Employment Law Update: Changes to Franchisor Liability

Proposed changes to national employment law will extend the circumstances in which a franchisor can be made liable for its franchisee’s breach of employee entitlements and protections.

The Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017 (“the Bill”) is currently being considered by the Commonwealth Parliament. The Bill is in response to recent high-profile instances of alleged underpayment of employees within franchise structures.

According to the Explanatory Memorandum to the Bill: “Some franchisors and holding companies have established franchise agreements and subsidiaries in their corporate structure that operate on a business model based on underpaying workers.” “Some have either been blind to the problem or not taken sufficient action to deal with it once it was brought to their attention.”

Under current laws, a franchisor can be taken to have contravened a “civil remedy provision” of the Fair Work Act 2009 if it was involved in the franchisee’s contravention.

A “civil remedy provision” means those entitlements and protections which an employee can sue their employer to enforce. These include underpayment of wages, breach of safety net entitlements such as annual leave, and breach of modern awards and enterprise agreements, among others.

The proposed laws go further than the current requirement that franchisors must be involved in the contravention to provide that it need only have known or could reasonably be expected to have known that its franchisee would or was likely to contravene a civil remedy provision.

For example, if a franchisee underpays an employee and the franchisor ought to have known this was occurring, then the employee can commence proceedings in court or the Fair Work Commission against the franchisor and the franchisee to recover what is owed. The franchisor can then be ordered to pay the amounts owed to the employee if it is found that it knew or could reasonably have known the franchisee would or was likely to be underpaying the employee.

However, the Bill provides that the franchisor can be relieved of liability if it had taken reasonable steps to prevent the franchisee’s contravention. In determining whether reasonable steps were taken, the court or Fair Work Commission can consider the franchisor’s ability to influence or control the franchisee, whether the franchisor took steps to ensure the franchisee understood its obligations and whether arrangements were in place to assess the franchisee’s compliance, among other matters.

The Bill also provides that if a franchisor is ordered to pay money to an employee because of a franchisee’s contravention, then the franchisor has six (6) years to commence proceedings against the franchisee to recover this amount plus interest.

The Bill passed the House of Representatives on 11 May 2017 and will now be considered by the Senate.

If the Bill becomes law, all franchisors should ensure the employment practices of their franchisees are in accordance with the law. This might include setting up auditing and monitoring systems. Franchisors may also wish to address their risk of liability under these proposed changes in their franchise agreements.

For assistance in relation to any workplace issues, please contact Michelle Morton.