Franchisors will need to carefully examine their role in the compliance activities of their Australian franchisees as a result of legislation passed in the Australian parliament on 5 September 2017.

The Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017 has important operational implications for franchisors. Some of the changes are specifically directed at franchisors and will be a focus of the Fair Work Ombudsman’s compliance efforts.

The new legislation is designed to deter franchisors (including sub-franchisors) with “significant influence or control” over their networks from turning a blind eye when their franchisees breach Australian workplace laws. There are some key changes to the Fair Work Act 2009 and franchisors may need to consider any action they may take to address this new regulatory risk.

The changes commence at the beginning of November 2017, but courts may have regard to conduct that occurred or circumstances existing in the six weeks leading up to commencement.

The new legislation was developed in response to widespread media coverage regarding the exploitation of vulnerable workers by some franchisees in several large franchise systems. The issue has been examined in a number of reports, including in an inquiry by the Fair Work Ombudsman, which revealed systematic underpayment of migrant workers and the practice of some franchisees to require employees to repay wages in cash.

Overview of amendments

Scope of liability. If the legislation applies to a franchisor under the tests below, they may be liable for penalties of up to A$63,000 (US$49,000) per breach, or A$630,000 per breach if serious and systematic, if the franchisor is considered to be involved and the franchisee contravenes any of a wide range of employment laws in their capacity as a franchisee of the franchisor. These laws include requirements to provide minimum wages and to comply with industrial awards or workplace determinations, with provisions against misrepresenting employment as an independent contracting arrangement, and failing to maintain required records.

Responsible franchisor entity. The new legislation imposes liability on a “responsible franchisor entity” if it knew, or could reasonably be expected to have known, that the contravention by the franchisee would occur, or that a contravention by the franchisee of the same, or a similar character, was likely to occur.

A franchisor will only be a “responsible franchisor entity” if the following three elements are met.

First, there needs to be a “franchise” relationship. The concept of franchise in the act is considerably broader than under the Franchising Code. It includes any “arrangement under which a person earns profits or income by exploiting a right, conferred by the owner of the right, to use a trademark or design or other intellectual property, or the goodwill attached to it, in connection with the supply of goods or services”. The use of this definition will likely extend liability beyond business format franchises to mere trademark licences, and to many co-operative arrangements and certain dealerships.

Second, a “franchisor” will only be a responsible franchisor entity if it has a significant degree of influence or control over the franchisee entity’s affairs. This is intended to be read broadly, to apply to the franchisor’s involvement in the franchisee’s financial, operational and corporate affairs, but it is recognized that not all such “franchisors” will have the required influence or control. Efforts to contain this to control only, and to involvement in employment affairs, did not succeed. As a result, Australian franchisor liability for the employment affairs of franchisees will now be broader than in some other jurisdictions.

Third, the franchisor must have known, or could reasonably be expected to have known, that the contravention by the franchisee would occur.

‘Reasonable steps’ defence

A responsible franchisor entity will not contravene this provision if it had taken “reasonable steps” to prevent a contravention by the franchisee of the same or of similar character. In determining whether it took reasonable steps, a non-exclusive list of factors to which a court may have regard includes:

  • the size and resources of the franchise;
  • the extent to which the franchisor had the ability to influence or control the franchisee’s conduct;
  • any action the franchisor took directed towards ensuring that that franchisee had a reasonable knowledge and understanding of the legal requirements;
  • the franchisor’s arrangements (if any) for assessing the franchisee’s compliance;
  • the franchisor’s arrangements (if any) for receiving and addressing possible complaints about alleged underpayments or other contraventions; and
  • the extent to which the franchisor’s arrangements (whether legal or otherwise) with the franchisee encouraged or required the franchisee to comply with workplace laws.

The legislature recognized that due to the diverse range of business models, industries and sizes of franchisors, what is reasonable will vary with the circumstances. However, it is clear that, depending on the size of the franchisor, the Fair Work Ombudsman may expect certain franchisors to provide compliance handbooks, conduct compliance audits or introduce a compliance hotline.

The bill does not exempt a responsible franchisor entity with no place of business in Australia. However, some connection between Australia and the franchisor entity, other than merely entering into a master franchise agreement, is likely to be required.

In determining whether a franchisor has taken “reasonable steps” to prevent a contravention by a franchisee, a court may have regard to all relevant matters, including:

  • the extent to which the franchisor could influence or control the contravening employer’s conduct;
  • any action taken by the franchisor to ensure the franchisee had a reasonable knowledge of the requirements for compliance with Australian workplace laws; and
  • the extent to which the arrangements between the franchisor and franchisee (e.g., franchise agreement) encourage or require compliance with Australian workplace laws.

Australian franchisors will need to become more vigilant in monitoring and auditing the compliance of their franchisees with workplace laws, and be prepared to take action if contraventions occur. However, franchisors will need to tread carefully, as the Franchising Code does not currently allow a franchisor to immediately terminate a franchise agreement if a franchisee has violated workplace laws. Strict and specific instructions to comply with Australian workplace laws should be included in franchise agreements and manuals, and compliance should be monitored closely by franchisors to reduce the risk of brand damage or regulatory action.

Business Law Digest is compiled with the assistance of Baker McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker McKenzie by emailing: Danian Zhang at danian.zhang@bakermckenzie.com, or for general enquiries contact Anand Ramaswamy at anand.ramaswamy@bakermckenzie.com