Create a compliant culture before it’s too late

At the National Franchise Convention 2016 one of the key topics discussed was the liability of franchisors for the actions of their franchisees, particularly in the area of employee entitlements.

Several high-profile cases, including the 7-Eleven underpayment investigation and more recently investigations of Chemist Warehouse and Caltex, have led to increased attention on the franchise industry and have given credence to policy proposals from both sides of politics for reform in the area of franchising.

The Government’s commitment

The Government has been committed for some time to amending the Fair Work Act 2009 (Cth) (Act) to guarantee greater protection for vulnerable workers.

In May 2016 the Government launched ‘The Coalition’s Policy to Protect Vulnerable Workers’ (Government Policy) in which it made a series of promises to protect vulnerable workers from systemic exploitation. The proposed reforms include:

1 an increase in penalties under the Act to 10 times current penalties of $10,800 for individuals and $54,000 for companies where employers deliberately underpay workers and fail to keep proper records;

2 amending the Act to make franchisors and parent companies liable for breaches of the Act by franchisees or subsidiaries where they should have reasonably been aware of the breaches and could have taken reasonable action to prevent the breaches occurring;

3 the contribution of $20 million to clamp down on wage fraud across the country;

4 the appointment of Professor Allan Fels as the head of a Migrant Worker Taskforce; and

5 the introduction of compulsory evidence-gathering powers to the FWO, similar to those of ASIC and the ATO.

While the Government Policy is yet to become law, given recent attention on the industry and a policy push by the Fair Work Ombudsman (FWO), it is likely that until the Government Policy is enacted in legislation, the FWO will use the current provisions of the Act to hold franchisees and franchisors to account.

Are franchisors already liable for actions of franchisees under the Act?

A speech given by the FWO, Natalie James, in July 2016 to the Australian Human Resources Institute, makes it clear that the FWO certainly thinks that franchisors can already be held accountable for breaches of the Act by their franchisees.

Under s 550 of the Act, individuals and companies can be found liable for breaches of the Act where they are ‘involved in’ the contravention. A person is ‘involved in’ a contravention of the Act, if the person:

1 has aided, abetted, counselled or procured the contravention; or

2 has induced the contravention, whether by threats or promises or otherwise; or

3 has been in any way, by act or omission, directly or indirectly, knowingly concerned in or party to the contravention; or

4 has conspired with others to effect the contravention.

The maximum penalties for each breach of the Act are $54,000 for a company and $10,800 for an individual.

Until recently this provision was seen as a fall back provision; used to prosecute directors where there was a fear that a company would be wound up to avoid paying workers. Now however, the FWO is using this provision to hold accessories to account on a more systematic basis. In the 2015-16 financial year, the FWO sought orders against accessories in over 90 per cent of the cases it filed.

Importantly, the FWO also no longer confines itself to seeking penalty orders against accessories. In one recent case, a former director of a now wound up company was ordered to personally repay almost $23,000 in lost wages to eight employees, on top of a $51,400 penalty.

Franchisors should be aware that there is clearly scope under the current Act for such orders to be made against them.

In one 2014 case, a franchisor who advised a franchisee on the process of terminating an employee, by drafting the termination letter and conducting a termination meeting, was found to be liable under s 550 for the franchisee’s adverse action. This is despite the fact that it was the franchisee that had made the decision to terminate the employee.

In November 2016, the Yogurberry outlet in Sydney’s World Square Shopping centre was found to have underpaid four Korean workers a total of $17,827 between July 2014 and May 2015. The franchisor was fined $25,000 for its direct involvement in establishing pay rates for employees and deliberately refusing to disclose information about its financial status to the FWO. The payroll company used by Yogurberry was fined $35,000 and Ms Soon Ok Oh, a director and part owner of all the corporate respondents, was personally fined $11,000.

As shown above, the requirement to be ‘involved in’ a contravention is not as onerous as it sounds and can be as simple as ‘aiding’ the contravention. By way of example, the FWO recently issued proceedings against an accounting firm which it alleges knowingly processed payments that were below the relevant award rates. Given that so many franchisors administer payroll for their franchisees, it is easy to see how a franchisor could be prosecuted in similar circumstances.

What should franchise systems do?

To date, only franchisors who have been intimately involved in a franchisee’s contravention of the Act have been liable as an accessory.

During the FWO’s investigation into 7-Eleven it was noted that mere knowledge or suspicion about general non-compliance does not meet the ‘involved in’ requirement of s 550. A successful prosecution requires evidence of involvement in or knowledge of specific contraventions by specific franchisees, which the FWO determined it did not have in the case of 7-Eleven. Therefore, those franchisors who manage to keep some separation between themselves and the action have avoided prosecution.

While franchisors may have to date opted to ‘stay out’ of the day-to-day management of their franchisees and their compliance with relevant workplace laws, given the potential ramifications of failing to comply with workplace laws this approach may not cut it. Leaving aside the damaging effects negative publicity has upon a franchise’s brand in the event of an underpayment or similar scandal, given the statements by the FWO and the Government Policy, it seems that franchisors can no longer afford to turn a blind eye to what their franchisees are doing.

The FWO is clearly intent on sending a message that no one is immune from prosecution. Ensuring that a franchise system doesn’t fall foul of the FWO’s renewed endeavour, as well as the Government Policy (if enacted into law), is about maintaining a strong culture of compliance. Franchise systems need to ensure that their employment arrangements are compliant with applicable laws and importantly, that employees are being remunerated at least with applicable minimum rates under the relevant industrial instrument.

Franchisors must act on any evidence of noncompliance, but on top of this should also consider arrangements to periodically confirm that franchisees are complying with their obligations under the Act.

Now is a good time for franchisors to review their arrangements with franchisees, as well as their internal policies and procedures, to create a culture of compliance.

Failing to take these steps will inevitably result in someone being held to account in the event of breaches of workplace laws and the associated brand damage that such scandals cause – the question is, do you want that someone to be you?

At Hall & Wilcox, we deliver ‘smarter law’. This means being smarter across our entire business – by being progressive, by our commitment to excellence and by our focus on building great relationships. For our clients, this translates to better quality, better value, improved efficiency and greater ease of doing business.

Melinda provides strategic and practical advice on a range of employment and industrial relations law issues. Melinda regularly advises clients on the employment-law related aspects of commercial transactions, the implementation of corporate restructures, transfers of business and outsourcing arrangements. She also regularly provides strategic advice to clients on the performance management of employees, employee discipline and the implementation of redundancies and workplace change.

Karl is the section leader in the firm’s Employment and workplace relations team. Karl is an experienced litigator who understands the complicated nature of employment disputes and the effect they have on a business’ culture. He is a skilled negotiator and appreciates that sometimes
less is more.

Melinda Bell
T +61 3 9603 3421
melinda.bell@hallandwilcox.com.au

Karl Rozenbergs
+61 3 9603 3583
karl.rozenbergs@hallandwilcox.com.au