How changes to fair work law will impact franchisors – and what you can do

Significant changes to the Fair Work Act are likely to become law. How will these changes impact you and your network? What is at risk? We discuss the critical issues and what you need to know to stay in the clear.

The Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017 proposes changes to the Fair Work Act that include:

  • Making a franchisor and its subsidiary companies with a significant degree of influence or control over a franchisee’s affairs liable for a franchisee underpaying its staff in circumstances where the franchisor ought to have known that the franchisee was doing so or that it was likely to occur.

  • Making a franchisor liable for its franchisee failing to keep proper payroll records.

  • Increasing the power of the Fair Work Ombudsman (FWO) to allow attendance at the premises of the franchisee and/or franchisor to interview staff and collect evidence.

  • Making cashback schemes (where the employee must repay their wages back to their employer in cash) unlawful.

  • Increasing penalties for deliberate and intentional contraventions by franchisors by almost 10 times. The proposed penalties for franchisor companies can be as high as $540,000.

How are you expected to know a franchisee has been or is likely to underpay its staff?

You will need to consider the nature of your business and to some extent, its business model. There are some franchise models which have very little need for employees. Other models and businesses, such as the retail industry, require employees to work long hours, and often these employees are young, inexperienced teenagers or adults, or those who are on working visas, and have very little English and knowledge of Australian laws.

Examples of when you may suspect a franchisee may be underpaying its staff:

  • They are failing to pay your royalty fees and other fees under the Franchise Agreement on time

  • They are financially struggling (or allege they are financially struggling)

  • They have a high staff turn over and their staff are mainly young adults or teenagers, migrants with very little or no English or on working visas

  • You have received complaints or concerns from employees about their payment of wages.

What is expected of a franchisor who is aware of franchisees underpaying its employees?

If you are aware of a franchisee underpaying its staff, you can:

  • Meet with the franchisee to ascertain why the underpayment occurred. Was it accidental or deliberate?

  • Help by way of an accounting service or program to assist the franchisee to properly record and calculate payment of wages.

  • Set up a helpline for the franchisee and franchisor.

  • Conduct monthly audits to ensure that the franchisee complies with the franchisor’s request regarding proper payment and recording of employee hours.

  • Introduce policy and procedures that assist franchisees to comply with their payroll obligations.

What steps are available to minimise your risk?

If you can show all reasonable steps available have been taken to minimise the exploitation and underpayment of the employees within your franchise network, then you may be safe from prosecution by the FWO – even if one of the franchisees was found to have underpaid its staff.

It is possible to implement changes without incurring enormous costs. Some of the steps you can take are:

  1. Review the franchise agreement. Is there a requirement for the franchisees to comply with workplace laws? Does your franchise agreement allow the franchisor to attend the franchisee’s premises to review their business and interview the franchisee’s employees? Does the franchise agreement allow the franchisor to request payroll documents and conduct an audit? Does the franchise agreement allow for the recovery of wages paid by the franchisor back from the franchisee or the franchisee directors, in the event the franchisee is placed into liquidation?

  2. Review the business practice and its network.

  3. Set up an assistance programme or hotline to allow employees to call you.

  4. Create legal and policy frameworks which enable and assist compliance with the new laws such as developing internal tools and processes to support compliance.

  5. Select, recruit and train franchisees who are committed to compliance.

  6. Monitor compliance using technology where possible to manage costs.

What should you do if the FWO knocks on your door?

If you find yourself face to face with a FWO inspector you should:

  • Take the inspector through all the steps implemented to minimise risk of exploitation and underpayment of employees within the network.

  • If there has been any underpayment of wages, show the inspector what steps have been taken to resolve the issues.

  • Provide the information requested by the inspector.

  • Be seen to cooperate with the FWO inspector.

  • Seek legal advice.

The unintended consequences of the proposed changes

The proposed changes do not only affect the franchisor entity. A director of the franchisor is also at risk of receiving a fine. If the franchisor and its directors are found to have breached Fair Work laws, the director may also have, unwittingly, breached his or her director’s duties under the Corporations Act 2001.

Generally, the Corporations Act imposes the following duties on a director:

  • The duty to exercise a director’s powers and duties with the care and diligence expected of a reasonable person. That means a franchisor director would be expected to ensure that the company takes all steps necessary to minimise any risk of breaching workplace laws, such as implementing a process to audit its franchisees regarding payment of its employees.

  • The duty to exercise a director’s powers and duties in good faith in the best interests of the company and for a proper purpose. For example, a director who learns of a possible employee being underpaid by a franchisee needs to implement a solution to have that employee paid correctly.

  • The duty not to improperly use a director’s position to gain an advantage for oneself or someone else, or to cause detriment to the company. For example, not using your position to encourage the franchisee within the network to underpay its staff or pressure the franchisees into taking on loans to service the payment of wages for staff.

The tax implication for a franchisor responsible for the payment of a franchisee’s employee’s wage is yet to be seen, particularly when a corporate franchisee is in liquidation or and the director of the franchisee is bankrupt.

It is an important time to think about whether change is required in your network. You should seek assistance to implement strategies to ensure the employees within your network are properly paid and the franchisees are provided the assistance they require in order to comply with their legal obligations.

While the proposed changes to the Fair Work legislation seem to place additional burden on a franchisor, with the right business model, systems and procedures, a diligent franchisor can still operate a successful and profitable network.