Franchisors Beware

On 5 September 2017, the Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017 passed both Houses of Parliament. Once the Bill receives Royal Assent, this legislation will have massive ramifications on the franchising industry.

Under the existing laws, a franchisor may potentially be held to be liable for a franchisee’s breach of workplace laws if the franchisor is involved in the contravention.

Along with increasing maximum penalties for employers who deliberately breach minimum wage and entitlement obligations under the Fair Work Act 2009, the proposed new legislation will hold franchisors and holding companies responsible for underpayments by their franchisees or subsidiaries if the franchisor knew, or reasonably should have known, about the contravention and failed to take reasonable steps to prevent it. This greatly expands on the current laws.

The controversial Bill has been heavily debated within the Australian franchise industry, predominantly because in many franchise models the franchisee operates its business independently from the franchisor, who is removed from the day-to-day running of the business such as paying wages and rent, which is the responsibility of the franchisee. The legislation will only apply to franchisors who have a significant degree of influence or control over the affairs of their franchisees. How this influence or control will be assessed is yet to be determined.

Triggered in response to the highly publicised 7-Eleven employee underpayment scandal which has engulfed the franchise sector since 2015, along with several recent employee underpayments by Domino’s and Caltex franchisees, the franchise-specific provisions of the new laws will take effect 6 weeks after the Bill receives royal assent (or in other words, when the legislation becomes enforceable law).

Turning a blind eye is no longer an option for franchisors, who must now pay closer attention to how their franchisees manage employment processes. Franchisors should take this opportunity to:

  1. review their standard form Franchise Agreements and Operations Manuals to clearly set out franchisee obligations under workplace laws;
  1. consider whether to include employee obligations in initial or ongoing training programs provided to franchisees;
  1. consider and revise any policies and resources provided to franchisees covering obligations under workplace laws;
  1. monitor franchisees, and if warranted, carry out compliance audits to determine if employees are being paid under the correct award, and correct entitlements such as superannuation and leave. Regular audits may act as a deterrent to other franchisees who will be aware that audits are commonplace and that consequences for non-compliance with employment laws are enforced;
  1. encourage feedback as both franchisees and their employees should feel comfortable approaching a franchisor in respect to issues with the system. Employees should not feel that they are prevented from raising employment concerns with the franchisor;
  1. listen to concerns that franchisees raise regarding the system and don’t ignore issues. It is in the best interests of franchisors to ensure that franchisees are operating their businesses adequately. If franchisees are struggling to pay their employees the proper entitlements, and if this is a widespread concern, that could indicate the need to review the structure of the franchise system; and
  1. treat franchisees with uniformity. Franchisors could be accused of breaching their good faith obligations under the Franchising Code of Conduct if they single out a particular franchisee. If audits are to be carried out and consequences for non-compliance enforced, then all franchisees must be treated equally.

Franchisees and franchisors will need to be prepared to face tougher penalties for breaching employment laws. In some cases the penalties for contravening employment laws will now be up to $630,000 for corporations and $126,000 for individuals per offence. The legislation also brings increased penalties for breaching record-keeping and payslip requirements. “Cash-back” arrangements where an employer delivers a wage to a worker but then asks for part of it to be repaid will also be specifically outlawed.

Depending on the provisions of the particular Franchise Agreement, underpayment of employees may constitute fraudulent conduct in certain circumstances, entitling a franchisor to immediately terminate a Franchise Agreement, or at the very least, acting as grounds for a breach notice to be issued.

If you have any concerns about the underpayment of employees or questions about the proposed new laws, Talk to the Franchising team at Rouse Lawyers. Contact us today!