Franchisor’s liability for franchisees’ employment terms

New laws have taken effect which impact on franchisors and holding companies as a result of changes to the Fair Work Act 2009.  The changes relate to when franchisors can be held responsible for breaches of workplace laws by their franchisees.

We recently wrote a hot topic on the  Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017 which was awaiting Royal Assent. With the Bill having passed and the laws now in force, there are some key take aways for franchisors.

Who is affected?

The changes to the law affect ‘responsible franchisor entities’, that is situations where all of the following are satisfied:

1. there is a franchise in place; and
2. the franchise business is associated with a trademark, logo or marketing in a major way; and
3. the franchisor has a significant degree of influence or control over the franchisee’s business affairs.

In assessing if significant control is being asserted by a franchisor, consideration will be given to whether the franchisor has the right to direct matters such as trading hours, sales targets, staffing levels, business expenses etc.  Consideration will also be given to, in the day to day operation of the franchisee’s business, how much influence the franchisor has on management or operational decision or how revenue and profits are generated.

For most franchise systems, it is likely that a franchisor will be a ‘responsible franchisor entity’.

When is a franchisor liable?

Responsible franchisors (or their officers) can be liable under the Fair Work Act 2009 if:

1. they knew or could reasonably be expected to have known a contravention would happen; or
2. when the contravention occurred, they knew or could reasonably be expected to have known that a contravention of the same or similar kind was likely to happen; and
3. the franchisor hasn’t taken reasonable steps to prevent the contravention or contravention of a similar character.

In other words, it is possible to be liable not only for what you knew, but also what you reasonably could have expected to know. As such, it is critical that you put in place steps to mitigate contraventions.

What is the outcome of a contravention?

Enforcement action and court proceedings are possible where a responsible franchisor contravenes the Fair Work Act.

The court may require a franchisor to compensate affected employees for any contravention and issue penalties. The penalties for each contravention are $12,600 for individuals and $63,000 for corporations.

How to prevent workplace contraventions

Preventing contraventions will require different action from different franchisors depending on things such as the size and resources available to the franchisor, its ability to influence the franchisees compliance with their obligations, procedures and training in place for franchisees and processes in place for the franchisors to assess its franchisees’ compliance with the Act.

Having systems in place to deal with contraventions that become known – and enacting those systems – will also be key to avoiding liability.

What can franchisors do to safeguard themselves and their franchisees?

Many franchisors will have clauses (and some have specific systems) in place to require compliance with applicable laws affecting franchisees businesses. However, there are always additional steps that can be considered such as:

• Including additional clauses in your franchise agreements requiring compliance with workplace laws;
• Providing franchisees with the support or directions and resources they need to ensure compliance;
• Encourage franchisees to seek appropriate legal advice;
• Ensure initial training to franchisees includes their obligations under workplace laws;
• Establishing a method for employees to report workplace concerns; and
• Having appropriate systems to investigate suspicions, and to escalate and take action over known breaches.

If you have any questions any franchising question or would like us to review your existing franchise agreements, please contact us.