Franchisor Liability and the Fair Work Act

It is a well established principle of Australian law that businesses that illegally exploit their employees can face serious penalties under the Fair Work Act 2009 (Cth) (“Fair Work Act”). It should therefore be unsurprising that franchisees who have engaged in behaviour that illegally disenfranchises their workers can be subject to penalties from the Fair Work Commission.

Franchisors should be aware however, that they may also be liable to penalties arising from a failure by their franchisees to comply with workplace laws.

When is a Franchisor responsible for a Franchisee Contravention?

One of the effects of the implementation of the Fair Work Amendment (Protecting Vulnerable Workers) Act 2017 (Cth) is that franchisors who are considered a responsible franchisor entity can be held liable for breaches of workplace laws by their franchisees.

A franchisor will be considered a responsible franchisor entity if the franchisor is judged to exercise a significant level of control over their franchisee's affairs.

While it is an inherent feature of franchisor/franchisee relationships that the franchisor will exert some control and direction over a franchisee, whether that arises to the standard of significant control will be analysed in the context of:

• the abilities and rights of the franchisor to manage, regulate, determine or command the franchisee regarding financial, operational or corporate matters; and
• how the arrangement between the franchisee and the franchisor works in practice with regard to the level of involvement the franchisor has in relation to the management or operational decisions of the franchisee's business, or influences the franchisee's capacity to create revenue or profits.

A Responsible Franchisor Entity can be vulnerable to contraventions of workplace laws by its franchisees in circumstances where the franchisor knew or could reasonably be expected to have known that a relevant contravention would happen, or could reasonably be expected to have known that a contravention of the same or of similar nature was likely to occur.

Responsible Franchisor Entities who meet the above circumstances may avoid facing liability if they can demonstrate that they took reasonable steps to prevent the contravention occurring.

What constitutes reasonable steps will be determined by reference to;

• The size and resources of the responsible franchisor;
• What complaint handing procedure is utilised by the responsible franchisor for handling potential underpayments or breaches of workplace laws; and
• The methods or tools provided by the responsible franchisor to their franchisees to encourage, assist or train franchisees to comply with workplace laws.

What contraventions can a franchisor be liable for?

The sorts of contraventions by franchisees that franchisors can be held legally accountable for include:

• Entitlements under: 

  • National Employment Standards;

  • Awards, agreements and workplace determinations;

  • National Minimum Wage Orders, equal remuneration orders and guarantees of annual earnings

• Pay slips and Record-Keeping;

• Rules surrounding methods and frequency of payment; and

• Sham Contracting Rules.

What penalties is the franchisor liable for?

Franchisors deemed to have breached workplace laws risk Courts issuing orders against them ranging from franchisors being required to compensate underpaid employees to franchisors paying penalties of up to $13,000.00 for individuals and up to $66,000.00 for corporations (per contravention).

Franchisors who commit more serious contraventions may be subjected to more severe penalties. Serious contraventions can occur when a franchisor knew that a franchisee was breaching an obligation under workplace law and that breach formed part of a systematic pattern of conduct against one or more individuals.

Franchisors who have been ordered to pay amounts to a franchisee’s employees because of a franchisee’s contravention, can apply to a Court to recover the costs from the franchisee.

However, franchisors that have been ordered to pay penalties cannot recover those penalties from the contravening franchisee.

What can franchisors do?

While many franchisors may be concerned about their potential liability, there are a variety of steps that franchisors can take to ensure they are supporting franchisees in compliance with workplace laws.

Prior to Entering the Franchise

It is important that franchisors ensure that potential franchisees are made aware of their workplace compliance obligations before becoming franchisees. Franchisors can undertake several actions to maximise compliant franchisees including:

• Encouraging and arranging for prospective franchisees to meet other successful franchisees or observe successful franchisor stores;
• Strongly recommending that prospective franchisees undertake detailed due diligence on the likely costs of labour involved in running a franchise;
• Ensuring that workplace compliance is a term of the franchise agreement; and
• Obtaining annual written guarantees from franchisees that the franchisees are complying and will continue to comply with workplace laws.

During the Term of the Franchise

Franchisors should also take steps during the term of their franchise agreements to maintain workplace law compliance. Such assistance can include:

• Offering franchisees introductory workplace training;

• Assisting franchisees to access quality and affordable workplace compliance advice;

• Establishing clear and constant communication with franchisees about any potential workplace issues and the Franchisor's expectation in connection with the workplace issue;

• Ensuring the employees of franchisees understand that their workplace rights are important and providing channels of communication for them to raise enquiries or complaints; and

• Providing franchisees with resources to maintain and better their workplace strategies.

How to know if there has been a breach?

Unfortunately, workplace issues can still arise even if franchisors implement strong workplace systems. Franchisors should therefore undertake regular audits of franchise businesses within their franchise networks to help locate any breaches of workplace compliance. An audit can include:

• Requiring franchisees to investigate workplace compliance against criteria including minimum wage, superannuation and allowances and have the franchisee and/or its director provide a statement of the results that states that the information reported is accurate; and
• conducting an annual audit of a random sample of the franchisees within the franchise network that examines compliance with workplace laws.

When a breach has been discovered

It is critical that franchisors take immediate action when they suspect or identify an area of workplace law non-compliance within the franchise network. Franchisors will need to identify whether this issue is isolated to one franchisee or whether it is a pervasive problem amongst the franchise network. Doing so can assist franchisors to realise what steps should be taken to resolve the issue whether that be working with franchisees to find a solution, issuing a breach notice or even terminating the franchise agreement.

For more information and assistance on franchisor liability under the Fair Work Act, please see the following links below:

Fair Work Compliance Fact Sheet

https://www.fairwork.gov.au/sites/default/files/migration/723/franchisor-responsibility.pdf

Online Course – Franchisors

https://www.fairwork.gov.au/tools-and-resources/online-learning-centre/workplace-laws-for-franchisors

Online Course – Franchisees

https://www.fairwork.gov.au/tools-and-resources/online-learning-centre/franchisee-workplace-essentials

Fair Work Handbook

https://www.fairwork.gov.au/sites/default/files/migration/712/Fair-Work-Handbook.pdf

Disclaimer

The information in this article is general in nature and is not intended to address the circumstances of any person or other entity. Although we do our best to provide timely and accurate information, we do not guarantee that the information in this article is accurate or that it will continue to be accurate in the future.