In 2016, a number of high-profile franchises were caught underpaying their staff. To strengthen Australia’s existing employment law framework, the Federal Government has introduced the Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017 (the Bill). The Bill seeks to amend the Fair Work Act 2009 (Cth) (the Act) which presently sets out an employer’s obligations and employee rights in the workplace.

Specifically, the new laws will hold the franchisor responsible for a franchisee’s workplace violations if the franchisor:

  • had significant control or influence over the franchisee,
  • knew or should have known about the underpayments, or
  • failed to take reasonable steps to prevent the violations.

We set out below how the Bill will likely affect franchisors and how it differs from existing protections in the Act.

Franchisor’s Liability

Under the proposed Bill, a franchisor will, in certain circumstances, become liable where a franchisee or one of the franchisor’s subsidiaries violates specific sections of the Act. For example:

  • National Employment Standards,
  • Modern Awards,
  • Methods and frequency of payments, and
  • Record-keeping obligations.

These changes are intended to widen the ‘accessorial liability’ principle under the Act as it applies to the franchise industry.

Accessorial liability means that an individual or company ‘involved in’ the breach could also be potentially responsible in situations where they were not directly participating in the breach itself.

A person can be involved if they:

  • assisted or encouraged the breach, or
  • were knowingly concerned to the breach, or
  • conspired with others to effect the breach.

For example, if a franchisee is caught underpaying its employees, the franchisor may be ‘involved in’ the breach if they knew and/or participated in the decision making process for making and setting wages.

The proposed amendments will apply to both franchisors and master franchisors if they exercise a ‘significant’ level of influence or control over the franchisee’s activities.

A franchisor may be liable if it knew (or could reasonably be expected to have known) that:

  • the franchisee would breach the provision of the Act; or
  • it was likely that violations of the same or a similar nature would occur.

There must be a reasonable basis for the franchisor to believe either:

  • that the franchisee would breach the relevant obligation, or
  • that the same or a similar breach would likely occur.

In relation to the level of knowledge required, the person bringing the proceedings (usually the Fair Work Commission) does not need to show that the franchisor actually knew about the breaches or the likelihood of the breaches arising.

Importantly, a franchisor’s obligations will not extend to foreign companies that have entered into a master franchise agreement but do not have any operations in Australia.

A worker can commence proceedings against a franchisor regardless of whether the franchisee has been found responsible for the breach. Under the new Bill, franchisors could face maximum penalties of $10,800 (for individuals), or $54,000 (for companies).

Higher Penalties

The Bill increases penalties for ‘serious contraventions’ of specific parts of the Act, and failures to maintain proper records. A serious contravention is conduct by an individual or company that is:

  • deliberate (or intentional); and
  • forms part of a systematic pattern of conduct, where such conduct occurs in relation to at least one person.

A civil remedy provision under the Act includes a breach of the National Employment Standards or a modern Award. Individuals who engage in serious contraventions of specified civil remedy provisions face a maximum penalty of 600 penalty units, or $108,000. Companies could face a maximum penalty of $540,000. This is a tenfold increase in the penalty than presently under the Act. The Government’s stated rationale behind the increase is to deter against exploiting workers more effectively.

The Bill includes an express prohibition on any unreasonable request by an employer for their employees to make wage back-payments to the business. For example, an unreasonable request would include franchisees who pay their workers the full Award rate but then ask their employees to pay a portion back to the franchisee.

The explanatory memorandum for the Bill specifically references the Inquiry into the 7-Eleven scandal and their involvement in ‘cashback’ practices. In late 2016, the convenience chain faced fresh scrutiny after some franchisees reportedly paid their employees the lawful rate, and then coerced their employee to pay back a portion of their wages in cash. In some cases, the franchisee then deliberately falsified records to disguise these underpayments. As a result, this manipulation of the books left the impression that the franchisee was lawfully paying their workers.

A franchisor could be found liable under the existing accessorial liability provisions, or the proposed amendments discussed above.

The new Bill aims to provide the Fair Work Ombudsman (FWO) with greater investigative and enforcement powers. For example, the FWO could issue a notice to individuals requesting an interview and conduct the interview under oath or affirmation. A recipient must comply with the contents of any notice (including any requirement to answer questions). If you respond to questions under an oath or affirmation and make false statements, you may face further consequences. The FWO can issue notices to both individuals and companies.

Under the proposed amendments, it would be a civil offence to make the FWO’s work more difficult intentionally. There is also a prohibition on providing false/misleading information.

The key element of the proposed amendments is that the person providing the information or documents must know that they are incorrect or are misleading. For example, knowingly creating false employee records. There is an exception if the business accidently provides information or documents to the FWO.

As parliament debates the Bill, it may undergo further changes. However, in its current form, the Bill significantly broadens the circumstances in which franchisors can be responsible for employment law breaches by their franchisees. Franchisors should begin to implement audit and review procedures now in anticipation of greater scrutiny by the FWO, regardless of the final wording of the legislation.