Proposed Fair Work Act changes put franchisors at risk


A series of recent reports about underpayments in franchised businesses should have caused those who abide by the rules to consider whether their franchise operations contained adequate workplace compliance systems. However, even imprudent franchisors would probably not realise that they could be directly liable for problems with their franchisees.

That looks set to change, with the Federal 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 slew 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 those 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;
  2. 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”.

Risks for HR staff working for franchisors

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.

Crucially for HR professionals, section 550 of the Act can allow for personal liability to attach to individuals (including those working in HR) who have been involved in the franchisor’s contravention.

(When can you be found personally liable as an HR pro? Watch this expert explain.)

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

How do you get compliant?

That then raises the question, what are these “reasonable steps”?

“All relevant matters” must be considered, which includes considering such things 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 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. It will not 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? 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.

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Proposed Fair Work Act changes put franchisors at risk


A series of recent reports about underpayments in franchised businesses should have caused those who abide by the rules to consider whether their franchise operations contained adequate workplace compliance systems. However, even imprudent franchisors would probably not realise that they could be directly liable for problems with their franchisees.

That looks set to change, with the Federal 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 slew 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 those 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;
  2. 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”.

Risks for HR staff working for franchisors

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.

Crucially for HR professionals, section 550 of the Act can allow for personal liability to attach to individuals (including those working in HR) who have been involved in the franchisor’s contravention.

(When can you be found personally liable as an HR pro? Watch this expert explain.)

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

How do you get compliant?

That then raises the question, what are these “reasonable steps”?

“All relevant matters” must be considered, which includes considering such things 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 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. It will not 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? 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.

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