Franchisors, take note.

On 1 March, the Federal Government introduced the Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017 (the Bill). The Bill is the latest in a series of changes that the franchising sector has experienced in recent years, including the new Franchising Code of Conduct in 2015 and the Unfair Contract Laws in November last year.

The Bill seeks to crack down on non-compliance with the Fair Work Act 2009 (Cth) (Fair Work Act) and includes specific changes to protect those working for a franchise business. As the Bill enjoys bipartisan support coupled with the wave of cases involving underpayment of wages in the franchising sector, it’s likely the Bill will pass in the next few months.

If introduced into Australian law, the Bill will have important consequences for franchisors. We discuss the pre-existing state of affairs in this space, the proposed changes and review some of the issues commentators have identified with the Bill.

Allegations of misconduct by individual franchisees have drawn significant media attention recently. Domino’s and 7-Eleven are two high-profile cases that have generated much discussion around the protection of workers in franchised stores.

The Fair Work Act sets out, among other principles, minimum pay and award conditions (along with the National Employment Standards). The Fair Work Ombudsman (Ombudsman) is the body that enforces the Act and can prosecute breaches of employment law.

Even in particular circumstances under the current Act, a franchisor can be held responsible for a franchisee’s breach. Last year, the franchisor for Yogurberry was found liable (along with the relevant franchisee) for underpaying employees at the World Square store in Sydney.

For a number of reasons, including the influence that the part-owner of the franchise has over wage levels, the franchisor was joined to the proceedings the Ombudsman commenced. The Federal Court of Australia issued penalties totalling $146,000 against the franchisor, the franchisee and the part-owner of the franchisor (in their personal capacity). The franchisor was also required (at its expense) to undertake an audit of every franchisee to investigate each franchisee’s compliance with employment law.

Reaction to the Bill

The Franchise Council of Australia (FCA) is lobbying to reduce some of the harshest aspects of the Bill. The FCA argues that the Bill singles out one industry – franchising – over other industries with similar issues with outsourcing or sub-contracting aspects of their supply chain. The FCA is also of the view that the Bill does nothing to distinguish between different sized businesses within that sector. It will be a test of the lobbying power of the industry to see amendments are made to the Bill.

Staying on the Right Side of the Law

As with any new law, the Bill’s scope and application will remain unclear until a test case is brought before the courts. Until then, the wording of the draft Bill provides some guidance around practical strategies franchisors can initiate to minimise the risks of being found liable for the misconduct of their franchisees.

The new Bill states that franchisors can protect themselves from liability by taking ‘reasonable steps’ to prevent the relevant breaches of the Act. A court can consider the following factors when deciding whether a franchisor took ‘reasonable steps’ to prevent contraventions by their franchisees:

  • size of the franchise;
  • level of influence/control the franchisor has over the franchisee in relation to the alleged contravention, or a contravention of a similar nature;
  • steps the franchisor took to ensure the franchisee had a reasonable understanding of their obligations under the Act e.g. providing franchisees with a copy of the Ombudsman’s Fair Work Handbook;
  • franchisor’s systems for monitoring the franchisee’s compliance with the Act e.g. undertaking periodic audits;
  • franchisor’s processes for managing complaints relating to employment law breaches by the franchisee (e.g. a reporting line for employees);
  • extent to which the franchisor requires/encourages the franchisee’s compliance with employment laws (e.g. express clauses in the franchise agreement requiring franchisees to strictly comply with the Act, and to co-operate with the Ombudsman).

What is reasonable for one franchise network will differ. As such, franchisors should consider what processes suit the size and nature of their business, and incorporate systems tailored to their needs. A court will not penalise franchisors for failing to take a particular action that is unreasonable. As a matter of best practice, however, all franchisors should be taking some steps to ensure their franchisees comply with employment laws.

There is good news for franchisors. If a franchisor has paid an amount to an employee as a result of a claim of underpayment/breach of specified provisions by a franchisee, the franchisor will have the statutory right (under the new bill) to commence proceedings to recover the outstanding amount from the franchisee.

If you are a franchisor, you should have a franchise lawyer review your franchise agreement to identify ways to increase your powers of oversight and enforcement when it comes to your franchisees’ compliance with employment laws, as well as practical tips for ensuring franchisees are aware of their obligations.

As the Bill makes its way through Parliament, it may undergo amendments – so watch this space. It’s clear, however, that in its current form, the Bill will broaden the circumstances in which franchisors are found liable for a franchisee’s employees.

If you are a franchisor, it is timely to start considering practical strategies to increase your franchisee’s compliance with employment law obligations. In doing so, you can get a head start on the new laws.