The Federal Parliament this week passed the Fair Work Amendment (Protecting Vulnerable Workers) Act 2017 (the Act), with some last minute amendments agreed to by the Government. This new legislation marks a significant change in the risk profile for franchisors with respect to workplace relations matters, and specifically payment entitlements of employees within their franchise network.

What do I need to Know?

There are significant implications for franchisors and holding companies, where their franchisees or subsidiaries fail to pay their employees their entitlements. There is also the potential for other arrangements (such as licensing arrangements) to get caught in the expanded net.

Further, all employers now potentially face greatly increased fines for serious contraventions.

What do I need to do?

Franchisors and holding companies should closely review their structures and practices in light of the increased risk of being liable for the breaches of workplace laws by franchisees and subsidiaries.

Liability for Franchisors and Holding Companies

The Act represents a significant change in the level of responsibility that holding companies and franchisors may now have for contraventions relating to employee entitlements by subsidiaries or franchisees.

Under the accessorial liability provisions in the Fair Work Act, a franchisor would need to be considered to be 'involved' in the breach to be held liable. Under the new provisions, the Courts will look to what the franchisor knew or ought to have known, and did or should have done to prevent the contravention. This will significantly lower the bar in respect of liability.

A franchisor will be liable for the contraventions of its franchisees if:

  • the franchisor has a significant degree of influence or control over the franchisee entity's affairs. This establishes the franchisor as a 'responsible franchisor' and therefore captured by the legislation
  • the contravention by the franchisee occurs in the franchisee's capacity as a franchisee entity
  • the responsible franchisor entity or an officer of it knew or could reasonably be expected to have known that the contravention would occur.

A defence to liability exists where a responsible franchisor entity can show that, at the time of the contravention, the franchisor had taken reasonable steps to prevent the contravention. The Act sets out a range of matters for the Court to consider in assessing whether reasonable steps have been taken by the franchisor.

Holding companies will also be liable for the contraventions of their subsidiaries if the holding company or an officer of it knew or could reasonably be expected to have known that the contravention would occur.

Implications for Franchisors

According to the Franchise Council of Australia, franchises account for 1,100 brands across Australia, supporting 79,000 separate small businesses that, between them, employ some 472,000 people.

In light of this new legislation, franchisors should:

  • review their franchising arrangements, and in particular the degree of influence franchisors have over their franchisees' arrangements
  • consider their level of involvement in the affairs of their franchisees, and whether this means that they would be considered a Responsible Franchisor Entity, for the purposes of the Act
  • consider what reasonable steps are appropriate within the franchising network to ensure compliance with pay related obligations.

Increased Penalties for Serious Contraventions

The new law will also provide for increased maximum penalties for 'serious contraventions' of pay related entitlements. These new maximum penalties are 10 times the maximum penalties currently available under the Fair Work Act ($630,000 for corporations and $126,000 for individuals per contravention). These changes apply to all employers, not just in circumstances of holding companies or franchise arrangements.

A contravention will be considered 'serious' if the contravention was committed 'knowingly' and the person's conduct was part of a systematic pattern of conduct relating to one or more persons. A body corporate will be taken to have knowingly engaged in a contravention if it expressly, tacitly or impliedly authorised the contravention.

The court will be required to take a range of matters into account in establishing whether a contravention was part of a systematic pattern of conduct, including the number of contraventions, the period of time over which they occurred and whether there was a failure to respond to any complaints regarding the contravention.

Other Changes 

The Act also introduces other changes to the Fair Work Act. These changes are relevant for all employers, and include:

  • increased penalties for contraventions relating to employee records and pay slips. These fines have been doubled and their increase is aimed at preventing employers from failing to keep proper records as a means of covering up the existence of underpayments
  • a reverse onus of proof where an employer fails to provide employee records when under an obligation to maintain them. In other words, if an employer cannot produce records that it was required to maintain, it will be assumed that the underpayment has occurred unless the employer can provide otherwise
  • greater powers for the Fair Work Ombudsman when investigating potential pay related contraventions.

These changes are all intended to prevent 'rogue' employers from exploiting vulnerable workers, but all employers should take careful note of them.