Franchising Focus – Winter 2017 edition

Welcome to the Winter 2017 edition of Franchising Focus.

There is much interest in the progress of the Fair Work Amendment (Protection of Vulnerable Workers) Bill 2017 (the Bill). It was not passed before Parliament recessed for winter, and in the current session Senate deliberations were unfinished. The Bill is in committee phase, with amendments being discussed and negotiated between the Government, Labor and the cross-bench senators. Debate will continue in two weeks when Parliament resumes, with Labor and the Greens seeking amendments to broaden the legislation and the cross-bench senators proposing amendments fairly consistent with those recommended by the Franchise Council of Australia to narrow the scope of the legislation and provide greater guidance concerning the requirement for a franchisor to take 'reasonable steps' to prevent a breach.

We remain closely involved in the representative activities with the politicians, and will inform you of the ultimate outcome once the Bill has been passed. Our best current guess is that our initial prediction – that the Bill will be amended largely in line with the FCA recommendations – will prove correct. But it is a highly fluid situation.

In this edition of Franchising Focus:

• Nick Rimington considers some of the strategic and legal issues you need to consider before engaging third party delivery service providers to assist your franchise network;
• Luca Saccoccio provides an update on the changes to casual employment conditions in the franchise sector; and
• We talk about the obligations of 457 visa sponsors – obligations that will continue for the remaining 457 visas, following the winding up of the 457 scheme next year.

Kind regards

Allison McLeod (Editor, Franchising Focus)

The growing prevalence of third party delivery services, such as UberEats and Foodora, presents both great opportunities and new challenges for retail food franchisors.

There are many key ingredients in creating a successful franchise system, none more important than the need to deliver a compelling customer proposition. If a brand doesn’t inspire customers to embrace its offering, success will be elusive. Increasingly, customers are demanding convenience and accessibility. Against this backdrop, it is impossible to ignore the potential of third party delivery services, provided the associated issues are properly worked through.

Franchise systems have historically led the way in home delivery, with sophisticated and well-established delivery services being a cornerstone of many large franchised businesses. However, the recent proliferation of third party delivery platforms has unlocked the home delivery market for smaller players and for food categories previously unseen in the delivery space.

The opportunity for franchise systems

Leveraging a third party delivery service can help franchisors open up a new customer base and access their existing customers in a new environment. It may present a great opportunity for systems to tap into a new revenue stream with minimal (if any) capital expenditure at head office or franchisee level.

While the opportunity will be attractive to many franchise systems, committing to this new channel and executing it effectively will require careful planning and decision making. Franchise systems rely on strict processes, controls and compliance monitoring to deliver a consistent customer experience. Outsourcing a crucial aspect of the business system will present many legal, strategic and operational challenges, some of which are addressed below.

Strategic considerations

There are a myriad of strategic considerations to take into account when deciding whether to embark on a third party delivery program. At the outset, you should consider the following questions, among others:

• Customer proposition – Is there a compelling reason to offer a third party delivery service? What are the benefits to the customer, franchisees and franchisor?
• Competitor analysis – Will you be at a competitive disadvantage by not exploiting this trend?
• Platforms – Should you partner exclusively with one provider or engage with multiple partners? Which partner(s) align best with your brand and offer the best service?
• Customer experience – How do you deliver a quality customer experience through this channel, given that you have less control over the customer interaction element?
• Brand positioning – Could the initiative compromise the perception of your brand?
• Pricing – Will you implement a different pricing structure for delivery orders to recover the commission overheads? If so, how will customers perceive the inconsistency?
• Allocation of orders – How will orders be allocated between nearby franchisees?
• Menu – What products are suitable for delivery without compromising quality, and will you develop a tailored menu for the delivery program?

A careful strategic analysis, including the above elements, will help determine whether it is in the best interests of the network to proceed with a delivery partnership, and help define the features of the program.

Legal considerations

Before proceeding with a delivery program, it is important to first consider a number of threshold legal issues, including those set out below.

• Conducting business online – Consider whether your franchise agreement gives you full control over online activities, so you can dictate which providers are approved and how the service is implemented and operated. Otherwise, it may be necessary to take a collaborative approach with your franchisees.
• Disclosure document – Review your disclosure document to ensure that it caters for potential use of delivery programs, or at least does not contain any statements that are inconsistent with the use of such a service.
• Exclusive territories – Consider the impact of any exclusive territories on the allocation of orders and delineation of delivery zones. Unless specifically carved-out from the exclusive territory clause in the franchise agreement, you may be obliged to ensure the delivery zones do not interfere with a franchisee’s protected area.
• Royalty calculations – Where a franchise agreement contemplates a royalty based on a percentage of gross sales, careful attention should be given to the definition of gross sales and whether the royalty is payable on the total amount of the sale, or the net proceeds after deduction of any commissions or fees. If you agree to a variation of the standard royalty mechanism, you must be careful not to undermine the integrity of the royalty formula, by confining the policy to delivery sales only.
• Food safety – Franchisees will remain primarily liable for compliance with food safety and labelling laws in respect of delivery orders, in largely the same way as on-premises consumption. However, the delivery process adds additional complications to ensuring the safety of the food, so you should determine the acceptable delivery radius, and preparation and packaging rules.
• Liquor licensing – If you approve the sale of alcohol using the delivery service, you should ensure that each franchisee is authorised to sell take away alcohol under its liquor licence.
• Customer/data ownership – When analysing whether a particular delivery program is suitable, consideration needs to be given to whether you will own the customer and the underlying data or the delivery program.  

Operational considerations

The operational considerations will be extensive, and unique to each individual system. The following questions should be considered early in the process:

• Food quality – What is the maximum delivery radius? Does the food have a quality window which could be at risk if a delivery driver is delayed?
• Packaging – Do you need custom packaging to protect the quality of the food? Does your packaging contain any required nutritional information or allergen labelling?
• Kitchen processes – Do you need to make any changes to kitchen processes to ensure the timely preparation of orders? Can your franchisees handle an increase in volumes at peak times?
• Technology – Will there be a need to invest in new technology to receive and process orders? Will your point of sale software need to be updated to cater for online orders?
• In-store collection – Will the collection of orders by riders or drivers cause disruption in your stores? Will this negatively affect the in-store customer experience?
• Complaints – Do you need to implement additional complaints handling process?
• Compliance – What additional audit and monitoring programs should be put in place to ensure compliance?

Tips for effective implementation

In summary, the following steps would be prudent in considering any delivery service:

1. Carefully consider the strategic, legal and operational consequences.
2. Review your franchise agreement and disclosure document for roadblocks.
3. Update your template franchise documents (if necessary) to cater for the program.
4. Prepare specific terms and conditions for franchisee participation.
5. Obtain a signed acknowledgement of the terms and conditions from each franchisee as a pre-condition to participating in the delivery program.
6. Add comprehensive policies and procedures to your operations manual.
7. Implement a robust compliance and monitoring program.

For advice on the strategic and legal issues underpinning the adoption of a third party delivery service, please contact Nick Rimington or any of our national franchise team.

In the past few months we have seen a number of significant changes to the penalty rate regimes that apply to many franchise networks. In this article, we consider the key changes that are likely to impact on franchise networks and provide suggestions to franchisors as to how they should be preparing for these changes.

Changes to penalty rates

Sunday penalty rates

The Fair Work Commission (FWC) has decided that its controversial cuts to Sunday penalty rates will be 'phased in' through a staged transitional arrangement, in order to mitigate the effects of any hardship likely to be experienced by employees as a result of its decision to cut Sunday penalty rates.

The Sunday penalty rates under the Fast Food Award 2010 and the Hospitality Industry (General) Award 2010 will be reduced by 25 per cent over the next three years. A four-year transition period will apply to employers covered by the General Retail Industry Award 2010 and the Pharmacy Award 2010 where Sunday penalty rates will be reduced by 50 per cent.

The first of these reductions came into effect on 1 July 2017 with the penalty rates under each of these modern awards being reduced by 5 per cent. Future reductions during the transitional period will take effect on 1 July each year during the transitional period. 

The Federal Court of Australia will hear an application from the SDA and United Voice to quash the decision to reduce Sunday penalty rates on 18 September 2017. However, for the time being, the 5 per cent reduction that took effect on 1 July continues. As such, franchisors may wish to revisit the penalty rates that they are currently paying to consider if they want to pass on this reduction immediately.

Public holiday penalty rates

The FWC did not decide to 'phase in' the implementation of its previous decision to reduce the public holiday penalty rates in the Fast Food Award, Hospitality Industry (General) Award, General Retail Industry Award or the Restaurant Industry Award 2010. As such, the 25 per cent reduction in public holiday penalty rates that is paid to employees for public holiday work came into effect on 1 July 2017.

Casual conversion

Following an application by the Australian Council of Trade Unions (ACTU) the FWC has determined that modern awards should contain a provision enabling casual employees to elect to convert to full-time or part-time employment, provided that they meet certain conditions.

The FWC proposes to insert a casual conversation clause into 85 modern awards, including the Fast Food Industry Award, the General Retail Industry Award, the Hospitality Industry (General) Award, the Restaurant Industry Award and the Hair and Beauty Industry Award 2010. 

The proposed clause will provide that a casual employee who has, over the previous 12 calendar months, worked a pattern of hours on an ongoing basis may elect to convert to full-time or part-time employment.

However, an employer may refuse a request for conversion on the following grounds:

• it would  require 'significant adjustment' to the casual  employee’s hours of work to accommodate them in part-time or full-time employment within the terms of the applicable modern award;
• it is not known if or it is reasonably foreseeable that the casual employee’s position will cease to exist;
• the employee’s hours of work will 'significantly change' or be reduced within the next 12 months; or
• on other reasonable grounds based on the facts which are known or reasonably foreseeable as to why the conversion should not occur. 

Under this proposed clause, employers will also be required to provide all casual employees with a copy of the casual conversion clause within 12 months of their initial engagement.

It is likely that a casual conversion clause will be inserted into the relevant modern awards later this year.

Overtime rates for casual employees

The FWC has also proposed to make casual employees covered by the Fast Food Industry Award, Hair and Beauty Industry Award, General Retail Industry Award and the Hospitality Industry (General) Award eligible for the payment of overtime penalty rates. 

The number of hours a casual employee must work to be eligible for payment of these rates will differ from award to award. For those modern awards that are most relevant to the franchising sector, overtime penalty rates will be payable for all hours worked in excess of, in respect of the:

1. Hospitality Industry (General) Award – 38 hours per week or 12 hours per day;
2. Restaurant Industry Award – 38 hours per week or 12 hours per day;
3. General Retail Industry Award – 38 hours per week or:
   (a) outside the span of hours for each day; or
   (b) in excess of nine hours per day (but with one day per week where the casual employee may work 11 hours without attracting overtime penalty rates);
4. Fast Food Industry Award – 38 hours per week or 11 hours per day;
5. Hair and Beauty Award Industry 2010 – 38 hours per week or 10.5 hours per day.

The overtime penalty rates will be applied to the employee’s ordinary rate of pay (as will their casual loading).

These provisions mean that employees need only meet the daily or weekly threshold to be eligible for overtime payments. For example, if a casual employee covered by the Hospitality Industry (General) Award works 2 x 14 hour days in a week, they will be entitled to four hours of overtime penalties, despite working less than 38 hours in the entire week.

Where a casual employee has regularly rostered hours of work a week, the FWC has proposed that to calculate the time worked, the rostered hours be averaged over the length of the roster cycle (which cannot exceed four weeks). For example, where a casual employee works a fortnightly roster in which they work 20 hours one week and 40 the next, the employee will not receive payment for any overtime as they have only worked an average of 30 hours a week.

The FWC’s view was that the requirement to pay overtime penalty rates to casuals under these modern awards would not result in a significant cost burden to employers.

The FWC has asked the SDA and United Voice to file draft determinations for these modern awards dealing with overtime rates for casual employees.

Again, it is likely that the new overtime provisions will be inserted into the relevant  modern awards later this year. 

How to prepare?

As noted above, a number of significant changes have been announced to penalty pay rate regimes over the past few months.

Franchisors (and their franchisees) should use these changes as a good opportunity to review their use of casual employees. In particular, we recommend that franchisors  undertake the following steps:

• assess the number of casual employees that they currently engage who have completed or are approaching 12 months employment;
• determine whether these casual employees have worked a pattern of hours on an ongoing basis without significant adjustment. For example, has the casual employee been engaged on a regular and systematic basis or only during peak periods on an intermittent basis?
• determine whether the casual employees’ roles can be performed on either a full-time or part-time basis;
• determine whether:
• the business would need to make significant adjustments to these casual employees’ hours of work to accommodate any request to convert to full-time or part-time employment;
• the relevant casual positions are required by the business on an ongoing basis; or
• the relevant casual employees’ hours of work will significantly change or be reduced within the following 12 months.

Franchisors are encouraged to work collaboratively with their franchisees in preparation for the changing landscape of casual employment in Australia to ensure compliance with the workplace relations framework, particularly in light of the Protection of Vulnerable Workers Bill which is still being debated. 

We are well placed to assist with implementing changes to the penalty rates regimes and developing and rolling out compliance programs.

If you have any queries about how the changes to the penalty rates regime, or the Protection of Vulnerable Workers Bill may impact your business, please contact Luca Saccoccio or any of our national franchise team.

By Mira Yannicos, Special Counsel
Migration Agent Registration No. 0532134
Accredited Immigration Law Specialist

Since our last edition of Franchising Focus, the second stage of the reforms to the 457 visa program was released on 1 July 2017. This is further to the Federal Government’s announcement on 19 April 2017 about the abolition of the 457 visa program and the proposed staggered changes until March 2018. 457 visa applications can continue to be lodged until March 2018. From March 2018, prospective visa applicants must apply for the new Temporary Skill Shortage (TSS) visa.

As it is anticipated that the sponsorship obligations will continue beyond March 2018, those employers who have employees on 457 visas will still need to be alert to their obligations, including the consequences of non-compliance with those obligations.

In our previous edition of Franchising Focus we focused on the sponsorship obligations as they pertain to 457 visa employers and suggested a number of strategies for compliance with the sponsorship obligations. In this article, we will focus on the monitoring of the sponsorship obligations and the consequences of non-compliance in the context of the franchise network.

How are these obligations monitored?

Sponsors will be monitored for compliance by the Department of Immigration and Border Protection (DIBP) during the period they are a sponsor and for up to five years after they have ceased to be a sponsor.¹ 

The DIBP generally relies on a target risk-based approach to monitoring 457 visa sponsors and are commonly informed of potential breaches by written requests from DIBP or Fair Work Ombudsman (FWO) inspectors for information (sponsors have an obligation to cooperate with these inspectors under reg 2.78); announced or unannounced audits and site visits to the employer business premises by DIBP; allegations from visa holders, community members and other third parties using the 'dob-in' line; and exchanging information with other agencies or areas such as the FWO, Department of Employment, Australian Taxation Office or 457 processing areas.

The DIBP also works closely with the FWO under a Memorandum of Understanding which grants FWO inspectors powers to specifically investigate breaches of reg 2.79 (the obligation to ensure equivalent terms and conditions of employment which are no less favourable than those provided to Australian citizens or permanent residents performing equivalent work in the same workplace and location) and reg 2.86 (the obligation to ensure that the sponsored person works or participates in a nominated occupation, program or activity for which their nomination has been approved).

The FWO then refers potential breaches to the DIBP. In 2015-16 the FWO referred 212 visa sponsors to the DIBP for further investigation.²

Taskforce Cadena

In 2015, Taskforce Cadena, a joint agency taskforce of the DIBP’s operational arm, the Australian Border Force (ABF) and the FWO, was established to reduce visa fraud, illegal work and exploitation of foreign workers. The taskforce is not limited in its scope of inquiry across industries and visa types, drawing on the collective powers of the ABF and FWO as conferred by the Migration Act 1958 (Cth) and the Fair Work Act 2009 (Cth).

Migrant Workers Taskforce

Furthermore, in May 2016 the Federal Government announced its Policy to Protect Vulnerable Workers, including the establishment of an additional joint taskforce, the Migrant Workers Taskforce. This taskforce’s role is to identify further proposals for improvements in law, enforcement and investigation methods, to reduce instances of migrant worker exploitation. This will include collaborating with Taskforce Cadena and other compliance operations.

What are the consequences for breaching these obligations?

The DIBP may initially issue letters to employers reminding them of their sponsorship obligations, or alternatively issue a formal warning letter, depending on the severity of the breach.

If an employer is found to be in contravention of their sponsorship obligations under the Migration Regulations 1994 (Cth) (the Regulations), depending on the severity of the breach, the court may issue sanctions such as a civil penalty order, or accept an undertaking. DIBP may also issue an infringement notice under the Regulations for the purposes of s 506A of the Act as an alternative to a civil penalty order.

The Minister may also bar the sponsor from doing certain things (e.g. sponsor non-citizens or limit the number of non-citizens to be sponsored, etc) or cancel the employer’s sponsorship status.

Furthermore, failure to comply with these obligations may amount to allowing non-citizens to work in breach of their visa conditions under the Migration Amendment (Reforms of Employer Sanctions) Act 2013 (Cth) (the Employer Sanctions Act). The civil penalty provisions of the Employer Sanctions Act do not require any intention on behalf of the employer in allowing an unlawful non-citizen to work in breach of visa conditions. However, having knowledge of, or being reckless in allowing a non-citizen to continue to work, can potentially constitute an aggravated offence with a potential sentence of five years imprisonment.

The recent cases summarised below indicate the factors the courts will take into account when considering the appropriate sanction.

Minister for Immigration and Border Protection v Choong Enterprises Pty Ltd³

Choong Enterprises Pty Ltd operated a number of restaurants and cafes in Darwin. The business obtained approval to act as a sponsor for ten Filipino citizens who had travelled to Australia on 457 visas to work as 'Cooks' and 'Restaurant/Café Managers'. Between 2009-12, Choong Enterprises contravened a number of regulations, with the most significant being the obligation to ensure equivalent terms and conditions of employment and to not recover certain costs from the visa holders. The conditions provided were far less favourable than would be provided to Australian citizens working in the hospitality industry at that time. The effect of this contravention was compounded by deductions of between $1,400 and $1,800 of pay from four employees to recover their recruitment costs.

When determining the appropriate sanction, Mansfield J took into account the fact that Choong Enterprises had received three reminders of its obligations from the DIBP during the relevant period and the presentation of inaccurate records to DIBP officers while under investigation. The element of general deterrence was considered significant and even more so when the sponsor had been directly made aware of their obligations. Consequently, Choong Enterprises had its sponsorship approval cancelled and was ordered to pay $180,000 in pecuniary penalties and $6,400 to employees for the recruitment costs that had been deducted from their salaries.

Minister for Immigration and Border Protection v Hallmark Computer Pty Ltd⁴

Hallmark Computer Pty Ltd conducted a business assembling, distributing and repairing computer products and mobile devices and was approved as a business sponsor to employ four 457 visa holders. Hallmark admitted to failing to meet its obligations to ensure equivalent terms and conditions, and to ensure the visa holders were being engaged in their nominated occupation and to not transfer costs to the visa holder.

In his decision, Buchanan J made it clear that in such a case, courts should attempt to ensure that civil penalties for breaching statutory obligations are not seen as an acceptable cost of doing business. The seriousness of the contraventions and deliberately sustained deception by Hallmark Computer during the DIBP investigation was taken into account when issuing the penalty. It was reinforced that to confine the assessment of the penalty for each course of conduct to the range of penalties for a single offence would not recognise the seriousness of Hallmark Computer’s conduct.

Ultimately a final penalty of $430,000 was imposed on Hallmark Computer and $86,000 on its director.

The significant penalties and scathing judgments in these two cases demonstrates the serious approach the courts take with employers who fail to comply with their sponsorship obligations.

Conclusion

In light of these decisions and the increasing scrutiny of legal compliance in franchise networks, it is imperative that anyone in a franchise network who routinely engages employees on 457 visas understands and complies with their obligations as a 457 business sponsor. Further, franchisors of such networks should consider what, if any, additional steps they should take to ensure that their franchisees are compliant with their 457 obligations, in order to minimise their own potential exposure.

Disclaimer

This information is general in nature and does not amount to legal advice. For further details about any of the issues raised in this article, or to discuss any immigration law matters your network may have, please contact Mira Yannicos at Norton Rose Fulbright Australia on +61 3 8686 6524.