
Models marketed as "side hustles" or "supplementary income" opportunities often promise predictable returns with minimal input. These structures can undercut the core premise of business ownership and expose franchisors to both employment and misleading-representation claims.
The common thread across these sectors is economic dependency, where the franchisee's opportunity to earn and grow is largely determined by the franchisor's system. Understanding these vulnerabilities allows franchisors to refine their operations, preserve compliance, and strengthen the integrity of genuine business ownership within their networks.
Looking Forward
The Closing Loopholes reforms represent more than incremental compliance adjustment, they signal a fundamental shift in how Australian law views complex business structures designed to diffuse employment obligations.
Success in this environment requires embracing compliance as strategic imperative rather than regulatory burden. Those franchisors that invest in sophisticated compliance architecture, genuine franchisee partnership, and innovative operating models will not only survive but may find unexpected competitive advantages. Conversely, those that persist with outdated structures or minimal compliance efforts face escalating regulatory intervention and potential criminal prosecution.
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.
