COVID-19 Updates: Read our blog for useful informaton about commercial, employment and family law issues.

Liability for franchisors and holding companies

Stephen Booth

Vulnerable Workers Legislation enforced 27 October 2017

The Federal Government’s Fair Work Amendment (Protecting Vulnerable Workers) Act 2017 has now passed Parliament. This legislation was promised by the Coalition in the 2016 election.

Some of the legislation, dealing with payslips and record keeping, takes effect immediately. The maximum penalties for offences involving payslips and record keeping have doubled, to $12,600 per contravention for individuals, and $63,000 for companies. For serious contraventions (where the offender knowingly contravened the law, and the contravention was systematic), the penalties are 10 times as much.

Employers who fail to provide payslips or to keep records will bear the onus of proof in relation to wage underpayment claims. That is, in the absence of compliant records, the employee’s account of how they were underpaid will be accepted unless the employer can prove otherwise.

The new legislation also specifically prohibits employers placing unreasonable requirements on employees to pay money to the employer or a third party. This is designed to deal with the situation which has arisen in a number of franchising situations, where the correct pay is shown in the records, and was in fact paid, but the employee was required to hand some of it back in cash. This will also extend to asking prospective employees for unreasonable payments in order to get a job.

All of these changes apply immediately.

The Fair Work Ombudsman (FWO) has had considerable success in the last two years in expanding the scope of liability for underpayments to accessories, including directors and executives involved in infringements and franchisors, to overcome situations where the franchisee is no longer in existence or is unable to pay. The new legislation applying to franchisors, with respect to franchisees, and holding companies, with respect to subsidiaries, gives firmer legislative footing for pinning liability on companies further up the chain (and their executives) who have not taken reasonable care or exercised due diligence. A franchisor or holding company which infringes these rules, and individuals involved in the infringement, will be liable for the underpayments to workers.  

The criterion for liability relates to having a significant degree of influence or control over the franchisee’s affairs. Due diligence will be a matter of establishing that appropriate policies and requirements were in place, through the Franchise Agreement and related policy and guideline documents, and that there was appropriate monitoring and oversight to ensure that there is compliance in the body of the franchise network or amongst the subsidiary companies. It goes without saying that franchise models or company groups where the controlling body imposes business models which prevent franchisees or subsidiaries from meeting their obligations are likely to fall foul of these laws.

The legislation also gives the FWO enhanced information gathering powers, akin to those of the ACCC under the Competition and Consumer Act. These include the ability to require production of information and documents and to answer questions under oath, along with protections such as evidence of an individual not being used against the individual personally. The FWO has commented that these powers will be used as a last resort against employers who systematically fail to meet their obligations, so there will be opportunities to comply before these sanctions are applied.

It is obvious that in the face of these expanded powers, penalties and liability provisions, franchisors, and those in charge of company groups, need to ensure that compliance with workplace laws is a KPI lower down in the organisation. Turning a blind eye will be fraught with risk. This requires a management focus on compliance, which is refreshed regularly, and monitored by audit or other checks to ensure that the franchisor or holding company deals with risks, or at least can show it did its best to prevent infringements.

If you would like to receive our regular legal updates, please subscribe here.  If you need any assistance with implementing suitable controls and audits on franchisees or subsidiary companies, please contact Stephen Booth or Dominic Russell in our Employment Law Team: