Australia - Franchisors should get their houses in order

Since the media exposé into the underpayment of wages and other contraventions by 7-Eleven, Caltex and Dominos, franchisors now have to demonstrate not only the profitability of their franchise models, but also that they are willing to take an active stance to prevent systemic breaches of workplace and immigration laws.

The Bill:

• holds franchisors accountable for the actions of their franchisees in relation to breaches of the even if the franchisee is not prosecuted;
• increases tenfold the civil penalties for 'serious contraventions' of the Act – up to $180,000 for individuals and $540,000 per breach for corporations; and
• gives franchisors a right to recover any underpayment monies paid to franchisee employees (pursuant to a court order), from the franchisee.

With this is mind, there is a genuine risk that the legislation will drive a wedge between franchisor and franchisee as together they navigate the increased costs associated with franchise system compliance issues. Franchisors will be held liable under the Bill for franchisee contraventions and their only defence will be to show that they are taking  reasonable steps to educate their franchisees about their workplace obligations and to have assurance processes in pace in order to monitor compliance.  So who is going to pay for this?

The smartest approach for franchisors is not to wait for the legislation to come into effect, but to immediately begin negotiating and implementing the sorts of structures and systems that will keep both franchisor and franchisee on the right side of the law and preserve the commercial viability of the relationship.

Summary of the amendments to the Fair Work Act 2009 (Cth) (Act)

1. Franchisors and holding companies will be held responsible for certain contraventions of the Act by their franchisees or subsidiaries where they knew or ought reasonably to have known of the contraventions and failed to take reasonable steps to prevent them.
2. Employers will be prohibited from unreasonably requiring their employees to make payments in relation to the performance of work. This has largely come out of the findings in the Fair Work Ombudsman's Inquiry into 7-Eleven report that indicated a practice of some franchisees paying their employees the lawful rate, but then coercing them to pay back to their employer a proportion of their wages in cash.
3. An increase to maximum civil penalties for serious contraventions of the Act, where there are aggravating factors. The current maximum penalties will increase substantially to $108,000 for corporations. The increases are intended to act as a deterrent, but also to appease the public reaction to the systemic contraventions that have been detected in recent times. A civil penalty contravention will be a "serious contravention" where the conduct was deliberate and part of a systematic pattern of conduct.
4. Strengthened evidence-gathering powers provided to the Fair Work Ombudsman, similar to those available to corporate regulators such as the Australian Securities and Investment Commission and the Australian Competition and Consumer Commission. This will include the power for the FWO to compel witnesses to give information, produce documents, attend at a time and place specified and answer questions.
5. Increased penalties for record-keeping failures. It is proposed that a contravention of the record-keeping obligations in relation to employee records and pay slips will be a strict liability contravention that will attract a maximum penalty of $10,800 for individuals and $54,000 for bodies corporate. This increase doubles the existing penalties.

The changes to the Act will capture a wide net of franchisor behaviours, as the Bill sets to attribute liability to 'responsible franchisor entities' for the acts of a 'franchisee entity' in circumstances where:

1. the entity is a franchisor (including a sub-franchisor) in relation to the franchise;
2. the entity has a significant degree of influence or control over the franchisee entity’s affairs; and
3. the responsible franchisor entity or an officer (within the meaning of the Corporations Act 2001) of the responsible franchisor entity knew or could reasonably be expected to have known that the contravention by the franchisee entity would occur.

Generally speaking, given that the framework of the franchising model is based on a relatively high level of control or ability to influence the franchisee, franchisors need to place themselves in a defendable position and show that reasonable steps were taken to prevent any contraventions. 

What factors will be taken into account to determine whether reasonable steps were taken to prevent the contravention?

1. the size and resources of the franchise or body corporate;
2. the extent to which the franchisor had the ability to influence or control the contravening franchisee's conduct;
3. any action the franchisor took directed towards ensuring that the contravening franchisee had a reasonable knowledge and understanding of the requirements under the Act;
4. the franchisor’s arrangements (if any) for assessing the contravening franchisee's compliance with the applicable  provisions of the Act;
5. the franchisor’s arrangements (if any) for receiving and addressing possible complaints about alleged underpayments or other alleged contraventions of the Act; and
6. the extent to which the franchisor’s arrangements (whether legal or otherwise) with the contravening franchisee encourage or require the contravening franchisee to comply with the Act or any other workplace law.

Recommended actions

Apart from considering the terms of your franchising agreement, franchisors should also carefully consider any documentation or training provided to franchisees which educates and informs them about workplace laws and compliance requirements. Is the current training sufficient so as to educate franchisees about their obligations? Do you monitor compliance on an ongoing basis and if not, should you start? Do franchisees' employees have an avenue to raise grievances/complaints?

Without a doubt, the new liability for franchisors and the substantial increase in civil penalties are both excellent reasons and a good opportunity for franchisors to review their compliance systems in terms of franchisees' operations and take action where necessary, before the legislation is passed. Whilst most of the provisions will commence when the amendments to the Act commence (after royal assent), a franchisor will not be held liable for a franchisee's contravention that occurs within the first 6 weeks after commencement. In addition, the changes to the Act are not retrospective in operation.