Australia has enacted a law with potentially far-reaching joint employer implications for both Australian and American franchisors. The Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017 could cause many of the 1,100 franchisors offering franchises in Australia to be held liable for any failure by their franchisees to adhere to employment and labor laws. As a result, franchisors may need to consider restructuring their relationships with their Australian franchisees and whether the benefits of continuing to franchise in Australia outweigh the potential liability risks.

Even for American franchisors without any franchisees in Australia, the success or failure of the proposed policies could influence future developments in the joint employment arena in the United States.

The new law, enacted in mid-September, amends the Fair Work Act 2009, which governs the employer/employee relationship, prevents discrimination against employees and provides minimum entitlements. In addition to other provisions generally strengthening the enforcement mechanisms and penalties within the Fair Work Act 2009, legislators included provisions to specifically target the franchise industry in response to a number of high profile instances where franchisees were accused of significant wage fraud.

Specifically, the law obligates "responsible franchisor entities" to take reasonable steps to ensure that franchisees comply with employment laws. Beginning on October 27, 2017, if a franchisee violates the Fair Work Act, a responsible franchisor entity could be found to be directly liable for enforcement actions brought by regulators or civil actions by employees or groups of employees, if it did not implement sufficient measures to attempt to avoid such violations.

The bill defines "responsible franchisor entities" expansively, including any person who grants a right to use intellectual property in connection with the sale of goods or services and has "significant degree of influence or control over the franchisee entity's affairs." As the law does not limit the control element to control over workplace conditions and employment matters, nearly all franchisors, as well as many licensors and distributors, would likely qualify as a responsible franchisor entity for any franchisee with whom they enter into a relationship.

A responsible franchisor entity may be held liable for the actions of its franchisees if it or one of its officers "knew or could reasonably be expected to have known" that the violation by the franchisee would occur or that a violation of the same or a similar character was likely to occur. However, a responsible franchisor entity can defend itself against such allegations if it can show that it has taken reasonable steps to prevent such a violation.

In considering whether the steps taken by a franchisor are reasonable, the amendment provides that a court may consider (but is not obligated to consider):

  1. the size and resources of the franchise
  2. the extent to which the franchisor had the ability to influence or control the employer's conduct
  3. any action the franchisor took directed towards ensuring that the franchisee employer had a reasonable knowledge and understanding of the law's requirements
  4. the franchisor's arrangements for assessing the franchisee employer's compliance
  5. the franchisor's arrangements for receiving and addressing possible complaints about alleged underpayments or other alleged violations of employment laws and
  6. the extent to which the franchisor's arrangements (whether legal or otherwise) with the franchisee employer encourage or require the franchisee to comply with employment-related laws.

Unfortunately, these categories are fairly vague, making it difficult for franchisors to know what they can or should do to reduce the potential liability risk. For example, it may be presumed that most foreign franchisors would be less likely to know about a possible violation than a local franchisor that is geographically closer to its franchisees and more familiar with local laws. However, the regulator (known as the Fair Work Ombudsman) or an employee could take the position that a foreign franchisor should have known that violations would occur if they failed to take any steps to ensure that franchisees are compliant with applicable employment laws.

On the other hand, if a foreign franchisor proactively take steps to implement oversight and enforcement programs, it may be easier to establish that such franchisor knew or should have known about a violation, putting the burden on the franchisor to establish that it has taken reasonable steps to minimize the risk of such violations.

Proactive steps in the face of uncertainty

While it is not clear what exactly franchisors must do, it is certainly advisable to take some immediate steps to attempt to reduce potential liability. To that end, franchisors with franchisees in Australia should, at a minimum, immediately assess potential liability risks in their franchise operations, evaluating what compliance programs are currently in place related to employment matters and what rights the franchisors have under their current agreements to police such matters.

After conducting this assessment, franchisors who have taken a passive approach overseeing their Australian franchisees may conclude that it is necessary to assume a more active role, which could involve added resources and expenses. Franchisors may also need to consider options such as implementing comprehensive employment law training programs, robust inspection, auditing, and reporting programs, whistleblower and employee complaint systems, and aggressive internal enforcement procedures. To give the franchisor adequate power to conduct such oversight and to enforce such obligations, franchisors may need to revise both existing and future franchise agreements, potentially restructuring certain aspects of such relationships and improving indemnification provisions.

While there is hope that the regulator will provide guidance as to how it intends to enforce the law, franchisors are faced with significant uncertainty and risk until such industry standards and guidelines emerge. Even then, the plaintiffs' bar could decide to routinely name franchisors in all employee-franchisee actions, forcing franchisors to frequently defend their programs.

It may take a long time for a consensus to emerge between courts and regulators on what steps are adequate and appropriate to protect franchisors from such risks. As a result, franchisors considering whether to enter, or whether to continue to expand in, the Australian market may choose to re-evaluate whether and how to implement such a strategy.

For franchisors with US operations, the impact of the law on Australian franchise systems may also prove influential in future joint employer policy debates. If the amendment causes franchisors to stop franchising in Australia or significantly changes the economic calculus of such operations, then public policy arguments against imposing joint employer liability on franchisors for the actions of franchisees may be strengthened. On the other hand, if Australian legislators are correct that the amendment will help to protect vulnerable workers by causing franchisors to more effectively influence franchisee compliance without causing any damage to the franchise model, efforts to impose joint employer liability in the United States may be emboldened.

As a result of the impact of this law on both Australian and US franchisors, we intend to keep a close eye on the implementation of the law and its impact. Please feel free to contact us for more information about the amendment and its potential impact on your franchise system.