The Greens have announced a new bill which potentially means Australian franchisors could be jointly liable for the breaches of employment awards and laws by their franchisees. But is there already potential liability for franchisors if their franchisees don’t pay their staff their proper entitlements?

In the US there has been a lot of discussion about joint employment and the issue of franchisors bearing some responsibility as a joint employer of the franchisee’s staff.  There is considerable lobbying in the US on this issue as it directly affects issues such as the minimum wages that are payable to staff.

The US Situation

Briefly the NLRB, an independent US federal agency which advocates for employees’ collective bargaining rights, ruled that companies can be held responsible for the labour violations of their contractors. Franchisors can be joint employers if they have indirect control or potential control over the franchisee’s workers’ terms and conditions of employment.

The decision centered on a case involving the waste management company Browning-Ferris, but the impact could be felt on diverse businesses, from restaurants and retailers to construction firms and staffing agencies.  Since then the NLRB has launched an investigation of this issue with respect to McDonalds citing the monitoring measures and productivity advice provided by the franchisor as evidence of its control over employment practices of franchisees.

Companies don’t want to be responsible for employees they don’t directly control and this is why many have speculated it could lead to the end of the franchise model as it now operates in the US.

Recently a bill has been introduced into Congress to roll back the ruling by the NLRB although it is yet to be passed.

Here in Australia we thought that this debate was largely an American concern - until now.

The Greens Proposal

In the wake of the 7-Eleven wage underpayment scandal, Greens MP and spokesman for industrial relations Adam Bandt has proposed a private members bill (to be called The Fair Work Amendment (Recovery of Unpaid Amounts for Franchisee Employees) Bill 2015[1]) which he says aims to amend the Fair Work Act 2009 (the Act) to make parent companies, or franchisors, more responsible for the behaviour of their franchisees, specifically when it comes to the underpayment of wages.

The amendments propose to enable any underpaid workers in a franchise arrangement to make a claim against the franchisor and require the franchisor to repay wages to workers and then claim the money from the franchisee. 

This is intended to make franchisors more motivated to enforce compliance with modern awards and any other industrial instruments among franchisees in their system.

"Instead of leaving it to vulnerable workers to uphold the law through expensive legal action, head offices would take more responsibility for what goes on in the stores that carry their name," Bandt has stated, and further:

"The head office could still pursue the franchisee for the amount of any underpayment, but they'd have an extra incentive for ensuring the underpayment didn't happen in the first place."

Bandt intends to introduce the new bill during the next sitting of parliament in October. It would need the support of the Opposition and cross benchers in order to become law. 

The difficulty employees have had in enforcing decisions against franchisees who have wound up their companies has been cited as a reason the legislation is needed.

How can Australian franchisors currently be liable for franchisee employment breaches?

We already have legislation that deals in part with these situations.

Under Section 550 of the Act a franchisor could be found to be involved as an accessory in a contravention of the Act, such as the breach of a modern award by not paying the minimum rate of pay, overtime and penalty rates.

In the case of corporate employers who have failed to pay employee entitlements because of insolvency, it is not uncommon that affected employees, or the Fair Work Ombudsman (doing so on their behalf), will commence proceedings under s550 against directors and other individuals previously involved in the management of the defaulting employer.

In recent cases[2]  the employer’s liability for the breach of the Act was established but as the employer was in liquidation the Fair Work Ombudsman pursued only the relevant directors of the companies concerned under s550 of the Act for recovery of the employee entitlements and/or civil penalties.

In order for a person to be liable as an accessory to a contravention under  s550, they:

(a) must have had knowledge of the essential facts;

(b) must have been knowingly concerned;

(c) must have been an intentional participant based on actual (not constructive) knowledge of the essential facts - although constructive knowledge[3] may be sufficient in cases of wilful blindness; and

(d) need not have known that the matters in question constituted it.

“An accessory must not only have actual knowledge of the misleading conduct but in addition should, in some positive way be associated with the primary contravention through the commission of positive acts. The mere fact of awareness of impending misconduct does not, of itself, raise a case of involvement in that misconduct.”[4]

The accessorial liability of sole directors especially, as well as directors who exercise a high degree of control over their company, is often the subject of litigation. Higher expectations are placed on directors or other people who are involved in the day-to-day management of an employer company.

Factors to be taken into account include:

• whether the person has “day-to-day control and supervision” over the employer company’s affairs and finances, or
• whether the person was responsible for determining and setting wage rates and conditions for the employees or
• whether he or she had the authority to direct payment of outstanding entitlements to the relevant employees. 

Whilst the concept of joint employment is yet to be accepted in Australia, if a franchisor is exercising control and management over a franchisee’s business to the extent that they are managing their payroll systems and processing wages which are based on breaches of the award (such as not querying flat hourly rates of pay for employees no matter how many hours or what days they work) then the franchisor may potentially be found to be liable as an accessory to the contraventions and liable for any underpayment claims.

While many franchisors provide advice to their franchisees on employment matters, they do not usually exercise the degree of control required for liability under s550. However, , for the sake of their brand and welfare of the employees that work under their banner, they should ensure so far as is possible that Franchisees are aware that they must comply with all relevant industrial laws. In particular if they are exercising a degree of control and management over a franchisee’s business, they must clarify and make enquiries if there is a concern that relevant industrial laws are being met and request confirmation of compliance.

It appears that the amendments proposed by the Greens would make it significantly easier to claim against franchisors for the misdeeds of their franchisees as it will presumably not be necessary to prove accessorial liability to succeed in any underpayment claim against a franchisor.

If the amendments proceed franchisors will have a legal obligation, not just a moral obligation, to ensure that their franchisees are meeting their respective obligations to employees.

By Corinne Attard and Rachael Sutton, Partners Holman Webb Lawyers Sydney

[1] A copy of the bill was unavailable at time of writing

[2] See for example: Fair Work Ombudsman v Aussie Junk Pty Ltd and Anor [2011] FMCA 39 and Fair Work Ombudsman v Bedington [2012] FMCA

[3] Constructive knowledge is knowledge of a fact that a person is presumed by law to have, regardless of whether he or she actually does, since such knowledge is obtainable by the exercise of reasonable care.

[4] Australian Building & Construction Commissioner v Abbott [No 4] [2011] FCA 950, [193]