Why the Vulnerable Workers Bill will add even more red tape to the franchise industry

Troy Wild | Deputy CEO & Director of Legal Services | National Retail Association | Principal Lawyer | NRA Legal

Why the Vulnerable Workers Bill will add even more red tape to the franchise industry

The retail industry in Australia accounts for a whopping 4.1 per cent GDP, and more than 10.7 per cent of Australia’s workforce, making it one of the most significant contributors to the Australian economy.

It’s one of the highest employers of young people – more than a quarter of employed people aged between 15 and 24 work across the almost 140,000 retail businesses in this country.

Among these are tens of thousands of franchisees, the majority of whom are already overburdened by red tape and compliance issues, however, there’s a very real danger that’s about to worsen.

As we all know, there’ve been a string of scandals in the franchise industry – 7-Eleven, Caltex, Domino’s Pizza and Pizza Hut have deservedly been outed for the serious underpayment of staff.

The 7-Eleven saga has probably gained the most attention after the Fair Work Commission handed it record penalties - more than $400,000 in one instance - for deliberate underpayments which are now in the 100s of millions of dollars.

The exploitation of workers is a serious issue and must be addressed with swift and hefty penalties. These cases were extreme and shocking examples of how the system can go wrong, however, none of them is an accurate reflection of this long-standing, successful model.

The ‘Protecting Vulnerable Workers’ Bill

On 1 March this year, the Fair Work (Protecting Vulnerable Workers) Bill 2017 (Bill) was introduced in Federal Parliament to amend the Fair Work Act 2009 (Cth) (FW Act) in an effort to make franchisors more responsible for the actions of franchisees, especially in relation to underpayment of employees.

As the Director of Legal Services at the National Retail Association (NRA), an industry association representing thousands of these retailers of all sizes, we have expressed serious concerns about the Bill which we believe unfairly penalises everyone in the franchise industry for the sins of an unscrupulous few.

What is it?

The Bill is effectively seeking to hold franchisors and holding companies as guarantors over the employment and payroll practices of separate legal entities and, in the case of franchisees, unrelated third parties.

The Bill seeks to:

  • Introduce fines of up to $54,000 for every instance of underpayment by a franchisee, and similarly, increase the penalty for serious breaches for a franchisee from $10,800 to $108,000, and for a body corporate franchisee, from $54,000 to $540,000;
  • hold franchisors and holding companies responsible for certain breaches by their franchisees or subsidiaries, where they knew or should have reasonably known but failed to take reasonable steps to prevent them;
  • clarify the prohibition on employers unreasonably requiring their employees to make payments in relation to the performance of work;
  • provide the Fair Work Ombudsman (FWO) with evidence-gathering powers similar to those available to corporate regulators such as the Australian Securities and Investment Commission and the Australian Competition and Consumer Commission; and
  • prohibit the hindering or obstructing of the FWO and or an inspector in the performance or his or her functions or powers, or the giving of false or misleading information or documents.

What will it mean for franchise groups?

We believe the Bill will add significant costs to those doing the right thing, deter entrepreneurs from considering franchising as an option, and erode the critical relationships between franchisees and franchisors. It’s not enough that a franchisor didn’t know about a significant breach, it’s enough simply that they should have known about it, and that the franchisor should have taken ‘reasonable steps’ to prevent this kind of behaviour.

The ‘reasonable steps’ are, in fact, unreasonably onerous on franchisors and holding companies, both in terms of costs and business confidence (eroding complex business relationships between franchisees and franchisors), with the extra costs inevitably going to be passed down to franchisees. Imposing an expectation of this kind is not sustainable or affordable for many businesses - many retailers and fast food entities that would be captured by the Bill in its current form simply do not have the financial or personnel resources for a finance or audit division.

In some cases, retailers have informed us that they would be required to reroute funding from core services focused on keeping businesses open or reduce staff levels to provide an auditing and other ‘watchdog’ type services (i.e. taking reasonable steps to prevent a contravention by a separate legal entity within their franchise or company framework).

These activities, in our view, will not grow business, innovate or support market competitiveness.

The NRA made formal submissions to the Senate Inquiry stating our opposition to the amendments as proposed under the Bill, and held several emergency meetings with the Department, however, with bipartisan support, it’s likely the Bill will become legislated later this year.

Some of the issues we have flagged include:

  • The current legislation is sufficient to cover franchise entities and holding companies (that are the subject of the Bill), for the issues that came to light in these investigations;
  • Terminology that is open to interpretation needs to be amended;
  • The Bill imposes a primary liability on a responsible franchisor or holding company for a contravention by a franchisee or subsidiary entity irrespective of whether an order has been sought or made against the franchisee or subsidiary, but in the vast majority of cases the franchisor is removed from the employment practices of its franchisees;
  • A prosecution would not need to prove the responsible franchisor (or holding company) knew exactly who was being underpaid and on what basis;
  • The reference to “auditing of companies in the network” in the Explanatory Memorandum indicates that this would be a necessary reasonable step for franchisors and holding companies to take to ensure compliance with the FW Act

How will it work in practice?

The real concern coming out of the 7-Eleven inquiry report is the lack of power the FWO has when it comes to gathering direct evidence in relation to an accessory’s role in or knowledge of the business and the facts comprising a contravention.

The 7-Eleven inquiry flagged widespread lack of cooperation, and the creation of records that concealed rather than established contravening conduct – limiting the FWC’s capacity to investigate and establish accessorial liability beyond the direct employer and franchisee level.

The inquiry also highlighted that many witnesses were unwilling to talk on the record or give evidence on the conduct of others. Unlike some regulators, the FWO doesn’t actually have the capacity to require or compel anyone to answer questions on the record in relation to alleged contraventions of workplace laws.

For this reason, we are supportive of the FWO being given further and better powers to obtain direct evidence in relation to an accessory’s role in, or knowledge of, these types of breaches, with the accompanying immunity that generally flows to a witness.

The long and short of it

We absolutely support the prosecution of those who are doing the wrong thing, however, the Bill, despite its best intentions, is unnecessarily holding to account the entire franchising industry for the acts of a small number of rogue entitles, in circumstances where the FW Act already has adequate protections in place (with only some modifications needed to extend the FWO’s powers to investigate suspected contraventions).

Should the Bill become legislation (which is highly likely) those franchisors and holding companies captured by the Bill will need to take reasonable and proactive steps to avoid liability, in areas such as education/awareness, non-compliance reporting and auditing. Such measures will require a review and likely amendment of existing franchise agreements and policy – which of course all comes at a cost and at a time when the franchising industry can least afford to take on extra costs and regulatory burden.

And when there are big retailers falling over in this country right now amid an increasingly competitive landscape, soaring wages and unsustainable leasing costs, more red tape and costs imposts are not the answer.

Troy Wild is the Deputy CEO of the National Retail Association and Director of NRA Legal. He has over 14 years’ experience in Employment, Industrial Relations and Work Health & Safety Law to the NRA Legal team, as well as 12 years as a NSW police detective. He has represented a wide range of clients throughout Australia and abroad, including national retailers, multinational corporations, energy and resources industries, small business, and member associations.

The National Retail Association (NRA) is Australia’s largest and most representative retail industry organisation. For almost 100 years, the NRA has represented the interests of the retail, fast food and broader service sector, delivering critical legal information, government representation, professional training and signature events. NRA offers an all-in-one solution for retailers with decades of retail-specific knowledge and experience.

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