On 5 September 2017, the Federal Parliament passed amendments to the Fair Work Act 2009 (Cth) which, among other things, have the effect of making franchisors responsible for underpayment of wages to the employees of their franchisees in certain circumstances.

When the new legislation commences, franchisors will be held responsible for underpayments by their franchisees where they knew or ought to have known of the contraventions of the legislation by their franchisees where they knew or ought to have known of the contraventions of the legistlation by their franchisees and failed to take reasonable steps to prevent the contraventions. The new responsibilities will apply where franchisors and holding companies hae a significant degree of influence or control over their franchise networks.

To determine which franchisors are caught by the new legislation, it will be necessary to consider the following:

  • the legislation will be limited to franchisor/franchisee businesses which are appropriately associated by branding. This is distinguished from other forms of arrangements such as buying groups with no common branding;
  • a franchisor will be considered to have a “significant degree of influence or control” if they have control in relation to the broad affairs of the franchisee, such as involvement in the franchisee’s financial, operational and corporate affairs. Merely having impact on minor matters which do not have any impact on the management or operational decisions of the business will not constitute a “significant degree of control or influence“;
  • franchisors do not need to have actual knowledge of the franchisee’s conduct. It is enough that the franchisor could reasonably be expected to have known the contravention would occur or that a contravention was likely to occur. This factor will require a general assessment of what was known, or could be expected to be known, at head office level about levels of compliance within the franchise network.

However, a franchisor will not contravene the new legislation if it can show that it took reasonable steps to prevent the contravention which occurred. Such steps include, but are not limited:

  • ensuring the franchise agreement requires franchisees to comply with workplace laws;
  • ensuring the franchise agreement requires franchisees to comply with workplace laws;
  • providing franchisees with a copy of the Fair Work Handbook and educating them on compliance with workplace laws;
  • encouraging franchisees to cooperate with any audits or investigations by the Fair Work Ombudsman;
  • establishing a contact line for employees of franchisees to report any contraventions to the franchisor;
  • auditing members in the franchise network for compliance.

We recommend that franchisors take the following steps to minimise the risk of being found in contravention of the new legislation:

  • issue a circular to all franchisees within the network notifying them of the introduction of new legislation and the expectations of the franchisor in relation to compliance with workplace laws;
  • amend the franchise agreement so that all agreements issued going forward expressly provide a requirement for franchisees to comply with workplace laws;mend the franchise agreement so that all agreements issued going forward expressly provide a requirement for franchisees to comply with workplace laws;
  • review the practices of the franchisor and the level of the franchisor’s involvement in franchisee businesses to ensure there is transparency and awareness of the conduct of franchisees in respect of compliance with workplace laws;
  • review or establish systems and processes to ensure compliance with workplace laws and to best ensure reasonable steps are being taken to prevent contraventions of workplace laws.

We would be pleased to assist you by providing further advice in relation to the new legislation and drafting and appropriate circular to all franchisees, as well as reviewing your current franchisor practices in respect of ensuring franchisees comply with the workplace laws.

Need more information? Should you require any further information, please contact us on (07) 3370 0200.