In recent times, revelations of systemic breaches of workplace laws in a number of major franchise businesses – including the widely reported investigation by the Fair Work Ombudsman (FWO) into the 7-Eleven franchise last year – have generated significant public concern.

They have also prompted calls for Australia’s workplace laws to be amended to increase the responsibility of franchisors to monitor and take action in relation to activities occurring within their business networks (see our previous commentary on this here).

In response, the Coalition Government has introduced the Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017 (the Bill) into Parliament. The Bill proposes to introduce a number of amendments to the Fair Work Act 2009 (Cth) (FW Act), implementing the Coalition’s 2016 election policy to address underpayments and other forms of exploitation identified in various inquiries by the FWO and federal and state parliamentary committees.

The most significant changes proposed by the Bill include:

  • Introducing higher civil penalties for ‘serious contraventions’ of prescribed workplace laws, to address concerns that civil penalties under the FW Act are currently too low to effectively deter employers who exploit vulnerable workers.

  • Clarifying and increasing the applicable penalties for provisions relating to the failure by employers to maintain accurate employee records and payslips.

  • Expressly prohibiting ‘cash-back’ arrangements through which employers unreasonably require their employees to make certain payments.

  • Strengthening the evidence-gathering powers of the FWO and introducing new offences for hindering or obstructing investigations, or providing false or misleading information to the regulator.

  • Making franchisors and holding companies responsible for contraventions of certain workplace laws by their franchisees or subsidiaries, where they knew or ought reasonably to have known of the contraventions and failed to take reasonable steps to prevent them.

The Bill has been referred to the Senate Education and Employment Legislation Committee, which is due to report on 9 May 2017.

In this article, we explain these proposed changes, with a particular focus on the new liability provisions for franchisors and holding companies, and their likely implications in practice.

1. Higher penalties for ‘serious contraventions’ of workplace laws

The Bill proposes to substantially increase the maximum civil penalties that apply for certain ‘serious contraventions’ of the FW Act. The maximum penalty will increase from $10,800 to $108,000 per contravention for individuals, and from $54,000 to $540,000 per contravention for corporations.

The higher maximum penalties will apply to the following provisions of the FW Act:

  • subsection 44(1) (contravening the National Employment Standards);

  • section 45 (contravening a modern award);

  • section 50 (contravening an enterprise agreement);

  • section 280 (contravening a workplace determination);

  • section 293 (contravening a national minimum wage order);

  • section 305 (contravening an equal remuneration wage order);

  • sections 323, 325 and 328 (method and frequency of payment, unreasonable requirements to spend an amount, etc); and

  • sections 535 and 536 (employer obligations in relation to employee records and pay slips).

The higher penalties will only apply where the contravention was deliberate and formed part of a systematic pattern of conduct.[1]

In the case of a corporation, a contravention is deliberate if it is expressly, tacitly or impliedly authorised by the corporation[2] (considering the corporation’s actions as a whole). Such authorisation may be given by an individual within the organisation, or via a policy, rule, course of conduct or practice that exists within the organisation.[3]

The reference to a ‘systematic pattern of conduct’ is intended to capture recurring patterns of methodical conduct, or a series of coordinated acts over time, as opposed to ad hoc or inadvertent conduct.[4]

In determining whether conduct is systematic, a court could have regard to whether other contraventions have been engaged in by the defendant, and if so, the relevant time period and persons affected by those other contraventions.[5]

Conduct is more likely to form part of a systematic pattern where, for example, concurrent contraventions of the FW Act have occurred at the same time (e.g. breaches of multiple award terms and record-keeping failures) or the contraventions also involve inaccurate retention of employee records or non-issuing of pay slips.[6]

2. Higher penalties for record keeping failures

In addition to raising the maximum civil penalties for ‘serious contraventions’, the Bill proposes to amend the FW Act to expressly prohibit an employer from:

  • making or keeping employee records that the employer knows are false or misleading; or

  • giving a pay slip that the employer knows is false or misleading.

The maximum penalty for breaching these provisions is $10,800 per contravention for an individual or $54,000 per contravention for corporations. The maximum penalty would increase to $108,000 for an individual and $540,000 for a corporation in the case of a ‘serious contravention’ (see above).

The amendments are said to be intended to deter the small minority of employers who deliberately fail to keep proper employment records, as part of the systemic underpayment of workers and concealment of wrongdoing.[7]

3. New prohibition on ‘cash-back’ arrangements

The Bill includes a provision which would amend subsection 325(1) of the FW Act to prohibit ‘cash-back’ arrangements, such as those uncovered during the 7-Eleven investigation. These arrangements typically involve employers requiring their employees to pay back a portion of their salary in unrecorded cash payments, as a means of disguising employee underpayments.

The amendment would prohibit an employer from directly or indirectly requiring an employee to spend, or pay to the employer or another person, an amount of money or part of the employee’s wage if:

  • the requirement is unreasonable in the circumstances; and

  • the payment is directly or indirectly for the benefit of the employer or a party related to the employer.

Genuine negotiations following a request for repayment by the employee of amounts overpaid by the employer would be exempt from this prohibition.[8]

However, asking an employee for a ‘cash-back’ payment in a manner that involves undue influence, duress or coercion, or as a requirement of their remaining employed, or with the purpose of undercutting their minimum statutory entitlements, would always be considered unreasonable for purposes of the new prohibition.[9]

The same maximum civil penalties would apply as outlined in sections 1 and 2 above.

4. Enhanced investigative powers for the Fair Work Ombudsman

The Bill also proposes to provide the FWO with new investigative and information-gathering powers, similar to those currently available to the Australian Securities and Investment Commission and the Australian Competition and Consumer Commission.

Significantly, the FWO will be able to issue a person with an ‘FWO Notice’ if the FWO reasonably believes that the person has information or documents relevant to an investigation, or is capable of giving evidence that is relevant to such an investigation. The FWO Notice may require the person to give information, produce documents or attend before the FWO to answer questions (with legal representation if the person so wishes).[10]

The maximum penalty for failing to comply with an FWO Notice is $108,000 for an individual and $540,000 for a corporation.[11] Penalties will also apply to a person who intentionally hinders or obstructs the FWO or its inspectors in the course of their duties.[12]

Several safeguards will apply to persons giving evidence in response to an FWO Notice. If a person has given information, produced documents or answered questions in good faith in response to an FWO Notice, that person will receive immunity from proceedings under any other law in relation to that conduct.[13]

However, the privilege against self-incrimination will not apply to a person giving evidence in response to an FWO Notice.[14] This is considered necessary to ensure that the FWO has all the information it needs to address non-compliance with workplace laws, for example in cases involving exploitation of migrant workers where a stalled investigation may not be concluded before the worker has left Australia.[15]

5. Extended liability for franchisors and holding companies

Currently, franchisees that do not comply with award obligations risk penalties of up to $54,000 per breach, as well as claims for back-payment and compensation going back six years.

The FWO has been particularly active in recent years in clamping down on non-compliance with award conditions. For example, in a recent FWO prosecution, the Federal Circuit Court awarded a record penalty of over $400,000, together with orders for back-payment of wages, against the operator of a 7-Eleven store in Brisbane.[16]

For franchisors, there have been two broad sets of risks, which sit uncomfortably together. One is legal: if a franchisor is ‘knowingly concerned’ in the breach of an award or the FW Act, they risk accessorial liability.[17] The more a franchisor seeks to be involved in its franchisees’ labour arrangements, the greater the risk of such liability. However, the other risk is potentially greater: bad labour practices of franchisees can be toxic for the brand of the franchisor, as seen in the recent scandal surrounding 7-Eleven.

New franchisor liability provisions in the Bill

Under the Bill, if a franchisee contravenes the FW Act (e.g. by not complying with an award),[18] the franchisor will also contravene the Act if it ‘knew or could reasonably have been expected to have known’ that the contravention (or a similar contravention) would occur.[19]

This rule would apply:

  • to franchisors that have a ‘significant degree of influence or control’ over the franchisee’s affairs[20] (e.g. involvement in the franchisee’s financial, operational and corporate affairs[21]); and

  • where the franchisee’s business is substantially associated with the intellectual property of the franchise.[22]

A franchisor will not contravene the new rule if it has taken ‘reasonable steps to prevent the contravention by the franchisee.[23] In considering whether reasonable steps have been taken, a court can consider various factors, including:[24]

  • the extent to which the franchisor had the ability to influence or control the contravening employer’s conduct;

  • any action taken by the franchisor towards ensuring that the contravening employer had a reasonable knowledge and understanding of the FW Act;

  • the franchisor’s arrangements for assessing the franchisee’s compliance with workplace laws;

  • the franchisor’s arrangements for receiving and addressing possible complaints about alleged underpayments; and

  • the extent to which the franchisor’s arrangements with the contravening employer ‘encourage or require’ the employer to comply with workplace laws.

The new provisions in the Bill contemplate that a franchisor can be sued by franchisee employees, their unions or the FWO for non-compliance, both in relation to penalties for the breach and for payments that the franchisee owes employees.[25] The franchisor can then take action against the franchisee to recover the payments owed to employees, but not in relation to penalties.[26]

The maximum penalty for contravening the new franchisor liability provisions would be $10,800 for an individual or $54,000 for corporations.

Extension of liability to holding companies in corporate groups

Adopting the same principles through which liability for FW Act breaches would be extended to franchisors (see above), the Bill would also make holdings companies liable for contraventions by their subsidiaries – where the holding company (or one of its officers) knew or could reasonably be expected to have known that those (or similar) contraventions would occur or were likely to occur.[27]

Implications of the new liability provisions

These proposed new provisions in the Bill are aimed at franchisor/franchisee and holding company/subsidiary arrangements which ‘operate on a business model based on underpaying workers. Some have either been blind to the problem or not taken sufficient action to deal with it once it was brought to their attention.’[28]

The Bill has important implications for franchisors in particular.

  • Firstly, whereas previously, franchisors would only be liable for franchisee labour transgressions where they were accessories to the contravention, the bar of liability will be lowered. Franchisors will be exposed to legal liability to penalties where they could reasonably be expected to have known of the contravention.The courts will likely take an expansive approach to the question of what a franchisor could reasonably be expected to have known about its franchisees’ labour arrangements. The factors that are relevant to whether a franchisor has taken ‘reasonable steps’ to prevent a contravention by franchisees (see above) are all proactive, robust measures designed to put in place systems to minimise the risk of contraventions or remedy their effects.Not complying with all of these measures would not necessarily mean that the franchisor has breached the proposed new liability provisions – it just means that the statutory defence would not be available.[29] However, a court is likely to view the absence of these measures as an indication that the franchisor ‘should have known’ about the risk of contraventions. In this regard, franchisees are in many cases small businesses with a minimal human resources function and limited experience in the area of workplace relations. As a result, they can overlook (or in some cases even disregard) their legal obligations to employees.

  • A second important implication is that employees and unions can now target franchisors not just for penalties, but for underpayment of wages. It opens the door to the possibility of class actions and generally makes the task of recouping wages for underpaid employees much easier. In addition, the FWO has greater powers to investigate and prosecute suspected breaches.

  • Thirdly, the new liability provisions and the higher penalties will attract significant attention not just from franchisee workers, their unions, lawyers and the regulator, but also from the media. This will continue to magnify the impact on a franchisor’s brand in the event of claims being made.