Legal Insights

New proposed laws for franchisors to be directly liable for a franchisee’s contraventions

• 14 March 2017 • 5 min read
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Proposed Bill creates a centralised system of compliance in the franchising industry, for certain employment obligations

Over the past year, there has been an increased focus on employment compliance issues in the retail and fast food industry.

A number of high profile brands have been the subject of scrutiny by the Fair Work Ombudsman (FWO), the Courts and the media, due to alleged (and proven) contraventions of the Fair Work Act 2009 (FW Act) by franchisees.

On 1 March 2017, the Federal Government followed through on its pre-election promise to introduce greater protections for vulnerable workers, particularly those employed in franchise systems, by introducing the Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017 (Proposed Bill) into the House of Representatives.

We expect the Proposed Bill will receive sufficient support in the Senate to be passed in substantially the same form.

The Proposed Bill

The Proposed Bill seeks to amend the FW Act as follows:

Impose liability on certain ‘responsible franchisor entities’ and holding companies for certain contraventions

For those franchisors who meet the definition of a ‘responsible franchisor entity’ (an entity that has a ‘significant degree of influence or control’ over a franchisee), the Proposed Bill will introduce a ‘self-executing’ liability regime that removes the need to establish that a franchisor had ‘actual knowledge’ of, and was involved in, a franchisee’s contravention.

Under this regime, a responsible franchisor entity will contravene the FW Act whenever a franchisee contravenes a specified provision of the FW Act, if, at that time, the responsible franchisor entity (or an officer of the entity) knew, or could reasonably be expected to know, the contravention would occur, or was likely to occur. The specified provisions in the FW Act generally relate to underpayments of wages and conditions, unlawful deductions and record keeping.

The only defence to this liability regime will be if, at the time of the franchisee’s contravention, the responsible franchisor entity had taken reasonable steps to prevent a ‘same or similar’ type of contravention by the franchisee. The Proposed Bill sets out a non-exhaustive list of factors to be considered in determining whether ‘reasonable steps’ have been taken, including:

  • the size and resources of the franchisor
  • whether the franchisor has taken steps to ensure the franchisee knew and understood their relevant obligations (i.e. an obligation to educate franchisees)
  • any proactive measures in place to assess or audit the franchisee’s compliance, to elicit information about non-compliance, or to ‘encourage or require’ compliance.

Importantly, the Proposed Bill permits legal proceedings to be brought directly against a responsible franchisor entity, without first bringing proceedings against the relevant franchisee.

A contravention of this new provision will mean a responsible franchisor entity is liable for a civil penalty. In addition, it is likely the Courts will also make orders that a responsible franchisor entity rectify the relevant underpayments by the franchisee, although the Proposed Bill includes a mechanism for a responsible franchisor entity to recover these amounts from the franchisee in question.

Equivalent provisions to the above exist for holding companies, in respect of contraventions by their subsidiaries.

Additional protections

The Proposed Bill will also introduce:

  • the concept of ‘serious contraventions’. A serious contravention will be any contravention of the FW Act that is both ‘deliberate’ and ‘part of a systematic pattern of conduct relating to one or more other persons’. The maximum penalty for a serious contravention of the FW Act will be up to $108,000 for individuals and $540,000 for bodies corporate
  • new provisions preventing ‘cashback’ deductions made by employers (where an employer pays an amount to an employee and then requires the employee to repay some or all of this amount)
  • increased compliance powers for the FWO.

Implications for franchisors and holding companies

If passed, the Proposed Bill will create a ‘centralised’ system of compliance in the franchising industry, for certain employment obligations. It is likely franchisors will more frequently become the direct target of the FWO, unions and franchisees’ employees, where it is alleged that a franchisee has failed to pay correct wages or to comply with other terms and conditions.

For those franchisors who traditionally placed themselves at ‘arm’s length’ from their franchisees’ employment arrangements, the Proposed Bill will prompt the need for a fundamental change in approach. Franchisors will no longer be able to rely on a lack of knowledge or involvement in the local employment practices of its franchisees, as a way of avoiding legal liability. Instead, it will be incumbent on franchisors to implement and maintain a proactive compliance system that satisfies the ‘reasonable steps’ defence.

This will require immediate action, as it is proposed the provisions will take effect six weeks after the Proposed Bill commences operation.

How Maddocks can assist

Prudent franchisors should consider and assess the potential implications of the Proposed Bill now.

Maddocks Employment, Safety & People and Franchising teams can work with your franchise system to:

  • determine whether the franchisor liability regime will apply to your system
  • develop and tailor a compliance system for your franchise network, including by delivering training, providing template documents, conducting audits and establishing reporting or ‘whistleblower’ systems
  • ensure that steps taken are consistent with provisions under your franchise agreements and your obligations as a franchisor.
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