Franchisors face tough penalties for franchisee misconduct

The risk of franchisors facing tougher penalties for deliberate and systematic underpayment of workers gets one step closer as the Vulnerable Workers Act passes the Senate.

The changes put franchisors in the line of fire, making them liable for franchisee misconduct where they are complicit or turn a blind eye to breaches.

Due to the number of amendments made in the Senate on Monday evening, it is expected that the Bill will return to the House of Representatives before it can become law.

What has changed in the Fair Work Act?

• a higher scale of penalties (up to 10 times the current amount) for a new category of ‘serious contraventions’ of prescribed workplace laws.

• employers are prohibited from unreasonably requiring employees to make payments (ie ‘cash-back’ arrangements)

• the evidence gathering powers of the Fair Work Ombudsman (FWO) have been boosted to ensure that the exploitation of vulnerable workers can be properly investigated.

• stronger provisions to make franchisors and holding companies liable for breaches of the Fair Work Act  by their franchisees or subsidiaries.

Raynia Theodore, principal at MST Lawyers, pointed out this includes circumstances where a franchisor/holding company could reasonably be expected to have known that the contravention by the franchisee/subsidiary would occur.

The Franchise Council of Australia has lobbied for greater clarity over the amendments and in particular over the definition of a franchisor ‘s culpability in ‘knowing or reasonably knowing’ of workplace breaches by a franchisee.

An official statement from the FCA responding to the Senate passing the bill says: “Given the potential impact of the Fair Work (Protecting Vulnerable Workers) Bill on the franchise sector, particularly on SME franchise businesses, the FCA is currently reviewing the amendments to the Bill in detail and its likely regulatory and compliance cost impacts, and will be in a position to provide a more considered response and assessment of anticipated implementation impacts in due course.”

Franchisor Giro Maurici, CEO at San Churro, is more positive about the legal changes. He told Inside Franchise Business, “This bill represents a huge opportunity for the franchising industry to get on the front foot and give the public the assurance that when their children are looking for work, for their first opportunity to join the workforce – that they can rest assured that they will be looked after and paid properly.

“If anything the singling out of the franchise industry actually will help this industry establish themselves as employers of choice, secure the best staff, create the best cultures and deliver superior service outcomes for customers as a result.”

Harry Hilliar, senior employment relations adviser from workplace relations firm Employsure said the onus of proof has shifted – employers will be forced to prove they pay their staff correctly if they are investigated for underpayments.

“If an employer does not keep or provide correct payslips or accurate employee records and an employee makes an underpayment claim, the onus is on the employer to prove they have paid the employee correctly,” he said.

“Failure to keep compliant records may incur newly increased fines in addition to exposing a business to significant back payments.”

8 things franchisors can do now

Theodore said “Franchisors need to be taking proactive steps to limit their liability arising from failures by their franchisees to comply with workplace relations laws.”

While there is no single solution, Theodore has recommended franchisors consider:

  1. reviewing and amending the franchisor’s franchise agreement to ensure it clearly sets out the franchisee’s obligations in respect of its employees. There should be a clear obligation on franchisees  to comply with workplace relations laws and rights granted to the franchisor to access employee records and payroll information and to conduct audits
  2. reviewing and amending the franchisor’s operations manual in so far as it deals with a franchisee’s  obligations as an employer
  3. conducting mandatory training programs to better educate the franchise network in relation to workplace relations laws and the obligations of franchisees as employers
  4. providing fact sheets, guides and templates, for example, summaries of applicable modern awards and minimum pay rates,  engagement letters and sample payslips to assist and educate franchisees
  5. having a specialist employment law firm undertake regular audits of franchisees to assess network compliance with workplace relations laws
  6. setting up a complaint service for employees of franchisees
  7. establishing a hotline to enable franchisees to seek legal advice from a specialist employment law firm
  8. taking immediate action against franchisees where a complaint is made by an employee or non-compliance is identified following an audit. This may include issuing breach notices and/or requiring franchisees to undertake additional training.