Employers, particularly franchisors and holding companies, should remain vigilant – the Fair Work Ombudsman is ready to strike. And when it does, the recent changes to the Fair Work Act aimed at protecting vulnerable workers and holding franchisors to account may see penalties higher than ever before, with maximum penalties increasing to $126,000 per contravention for individuals and $630,000 per contravention for companies.

The Fair Work Amendment (Protecting Vulnerable Workers) Act 2017 (Cth) was enacted to provide increased protection for vulnerable workers.

The need for legislative change was sparked by increased community concern about the exploitation of vulnerable workers, particularly migrant workers, by employers.

In particular, an inquiry into 7-Eleven attracted significant public attention when it revealed the systematic underpayment of workers through a “cash back” practice. 7-Eleven franchisees would pay their employees a lawful rate and later coerce them to pay back a proportion of their wages. The inquiry revealed that this practice was, to a certain extent, aided by the 7-Eleven franchise business model. It has been reported that the agreement between the franchisor and franchisee was such that the franchisee could not be profitable without underpaying or overworking their employees.[1]

The amendments to the Fair Work Act 2009 (Cth) (FW Act) are aimed at curbing unlawful practices such as these through increasing penalties, extending the chain of responsibility for contraventions of workplace laws to franchisors and holding companies, and equipping the Fair Work Ombudsman (FWO) with greater investigatory powers.

When did the changes take effect?

Many of the changes to the FW Act came into effect on 15 September 2017, whilst others commenced on 27 October 2017.

Who is affected by the changes?

The changes apply to all employers, companies and employees covered by the FW Act, but will be particularly important for:

  • Franchisors and holding companies;
  • Vulnerable employees, such as young and migrant workers; and
  • Individuals and companies who do not co-operate with FWO investigations.

Why are the changes particularly relevant to franchisors and holding companies?

The franchise sector publicly lobbied the government to alter the Fair Work Amendment (Protecting Vulnerable Workers) Bill as it progressed through parliament. Franchisors were concerned that the proposed changes, particularly those that recognised a level of control between franchisor and franchisee, would unfairly impact their sector and could deter international companies from entering the local market.

Despite their lobbying, a franchisor can now be held liable in circumstances where it exercised significant influence or control over the franchisee and did not take reasonable steps to prevent contraventions of workplace law before they occurred.

Similarly, a holding company can be liable if it has exercised significant influence or control over a subsidiary in circumstances where the holding company knew, or ought reasonably to have known, that the subsidiary wasn’t following workplace laws and it didn’t take reasonable steps to prevent the contravention.

What are the changes?

Increased penalties for serious contraventions of prescribed workplace laws.

A serious contravention occurs when a person or business knowingly contravenes a workplace law and the contravention was part of a systematic pattern of conduct affecting more than one person.

There was some concern that the penalties under the FW Act were too low to deter employers and that the cost associated with being “caught” was considered an acceptable cost of doing business.

Under the new provisions the maximum penalty for a serious contravention by an individual is significantly higher at $126,000 per contravention. The maximum penalty for a serious contravention by a company is $630,000 per contravention.

Increased penalties for breaches of record-keeping and pay slip obligations.

Increased penalties also apply to businesses that fail to maintain accurate records and fail to ensure that proper payslips are provided to employees. Employers who knowingly provide their employees with pay slips that are false or misleading will also face increased penalties.

Further, employers who do not meet their record-keeping obligations and cannot give a reasonable excuse for the failure will bear the onus of disproving wage claims in the event that the claim is before a court.

Liability for franchisors and holding companies

As mentioned above, the new provisions provide that franchisors and holding companies will be held responsible for underpayments by franchisees or subsidiaries where they knew, or ought reasonably to have known, of the contraventions and failed to take reasonable steps to prevent them.

In a similar vein, officers of the franchisor or holding company can be held liable as an accessory to a contravention by the franchisor or holding company.

Cash back schemes expressly prohibited

Employers are now expressly prohibited from unreasonably requiring their employees to pay them money. This is intended to capture the “cash back” practices that were employed by 7-Eleven franchisees.

Strengthening of the Fair Work Ombudsman’s powers

The evidence-gathering powers of the FWO have also been strengthened to ensure that the exploitation of vulnerable workers can be effectively investigated. The changes give the FWO new avenues to pursue employers and businesses that obstruct investigations by providing false or misleading information.

How will the changes impact employers more generally?

The changes do not significantly alter existing obligations placed on employers under the FW Act. However, the increased penalties for contraventions of workplace laws, including record keeping failures, mean that it is extremely important for employers to be aware of their legal obligations. Employers must have procedures in place to ensure that employee records are accurately kept and up to date.

In a press release issued on 9 October 2017, Fair Work Ombudsman Natalie James said "We will apply the new laws judiciously and fairly but we will not hesitate to use them to the fullest extent to protect vulnerable workers, I encourage franchisors to be proactive in taking steps to promote compliance in their networks."

What’s been the effect of the changes so far?

It is still too early to say whether the amendments to the FW Act will have the desired effect.

A recent study[2], has challenged the perception that vulnerable workers are underpaid because they are not aware of their entitlement to a minimum wage. The report confirmed that ‘”wage theft”, as it has been called, among Australia’s temporary migrant workers is endemic, but also found that the majority of workers surveyed (international students and backpackers) were aware that they were being underpaid.

The new provisions of the FW Act may go some way to protecting vulnerable workers. However, as this new study reveals, other factors, such as immigration-reporting threats, may prevent vulnerable employees from speaking out about unfair and unlawful employment practices.