February 5, 2018

Compliance with new employment laws: ‘reasonable steps’ franchisors can take

FRANCHISORS COMPLIANCE

By Luke McKavanagh, Justine Ansell & Matthew Rouse 

The Fair Work Amendment (Protecting Vulnerable Workers) Act 2017 (the Act)took effect on 15 September 2017. The Act was triggered in response to the highly publicised 7-Eleven employee underpayment scandal which has engulfed the franchise sector since late 2015, along with several recent systemic underpayment scandals by Domino’s Pizza and Caltex franchisees.

The key changes brought by the Act include:

1- new offences and increased financial penalties (details below) for breaches of workplace laws, including those who underpay employees, fail to keep correct time and wage records, fail to issue compliant pay slips and/or who force employees to repay wages (the ‘cash-back’ scheme that 7-Eleven was recently embroiled in);

2- increased investigative powers of the Fair Work Ombudsman, including increased powers to inspect and require employers to provide employment records and attend interviews under oath;

3- new offences and liability provisions for franchisors and parent companies making them liable in some circumstances for the actions of their franchisees and subsidiaries; and

4- a new onus of proof that effectively means someone is presumed guilty of an alleged underpayment if they cannot show, to the satisfaction of a court (e.g. through adequate employment records or other means) that they have paid their employees correctly. This means keeping the required employment records will become critical moving forward.

What the new laws mean for franchisors

The Act holds franchisors and holding companies responsible for underpayments and workplace law breaches by their franchisees or subsidiaries if the franchisor or holding company knew, or reasonably should have known, about the contravention and failed to take reasonable steps to prevent it. This greatly expands on the existing laws and has massive ramifications on the franchising industry.

The franchise-specific provisions of the legislation will only apply to franchisors who have a significant degree of influence or control over the affairs of their franchisees. How this influence or control will be assessed is yet to be determined because the legislation hasn’t been tested in the courts.

The legislation means that if a franchisee underpays an employee, fails to keep proper employment records or contravenes another workplace law (for example discrimination or bullying) then the employee could make a claim against the franchisor. The Fair Work Ombudsman can also institute proceedings against the franchisor. In the eyes of the law the franchisor could be seen as the party at fault, responsible and liable to pay compensation.

The legislation also adopts a much broader definition of what constitutes a franchise relationship compared to the definition under the Franchising Code of Conduct. This means that many licencing or distribution arrangements will be caught. For example, if a distributor underpays an employee then the employee could have recourse against the distributor’s supplier.

Sham contracting arrangements should also be kept in mind. If a franchisee was to engage a worker as a ‘contractor’ but in actual fact that worker should be classed as an ‘employee’, then this will be a breach of a workplace law, exposing the employer to a range of risks including underpayments, compensation and financial penalties. The worker may also have recourse against the franchisor.

What franchisors should do

If franchisors have significant control or influence over their franchisees then they need to take reasonable steps to limit their liability. Franchisors can no longer turn a blind eye and not take action if they have cause to suspect a franchisee is contravening workplace laws. Franchisors must now pay closer attention to how their franchisees manage their personnel and employment processes.

The crux of the legislation is that franchisors need to have reasonable steps in place to monitor compliance with workplace laws. Because the correct approach to determine what ‘a significant degree of control or influence over the affairs of a franchisee’ has not yet been determined, then from a risk-management point of view, or if adopting a conservative approach, then the prevailing view amongst industry professionals is that franchisors should assume that they do have such control and take reasonable steps.

What is a ‘reasonable step’ on a franchisor’s behalf will depend on the circumstances on a case-by-case basis. It is clear from the legislation that the more steps a franchisor takes, the less likely they are to be held liable.

If franchisors feel that they don’t have a degree of control or influence over franchisees then they need to be able to back that up.

As flagged above, the prevailing view amongst industry professionals which we recommend (at least until the legislation is tested and there is legal precedent) is to adopt a conservative approach and presume that franchisors will be liable unless this can be proven otherwise.

We recommend that all franchisors adopt a ‘reasonable steps compliance plan’ which might involve some or all of the following, depending on the circumstances:

1- A system-wide memo sent to all franchisees. This should explain and emphasise that the correct engagement of employees and compliance with workplace laws is the responsibility of the franchisee. It should remind franchisees of their obligation to comply with workplace laws such as correct classification of employees, correct payment of wages, compliance with any applicable modern award or industrial instrument and relevant legislation, correct payment of entitlements (PAYG taxes, leave, superannuation, etc), compliance with any visas for migrant workers and record-keeping obligations.

2- Reviewing standard-form franchise agreements and operations manuals to clearly set out the obligations of franchisees under workplace laws.

3- Regular and active monitoring franchisees, and if warranted, carrying out targeted or random field visits and compliance audits (complying of course with any process to be followed under the existing franchise agreement). Sending out questionnaires for completion by franchisees is another important step in active monitoring. Regular audits following the return of questionnaires may act as a deterrent to other franchisees who will be aware that audits are commonplace and that consequences for non-compliance with workplace laws are enforced.

4- Checking what modern awards or industrial instruments are applicable to the particular industry for the purpose of self-education and educating franchisees and employees.

5- Obtaining advice from third party consultants where required.

6- Reviewing or developing policies (covering such things as workplace bullying, sexual harassment, discrimination and privacy), information kits, checklists and other resources for franchisees. This doesn’t mean franchisors must take out their own exhaustive review of all workplace laws. However, the resources need to be enough to make the franchisee consider what needs to be taken into account and complied with. It should aim to point them in the right direction. The medium could be transmission through the franchisor’s internal intranet system or a link to a webinar. The Fair Work Ombudsman’s website has some useful online resources and training material as a starting point. We also recommend franchisors provide all franchisees with a copy of or link to the Fair Work Ombudsman’s Fair Work Handbook which they should be required to read and familiarise themselves with.

7- Reviewing or developing internal policies, educational resources and online/inhouse training for the franchisor’s own staff to know what to look for and to know what to say when presented with an employment related enquiry from a franchisee or one of their employees.

8- Reviewing the initial, ongoing and refresher training provided to new and existing franchisees to include workplace law compliance strategies. This could be incorporated into the induction process for new franchisees.

9- Depending on the franchisor’s rights under the applicable franchise agreement, requiring franchisees to complete online Fair Work training programs and provide completion certificates to the franchisor.

10- Encouraging feedback as both franchisees and their employees should feel comfortable approaching a franchisor in respect to issues with the system. Employees should not feel that they are prevented from raising employment concerns with the franchisor. There should be an agreed point of contact within the franchisor’s organisation (whether an individual, phone hotline or email address) by which franchisees and their employees can raise concerns.

11- Listening to concerns that franchisees or their employees raise regarding the system and developing internal reporting processes to manage concerns. Franchisors shouldn’t ignore issues. It is in a franchisor’s best interest to ensure that franchisees are operating their businesses adequately and in compliance with workplace laws. If franchisees are struggling to pay their employees the proper entitlements, and if this is a widespread concern, that could indicate the need to review the structure of the franchise system.

12- Treating franchisees with uniformity. Franchisors could be accused of breaching their good faith obligations under the Franchising Code of Conduct if they single out a particular franchisee. If audits are to be carried out and consequences for non-compliance enforced, then all franchisees should be treated equally.

13- Developing a process for the franchisor to follow when addressing alleged employee underpayments and contraventions of workplace laws.

14- Developing resources for the franchisor’s own staff and franchisees setting out how to respond to a request or investigation by the Fair Work Ombudsman, for example, FAQs or guidelines. It is important that franchisees are aware of their legal obligations in that regard and the powers of Fair Work Ombudsman inspectors.

15- If franchisors have any suspicions about a breach of workplace laws, taking immediate action and being on the forefront.

Simply referring franchisees to the Fair Work Handbook will not itself be sufficient to demonstrate the franchisor has taken ‘reasonable steps’.

Takeaways

If franchisors don’t have a reasonable steps compliance plan, then they expose themselves and their franchise system to liability.

If franchisees know that franchisors are serious about enforcement, then that may be more incentive for franchisees to carry out their own internal reviews into whether they are compliant and to be proactive in compliance.

Franchisees and franchisors must also be prepared to face tougher financial penalties for breaching workplace laws. These are now significant. In some cases, the penalties will be up to $630,000 for corporations (i.e. operating as a company) and $126,000 for individuals (i.e. operating as a sole trader, or people who are decision makers in a company, for example an officer/director or HR manager). These penalties apply per breach, meaning if two employees are underpaid then there could be multiple breaches and multiple penalties.

Usually there are multiple breaches of the Act for underpayment and non-compliance offences, so non-compliance is expected to be a very expensive exercise going forward. We expect the Fair Work Ombudsman and inspection activity and prosecutions to significantly increase and the fines imposed by the courts to continue to significantly increase as well.  We have already seen this in the most recent decisions being handed down. We are also seeing the move toward making the individuals involved in non-compliance liable, including directors, officers, HR managers, payroll providers and most recently third party professional services advisors, including accountants and payroll providers.

Deliberately underpaying employees or retaining false records may also constitute fraudulent conduct in certain circumstances, entitling a franchisor to immediately terminate a franchise agreement, or at the very least, acting as grounds for a breach notice to be issued (depending on the provisions of the applicable franchise agreement).

At Rouse Lawyers we can speak with franchisors to assess whether they are engaging in any operational activities which may indicate a ‘degree of influence or control’ over franchisees. This can involve an examination of the franchisor’s general systems and procedures for dealing with franchisees. We can also assist franchisees who may have concerns regarding compliance and the engagement of their employees.

As the recent 7-Eleven scandal has shown, if the media were to discover a contravention of workplace laws, then this can put a negative spotlight on a franchise system and cause irreparable reputational damage. Franchisors and franchisees have no control over what the media says once a story hits the news. The Fair Work Ombudsman could also take action to name and shame or prosecute the franchisee and/or franchisor and the business.

If you have any concerns about compliance, the underpayment of employees or questions about the new laws, please get in touch with one of our lawyers. We have dedicated franchise and employment law teams that can assist.

Need advice?  Talk to the Franchising team at Rouse Lawyers. Contact us today!