Franchisors will need to carefully examine their role in the compliance activities of their Australian franchisees as a result of legislation passed in the Australian Parliament on 5 September 2017. The Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017 has important operational implications for franchisors. Some of the changes are specifically directed at franchisors and will be a focus of the Fair Work Ombudsman's compliance efforts.

The new legislation is designed to deter franchisors (including sub-franchisors) with "significant influence or control" over their networks from turning a blind eye when their franchisees breach Australian workplace laws.

In this alert, we outline the key changes to the Fair Work Act 2009 (Cth) and consider action franchisors may need to take to address this new regulatory risk.

The changes will commence six weeks from today. However, courts may have regard to conduct that occurred or circumstances existing before the end of that 6 week period.

Background

The new legislation was developed in response to widespread media coverage regarding the exploitation of vulnerable workers by some franchisees in several large franchise systems. The issue has been examined in a number of reports, including in an inquiry by the Fair Work Ombudsman, which revealed systematic underpayment of migrant workers and the practice of some franchisees to require employees to repay wages in cash.

The Fair Work Act already included accessorial liability for any person "knowingly concerned" in a contravention. This could include if the accessory is “wilfully blind” to the contravention, so long as the accessory had actual knowledge of the essential facts making up the contravention. There has been some doubt regarding the level of knowledge that is required to constitute “knowingly concerned”, which is one of the reasons for the changes introduced by the amending legislation.

Even under the current “knowingly concerned” provisions, the Fair Work Ombudsman has increasingly prosecuted accessories as well as principals, and currently does so in more than 90% of cases.

Overview of the amendments

If the legislation applies to a franchisor under the tests below, they may be liable for penalties of up to AUD 63,000 per breach (or AUD 630,000 per breach if serious and systematic) if the franchisor is considered to be involved and the franchisee contravenes any of a wide range of employment laws in their capacity as a franchisee of the franchisor. These laws include requirements to provide minimum wages, to comply with industrial awards or workplace determinations, misrepresenting employment as an independent contracting arrangement and failing to maintain required records.

Responsible Franchisor Entity

The new legislation imposes liability on a "Responsible Franchisor Entity" if it knew or could reasonably be have expected to have known that the contravention by the franchisee would occur or that a contravention by the franchisee of the same or a similar character was likely to occur.

A franchisor will only be a "Responsible Franchisor Entity" if the following three elements are met:

Firstly, there needs to be a 'franchise' relationship. The concept of 'franchise' in the Act is considerably broader than under the Franchising Code. It includes any 'arrangement under which a person earns profits or income by exploiting a right, conferred by the owner of the right, to use a trade mark or design or other intellectual property or the goodwill attached to it in connection with the supply of goods or services'. The use of this definition will likely extend liability beyond business format franchises to mere trade mark licences and to many co-operative arrangements and certain dealerships.

Secondly, a 'franchisor' will only be a Responsible Franchisor Entity if it has a significant degree of influence or control over the franchisee entity's affairs. This is intended to be read broadly, to apply to the franchisor's involvement in the franchisee's financial, operational and corporate affairs, but it is recognised that not all such 'franchisors' will have the required influence or control. Efforts to contain this to control only and to involvement in employment affairs did not succeed. As a result of this, Australian franchisor liability for the employment affairs of franchisees will now be broader than in some other jurisdictions.

In the USA, the controversial Browning-Ferris decision introduced broader joint employer standards for franchisors that requires only 'sufficient control' over the essential terms and conditions of the employment for the franchisor to be deemed a 'joint employer'. Similarly, in Canada, a 'sufficient degree of relationship' between the employee and the franchisor is required in order for a franchisor to be held to be a 'common employer'. By contrast, in Australia, only influence is required, not control, and this 'influence' need not be over the franchisee's employment activities.

Although there has been support for legislative reversal of these decisions overseas, the opposite has occurred in Australia where the legislative have driven the change.

Thirdly, the franchisor must have known or could reasonably be expected to have known that the contravention by the franchisee would occur.

'Reasonable steps' defence

A Responsible Franchisor Entity will not contravene this provision if it had taken “reasonable steps” to prevent a contravention by the franchisee of the same or of similar character. In determining whether it took reasonable steps, a non-exclusive list of factors to which a court may have regard is included, being:

  • the size and resources of the franchise;
  • the extent to which the franchisor had the ability to influence or control the franchisee’s conduct;
  • any action the franchisor took directed towards ensuring that that franchisee had a reasonable knowledge and understanding of the legal requirements;
  • the franchisor’s arrangements (if any) for assessing the franchisee’s compliance;
  • the franchisor’s arrangements (if any) for receiving and addressing possible complaints about alleged underpayments or other contraventions; and
  • the extent to which the franchisor’s arrangements (whether legal or otherwise) with the franchisee encouraged or required the franchisee to comply with workplace laws.

The legislature recognised that due to the diverse range of business models, industries and sizes of franchisors, what is reasonable will vary with the circumstances. However, it is clear that depending on the size of the franchisor the Fair Work Ombudsman may expect certain franchisors to provide compliance handbooks, conduct compliance audits or introduce a compliance hotline.

The Bill does not exempt a Responsible Franchisor Entity with no place of business in Australia. However, some connection between Australia and the franchisor entity, other than merely entering into a master franchise agreement, is likely to be required.

Other provisions of the Bill include:

  • higher penalties for 'serious contraventions' of some provisions of the Act – being 'deliberate' contraventions that form part of a 'systematic pattern of conduct'. These also apply to any person or entity who knew that the franchisee's contravention was 'serious' and who expressly, tacitly or impliedly authorised the conduct. Authorisation could be by an act of an individual or by a policy or practice within the organisation. The maximum penalty for these is now AUD 126,000 for individuals and AUD 630,000 for bodies corporate, per offence; and
  • greater investigatory and evidence-gathering powers for the Fair Work Ombudsman, similar to those already available to regulators such as the Australian Security and Investment Commission and the Australian Competition and Consumer Commission.

What does this mean for franchisors?

In determining whether a franchisor has taken "reasonable steps" to prevent a contravention by a franchisee a court may have regard to all relevant matters, including:

  • the extent to which the franchisor could influence or control the contravening employer’s conduct;
  • any action taken by the franchisor to ensure the franchisee had a reasonable knowledge of the requirements for compliance with Australian workplace laws; and
  • the extent to which the arrangements between the franchisor and franchisee (eg, franchise agreement) encourage or require compliance with Australian workplace laws.

Australian franchisors will need to become more vigilant in monitoring and auditing the compliance of their franchisees with workplace laws, and be prepared to take action if contraventions occur. However, franchisors will need to tread carefully as the Franchising Code does not currently allow a franchisor to immediately terminate a franchise agreement if a franchisee has violated workplace laws. Strict and specific instructions to comply with Australian workplace laws should be included in franchise agreements and manuals and compliance should be monitored closely by franchisors to reduce the risk of brand damage or regulatory action.