Prevention Is Better Than Cure

Alexander Millman | Senior Workplace Lawyer and Advisor | National Retail Association
Prevention Is Better Than Cure

Prevention Is Better Than Cure

Franchising has been a firm part of the Australian retail landscape for almost fifty years, long after the first fast-food chains became part of our culture.

The numbers behind the industry are staggering - according to a Griffith University report, endorsed by the Franchise Council of Australia, as of 2016 there were 1,120 franchise brands operating in the  marketplace, supporting 79,000 separate small businesses, that collectively employed around 472,000 direct employees, with a combined sales turnover of around $146 billion.

Despite these decades of great success, overwhelmingly positive relationships between franchisor and franchisee, and its immense value to the Australia economy, the entire franchise sector has been  firmly in the spotlight over the past 18 months for all the wrong reasons.

From the gross underpayment and systemic exploitation of workers uncovered across 7-Eleven stores, to Fairfax Media’s expose on the underpayment of hundreds of Domino’s Pizza staff (including  some of its franchisees who were caught offering Australian residency visas in exchange for cash) – you don’t have to look very far to see why the media, and the Government, has been up in arms.

Most recently, Caltex announced it would be transitioning all franchisee sites to company operations after Fair Work Ombudsman Natalie James called the Caltex franchise model unsustainable. This  followed an investigation by the Ombudsman which found non-compliance with Fair Work laws at a whopping 76 per cent of audited franchisee stores.

While the media reports are disturbing to say the least, cases of serious non-compliance are the exception, and not the rule – for every bad headline, impossible-to-sustain business model, or genuinely  unscrupulous operator, there are thousands more exemplary franchise arrangements.

Vulnerable Workers Bill

Although admirable in its intended purpose, the Federal Government’s vulnerable workers legislation has left franchise brands potentially open for prosecution for unconscionable conduct committed by  any one of their franchisees.

Franchisors who have a significant degree of influence or control over their franchisees will be liable for contraventions of the Fair Work Act 2009 by their franchisees unless they can show that:
(a) they were unaware of, and in all the circumstances could not reasonably be expected to be aware of, the contraventions; or (b) they had taken reasonable steps to prevent the contraventions from  ccurring. Critically, it is no defence for the franchisor to argue that their control over the franchisee does not extend to employment practices.

In the case of 7-Eleven, the franchisor’s control extended into every corner of the business except employment, and Parliament drafted thelegislation to get around this potential loophole.

The defences available to franchisors were also left deliberately vague so that they could be adapted to the circumstances of each case. The intention was that smaller, less sophisticated franchisors  would be held to a lesser standard than larger, more sophisticated franchisors. Because of this, there is relatively little guidance to be found as to what are ‘reasonable steps’ or circumstances where a  franchisor could ‘reasonably be expected to have known’ about contraventions by franchisees. This lack of certainty means that a significant contingent liability, like a legislative Sword of Damocles, hangs over the head of franchise businesses. In addition to changes to the legislation, the Federal Government granted a $20 million increase in the funding of the Fair Work Ombudsman with which the  agency may increase its enforcement actions in this new paradigm. We expect to see a significant increase in regulator action against franchisors in the near future.

With penalties now potentially reaching $630,000 for a corporation, there are plenty of incentives for businesses to keep themselves out of the Ombudsman’s firing line.

Better vetting practices

While tension between the interests of franchisor and franchisee is inevitable, and an essential component of a dynamic business, the easiest way for franchisors to ensure that they stay out of the courts  is to first make sure that they only engage the right sort of franchisee. Some franchises do this exceptionally well already – McDonald’s is renowned for its thorough vetting process of franchisees to ensure that a franchise restaurant doesn’t fall below standards (or worse, become a headline). Other franchises are less careful and don’t look far beyond the payment of the franchise fee. The adage that  prevention is better than cure is true in franchising as it is in medicine. The right kind of franchisee will ensure that their business is compliant with all relevant laws as a matter of course. The wrong  kind of franchisee will need a lot of extra attention (and expenditure) to bring them into compliance with the law. Getting the right franchisee at the start will save a lot of time and money later.

Just because your franchise is a well-known name with dozens or even hundreds offranchises all over the country and a proven business model to back it up, doesn’t mean it’s right for every candidate.

For any franchisor about to enter into an agreement with a new franchisee, it’s crucial to undertake proper due diligence legally, economically and socially, on all potential candidates, to ensure each one  can, and will, hold up their end of the bargain.

Employee arrangements

One of the areas where industrial advisors see franchised businesses go wrong is right at the start, when taking over an existing business. When a franchisee takes over an existing business, they not only  et the use of the intellectual property, the premises, and the equipment – they often get the old owner’s employees too. If the old owner did not operate a compliant business, this also means that the new franchisee inherits the old owner’s mistakes.

An all-too-common occurrence is that the former franchisee engaged their staff under the wrong Modern Award, and the new franchisee simply carried on this practice on the assumption that it was  correct. In this sort of situation, not only does the franchisor have a compliance issue with the old franchisee, but failing to have it rectified has put the new franchisee on the wrong path from day one. Another common occurrence is the failure of new franchisees to understand what employee entitlements transfer from the old franchisee to the new franchisee. Exacerbating this, we see new franchisees failing to understand that the legislation overrides any agreement they, in their ignorance, may have made.

In the current regulatory environment, with an increasingly empowered regulator and increasingly irritated courts, the excuse of ‘that’s the way it’s always been done’ or ‘that’s the way the last owner  did it’ will do nothing to save anyone from harsh penalties. A culture of this nature begins to permeate the franchise chain, and soon other franchises are operating in the same, non-compliant fashion –  as the 7-Eleven inquiry showed us.

A diligent franchisee will double-check every practice of the old franchisee, and will not be afraid to make sweeping changes if they think they are necessary. Keep these ones.

Adequate recording and reporting systems for time and wages

Among the new changes to the Fair Work Act in late 2017 was the introduction of the reverse onus of proof in the absence of records. Normally, an applicant to the court (typically an employee) must  prove that what they are saying is true before the court can find in their favour. Under the reverse onus of proof, the situation is (amazingly!) reversed and insteadit falls to the employer to prove that the assertions of the employee are false.

This only applies where the employer is required to keep records under law but has failed to do so. For example, if an employee claims that they have been underpaid, and the employer has failed to  keep compliant time and wages records, the employee is deemed to be the victor unless the employer can produce some other form of convincing evidence. In this environment, it is not enough to be confident that your franchise network is paying their staff correctly – you need to be confident that they can prove it too. As such, franchisors need to turn their mind to measures to simplify and  standardise accurate time and wages recording and monitoring systems. All of these records must be kept for seven years and readily available for inspection if the Ombudsman ever calls.

There are myriad payroll software options out there for small business, however it’s generally much easier to produce things like compliant pay slips and records using automated cloud payroll software  – many of which also include business tools to help operators maintain compliance, and manage the day-to-day operations.

Introducing a specific software system sanctioned by the franchisor is a great way to ensure consistency, ease of access, and accountability among the entire franchisee network.

Employers have enough to do, so utilising automated payroll and employee management software can free up a great deal of their time to focus on running a successful business.

Staying up to date to  avoid non-compliance

It’s incredibly difficult for SMEs and franchisors to find the time (and inclination) to study and stay up to date with the ever-evolving industrial relations landscape. Our industrial relations system is one  of the most complex in the developed world, and as we’ve seen with last year’s amendments to the Fair Work Act, changes can be swift and have far-reaching consequences.

The largest areas of non-compliance uncovered in the Caltex inquiry were pay slips and employment records, followed by penalties, overtime loadings and allowances. While Caltex’s response to this  was clearly an indication of a system that was easier to scrap than to repair, it’s fair to say the majority of Australian franchisees who find themselves on the wrong side of compliance issues don’t intend to do so. However, in the new landscape of joint liability, it’s now up to franchisors to protect their own franchise business.

Specialising in employment law, Alexander Millman provides advice and representation to a collective network of more than 19,000 retail, fast food and quick service outlets nationwide. This includes  representing members and providing expert guidance in the modern award review process (including appearances before the Full Bench of the Fair Work Commission) and individually in discreet cases  before industrial tribunals.

The National Retail Association is here to help employers, business owners and companies navigate these and other HR and compliance issues, and keep you upto- date on any changes to the industrial landscape that might affect you. We have a dedicated team of legal professionals who specialise in these areas and are on hand, every day, to provide expert guidance on these and other issues common  to retail business. If you’d like more information on franchise arrangements, please don’t hesitate to get in touch via:

1800 RETAIL (738 245)
www.nra.net.au