The 7-Eleven scandal, which involved unlawful conduct by franchisees such as requiring employees to pay back a significant amount of their wages and falsely recording data, sparked a thorough investigation by the Fair Work Ombudsman. Following the release of the Ombudsman’s report, the Australian government announced its policy to protect vulnerable workers in light of the saga.

The Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017 (the Bill) has been recently introduced to Parliament and proposes changes to workplace laws targeted specifically at franchisors and holding companies of franchise systems. The Bill aims to address the concerns regarding the exploitation of workers in franchise systems and to make franchisors more accountable for breaches of workplace laws by their franchisees.

Key Changes

The Bill’s main changes propose to:

• introduce ‘serious contraventions’ of the Fair Work Act 2009 (Cth) (Act) with high penalties
• make franchisors and holding companies of franchise systems responsible for various contraventions of the Act by their franchisees or subsidiaries (e.g. underpayment of wages)
• prohibit employers from unreasonably requiring employees to make payments for the employer’s benefit (e.g. pay back part of their wages)
• increase the Fair Work Ombudsman’s evidence-gathering powers to ensure investigations can be properly carried out

Serious Contraventions

If enacted, the Bill will introduce ‘serious contraventions’ for the Act’s civil remedy provisions, which include contraventions such as not paying lawful wages, requiring employees to pay back part of their wages, not keeping employee records, not giving pay slips etc. Contraventions of these provisions currently carry maximum penalties of $5,400 or $10,800 for individuals and $27,000 or $54,000 for bodies corporate.

A serious contravention would occur where a person’s conduct was deliberate and part of a systematic pattern. Any matters could be taken into account in finding a systematic pattern of conduct, including the total number of contraventions, the period over which the contraventions occurred, the number of employees affected, and if in addition to the contravention the employer also failed to keep employee records and/or give pay slips.

A body corporate’s conduct would be deliberate if it expressly, tacitly or impliedly authorised the contravention (for example, via a policy, rule, course of conduct or practice). This would not apply where a rogue manager gives the authorisation, provided the body corporate proves it exercised due diligence to prevent the rogue conduct.

Penalties

Serious contraventions would carry a maximum penalty of $108,000 for individuals or $540,000 for bodies corporate – 10 times higher than general contraventions. This is aimed to act as a significant deterrent as currently it may be seen by some employers as an acceptable risk to contravene workplace laws when weighed against the savings of exploiting workers.

Responsibility of Franchisors

Currently under the Act, franchisors can only be accessories to general contraventions of civil remedy provisions if they are “involved” in the contravention (i.e. aid, procure, induce etc).

The other significant changes proposed are in addition to the accessorial liability provisions and are directed at making franchisors and holding companies specifically responsible for contraventions of workplace laws by their franchisees or subsidiaries.

To apply, the franchisee’s business must be substantially or materially associated with the branding of the franchise and the franchisor must have a significant degree of influence or control over the franchisee’s affairs. This means the changes will not extend to other arrangements, such as distribution agreements.

A franchisor or master franchisor will be responsible if its employer franchisee or subfranchisee contravenes a civil remedy provision and either:

• the franchisor or one of its officers knew or could reasonably be expected to have known that the contravention by the franchisee would occur; or
• at the time of the contravention by the franchisee, the franchisor or one of its officers knew or could reasonably be expected to have known that a contravention by the franchisee of the same or a similar character was likely to occur.

A franchisor’s holding company will also be responsible if either of the above apply and its employer subsidiary contravenes a civil remedy provision.

Avoiding contraventions

Franchisors and holding companies can avoid being penalised by taking reasonable steps to prevent contraventions by its franchisees or employer subsidiary. There is no set standard of what will constitute “reasonable steps”. However, certain matters may be taken into consideration, such as the size and resources of the franchise, the extent to which the franchisor could influence or control employers’ conduct, action taken to ensure employers had reasonable knowledge and understanding of workplace law requirements, the franchisor’s arrangements for assessing employers’ compliance and addressing complaints within the franchise and whether the franchisor’s arrangements encouraged or required employers to comply with the Act.

Foreign franchisors

The Explanatory Memorandum of the Bill states that changes do not propose to extend the obligations to franchisors operating completely outside Australia (e.g. franchisors who have only entered into a master franchisor arrangement with an Australian company and have no operations in Australia). However, this is not specifically dealt with in the Bill. This may be subject to clarification before the Bill is passed by Parliament.

What to do now

Given the proposed changes have bipartisan support, the passage of the Bill is likely to be forthcoming with limited amendments. If enacted, the new provisions will catch any contraventions occurring from 6 weeks after the Bill’s commencement. However, franchisors’ conduct occurring before that time could be taken into account by a court.

Franchisors and holding companies should review their documents and procedures to ensure they are taking reasonable steps to prevent contraventions by their franchisees or employer subsidiaries.

Get in touch with us if you require any assistance reviewing your agreements, policies or procedures or if you need advice on what steps your franchise system should be taking.