September 12, 2017

Franchising | QLD

FRANCHISOR ALERT: DON’T LET YOUR FRANCHISE BE THE NEXT SCANDAL – ACT NOW TO PROTECT YOUR FRANCHISE SYSTEM FROM PENALTIES UNDER NEW LAWS

Protecting vulnerable workers bill passed

The Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017 (Bill) was passed by the Senate on 5 September 2017. 

Our previous article concerning this Bill (available here) highlighted the potential risks to Franchisors of this legislation. 

Now that the Bill has passed, it is clear that Franchisors can no longer avoid reviewing their Franchise Systems and networks for compliance issues. 

The Bill achieves a number of objectives of the government arising out of the 7-Eleven Inquiry and Senate Committee Inquiry into the exploitation of temporary work visa holders, including:

  • Increasing maximum civil penalties for certain contraventions of the Fair Work Act 2009 (Act);
  • Making Franchisors and holding companies liable for contraventions of the Act by their Franchisees and subsidiaries; and
  • Increasing the powers of the Fair Work Ombudsman

It is not yet known when this legislation will come into effect, as it must still receive royal assent.  Despite this, Franchisors should not wait for this to occur but should take action now. 

what do the changes mean for franchisors?

The law will apply to franchisors who have a ‘significant degree of influence or control over the franchisee entity’s affairs.’  Significantly, the control is not limited to the Franchisee’s employment practices but extends to affairs generally.  The nature of franchising as a business model will mean that most, if not all, franchise systems will be captured.

If a responsible franchisor entity “knew or could reasonably be expected to have known” that the contravention (or a similar nature) by a Franchisee will occur, then the Franchisor will also be held responsible for that contravention. 

Federal case law such as the Yogurberry Case (Fair Work Ombudsman v Yogurberry World Square Pty Ltd [2016] FCA 1290) decided in November 2016 shows us that Franchisors, by virtue of their knowledge of the business system, are now likely to be ‘expected to know’ about their Franchisee’s conduct. 

penalties

Franchisors will be held responsible for contraventions by a Franchisee of a civil remedy provision under the Act, including matters such as breaches of the National Employment Standards or modern awards, or failure to keep required employee records.  A full list of contraventions for which Franchisors will be responsible can be found at section 558B(7). 

If a contravention is “serious”, the penalties will now be:

  • $126,000 for individuals; and
  • $630,000 for corporations

This is 10 times higher than the existing maximums.  For individual franchisees who are caught out engaging in serious contraventions of the Act, these penalties are likely high enough to sink their business and should be taken very seriously.

A ‘serious’ contravention is where the Act is contravened by an employer knowingly, and is part of a systematic pattern of conduct.  For example, the employer knowingly fails to pay one or more staff members in full. 

the ‘reasonable steps’ defence

As a Franchisor, to protect your business against liability for your Franchisee’s conduct, you must be able to show that you have taken “reasonable steps” to prevent the Franchisee from breaching the Act.  ‘Reasonableness’ will look different for different businesses. 

The legislation specifically identifies the following types of factors that may be taken into account:

  • The size and resources of the Franchisor and the limits of its’ control;
  • The Franchisor’s arrangements for assessing the Franchisee’s compliance with the Act;
  • The extent to which the Franchisor’s arrangements with the Franchisee encourage or require the Franchisee to comply with the Act; and
  • Actions which the Franchisor took to ensure that the Franchisee had a reasonable knowledge and understanding of its Fair Work Act obligations.

protecting your brand

In addition to the substantial fines which could be imposed on the Franchisor, significant brand damage is likely to follow any prosecution under this new legislation. 

It is an unfortunate reality of the franchise sector that the woes of an individual franchisee are generally attributed in the media to the Franchisor, regardless of the circumstances behind the Franchisee’s conduct. 

The best protection of your Franchise System should involve proactive compliance with the Act by all members of the network. 

What this looks like for your business will depend on the needs of your individual franchise system.  A number of options are likely open to you to identify, assess and manage your risk.  We are currently working with our clients to develop manageable compliance regimes to prepare them for these incoming reforms. 

If you need advice, or an assessment of your business practices, please contact us.