Proposed Fair Work Act changes put franchisors on the hook for franchisee underpayments

A series of recent news reports about underpayments in franchised businesses should have caused prudent franchisors to consider whether their franchise operations contained adequate workplace compliance systems.  However, even imprudent franchisors would probably not have considered that they might face the risk of direct liability for the sins of their franchisees.

That looks set to change, with the Government introducing legislation on 1 March 2017 to make a number of amendments to the Fair Work Act (“the Act”). The “Protecting Vulnerable Workers” Amendment Bill contains a number of changes, such as increasing penalties for “serious contraventions” of the Act, and amending existing parts of the Act to clarify that employers cannot demand “cash back” from their employees.  However, the changes which are likely to be the most controversial are changes which, for the first time, expose franchisors to liability for breaches of the Act committed by their franchisees.

It is true that the scope for franchisor liability is reasonably narrow.  According to the new section 558B (which perhaps, given recent news coverage, should have been called section 711) the franchisor will only be liable if:

  1. there is a contravention of a civil remedy provision by a franchisee; and;
  1. the franchisor, or its officers, either knew, or could reasonably have been expected to know, that the contravention either “would occur” or “was likely to occur”.

Liability under section 558B is bad news all round – not only does the franchisor face exposure to civil penalties, but orders can also be made under section 545 of the Act requiring the franchisor to directly compensate underpaid employees of the franchisee.  In that circumstance, the franchisor is given a legal right to recover from the franchisee any money which the franchisee pays, but if the franchisee has gone broke (leaving the employees unpaid in the first place) such a right of recovery may be effectively worthless.  It is also important to note that section 550 of the Act can allow for personal liability to attach to individuals (including HR professionals) who have been involved in the franchisor’s contravention.

However, the franchisor will be off the hook completely if the franchisor can show that it has taken “reasonable steps” to prevent the contravention (or a similar contravention) by the franchisee.

That then raises the question, “what are these “reasonable steps”?”  “All relevant matters” must be considered, which includes considering such matters as the size of the franchise, the extent of the franchisor’s control over the franchisee, and the extent to which the franchisor has systems for assessing and encouraging (or requiring) compliance with the Act.

So, what does this mean for franchisors?  Some franchisors might think that a “hands-off” approach is warranted, on the basis that if the franchisor has no control over the payment of wages, the franchisor’s “reasonable steps” will be simpler.  However, this is unlikely to be the most sensible approach.  Nor will it be sufficient for a franchisor to point to generic clauses in franchise agreements which require franchisees to comply with all laws.  The better position is likely to involve the provision to franchisees of training and advice which is directed to the particular needs (and the particular industrial issues) likely to arise in the industry in which the franchise is operating.

When should franchisors (and most importantly, their HR professionals) start to prepare for these new requirements?  Unsurprisingly, there is no time like the present.  At this stage, there is no indication of when the new requirements will commence, but even given the current logjam in the Senate, it is hard to see that too many politicians will be keen to hold up the progress of a Bill with “Protecting Vulnerable Workers” stamped across the front.  Lawyers love being involved in test cases on new legislation, but clients love them a  great deal less; unless you want your franchise group to be the test case, you should start thinking about your compliance strategy now.

For more on our franchising law capabilities, contact Philip Stevens or Angus Macinnis or William Han

March 2
Franchising Law