Franchisors exposed for franchisee failures with passage of Fair Work Amendment (Protecting Vulnerable Workers) Act 2017

15 September 2017
Siobhan Mulcahy, Partner, Melbourne Adam Walker, Partner, Melbourne

Further to our update, the Fair Work Amendment (Protecting Vulnerable Workers) Act 2017 (Act) has been passed by the Australian Parliament after modification by the Senate. The Act became law on 15 September 2017. Franchisors will come under the new regime from 27 October 2017.

Introduced following revelations of franchisees breaching their obligations as employers, the objective of the Bill is to enhance the protections provided in the Fair Work Act 2009 (Cth) (Fair Work Act) for employees, particularly those who are employed by franchisees.

This new regime goes beyond the accessorial liability provisions currently in the Fair Work Act, and will potentially expose franchisors for franchisee contraventions and, likewise, expose holding companies of contravening subsidiaries. Even without a contravening employer being prosecuted, a responsible entity could face a civil penalty of up to $63,000.00 for a corporation, together with orders to make relevant payments to affected employees.

Franchisors therefore need to be taking steps now to review their systems and processes to minimise the prospect of being liable for a franchisee’s failures.

Which franchisors will be affected?

The Act provides that a “responsible franchisor entity” will be liable for contraventions of various provisions of the Fair Work Act by its franchisees in circumstances where the responsible franchisor entity (or its officers) knew or could reasonably be expected to have known the contravention (or a contravention of the same or similar character) by the franchisee would occur.

A “responsible franchisor entity” is defined as follows:

A person is a responsible franchisor entity for a franchisee entity of a franchise if:

  • the person is a franchisor (including a subfranchisor) in relation to the franchise; and
  • the person has a significant degree of influence or control over the franchisee entity’s affairs.

The Act does not provide guidance on what amounts to a significant degree of influence or control, Despite the Senate Committee recommending the Government clarify that “affairs” be specifically associated with workplace relations matters, this was not adopted. Rather, the Government has indicated that it is looking at the concept broadly, being the ability to influence or control things that would have an impact on the management and operational decisions of the business.1

Most franchisors should expect to be captured by this legislation.

When will a franchisor not be liable?

A responsible franchisor entity will not be liable if it had taken reasonable steps to prevent a contravention by the franchisee entity of the same or similar character. The Act specifies a list of factors for a court to consider when assessing whether a responsible franchisor entity took reasonable steps to prevent a contravention. Some of these items include:

  1. the size and resources of the franchisor;
  2. the extent to which the franchisor had the ability to influence or control the contravening employer’s conduct; and
  3. any action the franchisor took towards ensuring that the contravening employer had reasonable knowledge and understanding of the requirements of the Fair Work Act.

We can advise franchisors on appropriate reasonable steps to minimise their risk in this regard. Franchisors will most likely need to be more proactive in dealing with franchisees on issues of workplace relations. Things like compliance training for franchisees in their employment obligations, and setting up a method for employees to complain about alleged contraventions are examples of practical steps that could be expected of franchisors.

Senate amendments

The modifications made by the Senate do not fundamentally alter the nature of the Act, compared to when it was first introduced as a Bill to Parliament, or expand the obligations imposed on responsible franchisor entities and holding companies (each a responsible entity), but we highlight the notable Senate amendments that may impact employers in the future which may in turn have ramifications for those responsible entities.

  1. Reverse onus arising from failure to maintain paperwork

Where there is an application made concerning a contravention of the Act and the employer has failed to keep, and make available, employee records or payslips, section 557C will establish a reverse onus of proof whereby the employer must disprove the allegation.

To illustrate how this section will operate in practice, if:

  • an employer fails to keep records of an employee’s overtime hours (as required by the Fair Work Act and Fair Work Regulations 2009 (Cth) ; and
  • an employee alleges his/her employer has failed to pay overtime and therefore contravened the applicable modern award,

then the employer is presumed to have contravened the overtime provisions of the modern award, unless it can provide a reasonable excuse for failing to comply with its obligations to maintain records.
For a responsible franchisor entity, it may wish to enhance and enforce its audit powers under the franchise agreement, to utilise same to assess the appropriateness of paperwork.

  1. Fair Work Ombudsman Notices

The Administrative Appeal Tribunal (AAT) will have oversight of the Fair Work Ombudsman (FWO) Notices. The Notices can require a person to provide information or documents or attend to provide answers as part of an investigation. The Notices can be issued where the FWO believes on reasonable grounds that a person has information or documents relevant to an investigation regarding contraventions (such as underpayment of wages, unreasonable deductions, dismissals, bullying, contraventions of the National Employment Standards or coercion).

  1. Prospective employee payments to employers

Prospective employers will now be prohibited from requiring prospective employees to spend, or pay to the prospective employer or any other person, money if the requirement is:

  • unreasonable;
  • in connection with the employment, and
  • for the benefit (directly or indirectly) of the prospective employer.

This provision will limit, for example, a prospective employer’s ability to require a prospective employee to pay for training run by the employer ahead of commencing employment, unless that requirement is reasonable.

For employers, the objective standard of “reasonable” may be hard to firmly identify. Caution will therefore need to be applied when considering whether to insist on payments from prospective employees.

  1. Serious contravention

The Act also modifies the definition of “serious contravention”. A serious contravention will be established where:

  • a person knowingly contravened a provision; and
  • the person’s conduct constituting the contravention was part of a systematic pattern of conduct relating to one or more other persons.

The word “knowingly” has replaced the word in the previous draft of “deliberately”. This amendment appears to create a lower threshold against which to measure serious contraventions.

Serious contraventions can attract penalties of up to ten times those available for other contraventions of the Fair Work Act, which would currently be up to $630,000 for a body corporate and $126,000 for individuals.

What next for franchisors?

Franchisors may be found to have contravened the Fair Work Act as a result of conduct of their franchisees despite not having actual knowledge of the contravention.

While a responsible entity will have the capacity to bring a claim against a contravening employer to recover monies paid by the responsible entity to an employee, the responsible entity is not empowered under statute to recover the payment of any civil penalty.

In addition to any policy and procedures that franchisors may put in place, franchisors should also carefully review their franchise agreements to ensure franchisees are obliged to comply with the Fair Work Act, to ensure the franchisor has sufficient audit and inspection rights, and for the franchisor to have the power to take action against a non-compliant franchisee.

Gadens can provide specific assistance for franchisors in preparing for this seismic change to the sector.

1 Explanatory Memorandum, Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017, para. 39

This update does not constitute legal advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of the content.

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