A new era in franchising compliance is here

The Federal Government’s Protecting Vulnerable Workers Bill received the Royal Assent on 14 September 2017. With the exception of the provisions in relation to responsible franchisors (which commence on 27 October 2017), the Fair Work Amendment (Protection of Vulnerable Workers) Act 2017 (Cth) (Act) commenced on Friday 15 September 2017.

We recommend that franchisors take appropriate steps to protect their businesses. In this article, we examine what the amendments mean for franchisors and provide recommendations for a carefully considered approach to assist franchisors in complying with the new laws while continuing to foster a collaborative relationship between them and their franchisees.

The Act makes parent companies and franchisors liable for the workplace relations breaches of their subsidiaries and franchisees in certain circumstances. It also strengthens the evidence gathering powers of the Fair Work Ombudsman (FWO) and introduces a higher scale of penalties for some offences.

Franchisees, like all employers, are required to provide minimum rates of pay, meet obligations in relation to overtime, penalties and allowances, keep and maintain employment records and provide pay slips to all their employees.

However, under the Act, a responsible franchisor will be liable for workplace breaches by a franchisee where the franchisor, or an officer of the franchisor, knew or could reasonably have been expected to have known that the contravention would occur, or a breach of the same or similar character was likely to occur.

A franchisor will not be liable for the breaches of its franchisees where it is able to establish that it has taken reasonable steps to prevent the contravention by those franchisees.

A number of factors may be taken into account by a court in deciding whether or not a franchisor has taken reasonable steps. These factors include:

• the size and resources of the franchisor;
• the extent to which the franchisor had the ability to influence or control the franchisee’s conduct in relation to the contravention;
• any action taken to ensure the franchisee had a reasonable knowledge and understanding of the legal requirements;
• the franchisor’s arrangements for assessing compliance with the law;
• the franchisor’s arrangements for receiving and dealing with possible complaints about underpayments and other workplace breaches;
• the extent to which the franchisor’s arrangements encourage or require compliance by the franchisee.

Most recently the House of Representatives accepted amendments made by the Senate that:

• clarify how the proposed ‘serious contraventions’ regime applies in relation to an alleged accessory to a contravention;
• clarify what a person needs to know about a contravention for it to be considered deliberate under the proposed ‘serious contraventions’ regime;
• supplement the list of matters a court may take into account when determining whether a contravention formed part of a systematic pattern of conduct for the purposes of the ‘serious contraventions’ regime; and
• enable the FWO to exercise coercive evidence gathering powers for breaches of the Fair Work Act 2009 (Cth) (FW Act), subject to oversight by the Australian Administrative Tribunal (AAT).

Serious contravention

The Act clarifies what an alleged wrongdoer needs to know, before they may be held responsible for a serious contravention and therefore a higher penalty. The person’s contravening conduct still must form part of a systematic pattern of conduct in order to be considered a serious contravention.

The Supplementary Explanatory Memorandum explains that, to be held responsible for a serious contravention, the alleged wrongdoer must have knowledge of the ‘essential elements’ of the contravention. This includes knowledge of, or at least some appreciation of, the fact that their conduct was unlawful at the time it occurred. For example, an alleged wrongdoer may know:

• their employee or an identifiable class of employees are not receiving their full entitlements under the FW Act; or
• they are not complying with the relevant record-keeping or pay slip requirements under the FW Act and Fair Work Regulations 2009 (Cth) (FW Regulations). 

The wrongdoer does not need to know the precise provisions of the FW Act, FW Regulations or relevant industrial instrument to be held responsible. This is consistent with the existing provisions in relation to accessorial liability. The previous requirement to act deliberately was removed by the Senate.

The Act also clarifies how a person ‘involved in’ the contravention of a civil remedy provision (accessory) by the principal wrongdoer (principal) may be penalised for a ‘serious contravention’. Specifically, this will only happen if:

• the principal’s contravention was a serious contravention; and
• the accessory knew that the principal’s contravention was a serious contravention.

The importance of a franchise system’s response to contraventions

Critically, for all franchise systems, the Act includes a person’s response, or failure to respond, to any complaints made about relevant contraventions as a factor in determining whether the person’s conduct constituting the contravention was part of a systematic pattern of conduct. This applies to all responsible franchisor entities and holding companies.

The Supplementary Explanatory Memorandum provides that this may include consideration of the nature and timing of any response, and whether the response achieved, if required, a reasonable and durable solution to the problem for all affected employees.

Where complaints about workplace entitlements are voluntarily and properly addressed as they arise, any contravening conduct is less likely to be considered either deliberate or systematic.

Record-keeping and payslips – reverse onus of proof

Labor’s amendments to reverse the onus of proof in claims for unpaid wages, where the employer has not produced wages slips or employment records, have been accepted. Where an employer has failed to comply with the record-keeping and payslips provisions of the FW Act and the FW Regulations, they may be required to bear the burden of disproving allegations of non-compliance with those provisions.

The employer can provide a reasonable excuse as to why there has not been compliance with the record-keeping and pay-slip obligations. At this stage, it is difficult to conceptualise what may be considered a ‘reasonable’ excuse for not complying with these obligations.

FWO Powers

The FWO will now have to apply in writing to a nominated AAT presidential member for the issue of an FWO notice if the FWO reasonably believes that a person is capable of giving evidence that is relevant to any such investigation, or has information or documents relevant to an investigation that relates to:

• the underpayment of wages, or other monetary entitlements of employees;
• the unreasonable deduction of funds from amounts owed to employees; or
• the placing of unreasonable requirements on employees to spend or pay amounts paid, or payable, to employees.

The FWO notice may require the person to give the information, produce the documents or attend before the FWO to answer questions.

The following key provisions (set out in the original Bill) remain unchanged:

• the definition of “Franchisee entity” only applies to franchisees whose business is substantially or materially associated with “intellectual property relating to the franchise”. This would include the use of trademarks, advertising or commercial symbols that are owned, used, licensed or specified by the franchisor. The effect of this qualification is that franchise businesses which are associated by branding, being an overwhelmingly majority of franchise businesses, will be caught by the new laws. The breadth of the definition also means that some businesses that do not necessarily constitute franchises for the purposes of the Franchising Code of Conduct will also be caught by this definition;
• the definition of “Responsible franchisor entity” applies to those franchisors which exercise a significant degree of influence or control over the franchisee entity’s “affairs”. The term “affairs” remains and the Senate Committee’s previous recommendation of clarifying that the term “affairs” be specifically associated with workplace relations matters has not been revisited. The term “affairs” is undefined;
• the exception of a franchisor or parent company taking reasonable steps to prevent a contravention;
• a franchisor’s ability to recover from the franchisee entity that is responsible for the underpayment, any amount paid by it to rectify the underpayment (unless it has already recovered it under the terms of the franchise agreement). There is no ability to recover from the franchisee the amount of any penalties imposed by a court; and
• provisions prohibiting the hindering and obstruction of officials exercising powers under the FW Act and the provision of false or misleading information.

So now that we know what the law will look like, what do franchisors need to do to comply?

We recommend taking a staged and cautious approach, with risk assessment being the critical first step. It is unwise to launch immediately into an audit or enforcement processes without properly understanding the nature and extent of the problems, or managing the franchisee relationship.

Not only can this cause a fracturing of the franchise relationship, but it can cause major brand damage. It can also frustrate efforts to properly allocate responsibilities and costs between franchisor and franchisee, particularly if costs blow out and franchisees see the franchisor incurring uncontrolled amounts largely designed to cover the franchisor’s back.

For those franchise systems wishing to distance themselves from legal responsibility there is an additional legal problem – audits and other activities can gather information that may later be used to establish that a franchisor knew or ought to have known of a breach.

We recommend establishing a compliance program that documents risk management strategies and elements, and has the following stages:

• risk assessment and quantification: rather than immediately moving to amend agreements, implement audit procedures or set up hotlines that could easily expose franchisors to additional liability, we recommend first conducting a comprehensive risk evaluation that considers whether the legislation will apply to the organisation, and the extent of potential exposure and liability. It is sensible to use an independent expert to remove the significant risk of internal bias both in risk assessment and compliance program design. Think before you act is always a good motto, but particularly in the context of this legislation.
  
  The risk assessment should consider issues such as the nature of the franchise model, franchisee profitability and the presence of high risk indicators such as extensive use of employees on temporary work visas, high ethnic commonality between franchisees and employees and franchisee record keeping. There should also be a review of current franchise documentation to assess current allocation of responsibilities for workplace matters, ability to influence franchisee conduct, default mechanisms, audit and inspection powers and other relevant matters.
  
  Legal compliance is of course only part of the issue – brand damage can occur even if compliance measures meet the expectations of the regulator, so some franchise systems have adopted a “zero tolerance” attitude, and designed compliance programs accordingly.
  
  
• compliance program design, assuming the franchisor wishes to become involved in compliance. It is necessary to consider the risks, the consequences and what elements (if any) a franchisor wishes to include in a compliance program. Some common elements are:
  • communication of an overall compliance policy, so that franchisees are in no doubt concerning compliance expectations, and the serious consequences that will flow in the event of a serious breach of workplace laws;
  • passing on information from the FWO on wages, conditions and entitlements, so franchisees are fully possessed of all requisite information concerning their compliance obligations;
  • providing initial and ongoing training concerning workplace law issues – this can range from providing basic general information, to providing comprehensive human resource management services;
  • the production of accompanying educational materials for franchisees and employees;
  • compliance record keeping and testing to accompany training that confirms participation in, and comprehension of, training sessions;
  • establishing employee complaint handling procedures, including employee hotlines, whistle-blower protections and mechanisms for franchisee employees to contact a franchisor or third party; and
  • introduction of compliance verification measures – examination, certification, internal audits and external audits.
• implementation, which should only occur once the program has been thoughtfully designed and all franchise documentation and processes aligned to ensure:
• the compliance program can lawfully be introduced;
• the cost of compliance is allocated as determined to be appropriate;
• audit and inspection powers are adequate;
• default, breach, dispute resolution and termination processes are aligned.

It is important to consider how to manage franchisee breaches before launching into a compliance initiative. The Franchising Code of Conduct does not permit immediate termination for breach of workplace laws by a franchisee unless there is fraudulent conduct by the franchisee. Further, many franchise agreements do not entitle a franchisor to recover costs of audits and inspections unless they occur as part of a formal breach process. Even then it can be challenging to obtain sufficient evidence of breach, as employees can be very reticent to particularise their complaints in circumstances where they have themselves committed a breach of the law in relation to their visa conditions.

The Fair Work Amendment (Protection of Vulnerable Workers) Act 2017 creates new risk for franchise systems. It ought to be possible to fairly readily design a compliance program that demonstrates that a franchisor has taken the requisite “reasonable steps” to avoid risk of prosecution, and the introduction of an industry standard ought to reduce the risk of a civil claim or class action by employees. The real challenge is to ensure any compliance program does not impose uneconomic compliance costs or destroy the synergistic collaborative relationship between franchisor and franchisee.