Could franchisors be liable for franchisees underpaying themselves?

Inside Franchise Business: could franchisors be liable for franchisees underpaying themselves?Franchisors may be liable for underpayments by franchisees: what to watch out for.

Over the last decade, there have been multiple reports and cases regarding franchisees of mega companies such as 7-Eleven and Caltex being involved in wage fraud and underpayment of workers.

Whenever these cases were investigated by the media or the Fair Work Ombudsman, the franchisor companies were compelled to respond to the media rather than the law. To dilute reputational damage of the Company, the franchisors ensured they were seen to support the investigation, condemned the franchisee’s conduct as inexcusable and terminated the franchisee.

Those days are now over.

In response to the 7-Eleven wage scandal and other similar cases, the Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017 was passed on 5 September 2017 and amends the Fair Work Act 2009. The new laws place a significant proportion of responsibility on the franchisor to ensure franchisees are compliant with workplace laws.

The new laws will apply to franchisors who have a significant degree of influence or control over the franchisee entity’s affairs.

Under the recent amendments, such franchisors and holding companies may be responsible for any breaches of civil remedy provisions by their franchisees:

  • where they knew, or
  • reasonably should have known about the contraventions; and
  • failed to take reasonable steps to prevent them.

Below are some examples of potential contraventions by franchisees of which a franchisor should be mindful. The franchisor should be proactive in addressing this misconduct and should not turn a blind eye to indicators that may be occurring in their franchise network.

  • Franchisees underpaying employees or ignoring Fair Work Act entitlements such as overtime, casual loading, shift work and penalty loading;
  • Franchisees underpaying themselves or appearing to underpay themselves by paying funds into a relative’s account or maintaining inaccurate records of payment and inaccurate payslips;
  • Franchisees ignoring statutory orders regarding minimum wages or equal remuneration;
  • Franchisees falsifying records of hours worked, income paid and failing to accurately calculate entitlements on payslips;
  • Improper maintenance of employment records.

If a franchisee contravenes the above workplace laws ‘knowingly’ and as part of a ‘systematic pattern of conduct’ (for example, over a prolonged period or over multiple employees), such conduct will be termed a ‘serious contravention’ of the Fair Work Act.

Where the franchisee is involved in a ‘serious contravention’, the penalty imposed on a responsible franchisor is 10 times higher than for an ordinary contravention, being $126,000 for each serious contravention.

How will the law be implemented?

It is not yet known how far reaching a franchisor’s liability may be as this issue is yet to be tested in Court.

Several questions will arise, which may serve to protect the franchisor:

  • What is a ‘significant degree’ of influence or control?
  • Which franchisee breaches will a franchisor be expected to ‘reasonably know’ about?
  • What actions will be considered ‘reasonable steps’ by the franchisor to prevent breaches by the franchisee?

The Explanatory Memoranda to the Bill provides some background about how parliament intended the new laws to operate.

Significant degree of influence or control

The Explanatory Memoranda acknowledges that there are various franchise models. It is intended that for a franchisor to be liable for its franchisee’s conduct,the business model would require the franchisor to be involved in the management and operational decisions of the business.

Reasonable knowledge

The Explanatory Memoranda contemplates taking into account the responsible franchisor entity’s knowledge, experience and acumen when determining whether or not the franchisor could be reasonably expected to have known about the franchisee’s conduct. There will be no requirement to show that the franchisor’s head office knew the exact details of the contraventions.Rather, the legislation encourages Courts to consider whether there wasknowledge that contraventions in the franchise network regarding employee entitlements were likely to occur.

Reasonable steps

In any case, to avoid becoming liable for a franchisee’s potential misconduct, and suffering from the consequential penalties and reputational damage, franchisors should take reasonable steps to prevent franchisee breaches such as providing appropriate education and training, conducting due diligence checks, establishing reporting procedures and acting swiftly when any contraventions are discovered.