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Franchisor liability – where do you stand?

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By James Cox, Lawyer, MST Lawyers and Chao Ni, Senior Associate, MST Lawyers

In 2015 the Fair Work Ombudsman (FWO) launched an inquiry into the 7-Eleven franchise network.  The findings from this inquiry were released in April 2016 noting that a number of franchisees had deliberately falsified records to disguise the underpayment of wages as well as committing other contraventions of workplace laws.

Fast forward to November 2016 and the same issues have arisen for Caltex. As part of their own audit process, Caltex has uncovered that a number of its franchisees have been underpaying employees; with some being paid as little as $12.00 per hour.  To place this into context, the adult minimum hourly rate for a console operator under the Vehicle Manufacturing, Repair, Services and Retail Award 2010 is $19.56.  The FWO recently gave Caltex notice that it would begin raiding its franchisee service stations as part of its own separate investigations.

Apart from the serious damage to the brand that franchisors suffer as a result of the actions of their franchisees, there is also a question of whether franchisors can be held liable.

Section 550 of the Fair Work Act allows a Court to find accessorial liability against persons knowingly involved in a contravention of a civil remedy provision. To that end, if a franchisor is aware of underpayments made by franchisees, they could be found to be an accessory and consequentially, face significant monetary penalties. 7-Eleven were fortunate to escape from being caught by the accessorial liability provision under the Fair Work Act because the FWO could not show that the franchisor was aware of their franchisees’ contravention of workplace laws.

In order to make franchisors more accountable, the Turnbull government has outlined in its Protect Vulnerable Workers Policy (“Policy”) that it intends to introduce new offence provisions that capture franchisors and parent companies who fail to deal with exploitation by their franchisees/subsidiaries in situations where the former should reasonably have been aware of the breaches and could reasonably have taken action to prevent them from occurring.  The Policy also foreshadows a tenfold increase to maximum monetary penalties under the Fair Work Act (currently $54,000 per breach for a corporation and $10,800 per breach for an individual).

What does this mean for franchisors? Regardless of what legal reform the Turnbull government can get through the Senate, franchisors already face the risk of significant brand damage and accessorial liability under the current workplace laws if their franchisees are not compliant. Franchisors must take the lead to protect their franchise network by ensuring all minimum standards are met.

MST conducts workplace law compliance audits on behalf of franchisors to ensure that their franchisees are compliant with relevant workplace laws. For more information, contact Employment Law and Workplace Safety team by email or call us on +61 3 8540 0200.