Franchisor liability has changed

There have been recent amendments to workplace laws that affect certain franchisors. Under these changes, there are additional provisions that mean franchisors can be held responsible for contraventions of workplace laws by their franchisees.

Who is affected?

These provisions apply to what is called a ‘responsible franchisor entity’.

To be a responsible franchisor entity, all of the following three things are required:

1. There must be a franchise

This requires an arrangement where the owner of a brand or trademark (franchisor) allows a person to earn money by using the brand or trademark, or the reputation of the brand, in running a business (franchisee)

2. The franchisee’s business must be substantially or materially associated with intellectual property relating to the franchise

This means that the use of the franchise branding, such as a trademark, logo or marketing, must be a major feature of the business operated by the franchisee.

Example: ABC Foods Pty Ltd is a franchisor for a food outlet called ‘Good Foods’. XYZ Pty Ltd enters into an arrangement to become a ‘Good Foods’ franchisee. XYZ Pty Ltd opens a new food outlet, which is branded as a ‘Good Foods’ and uses the ‘Good Foods’ logo on all of its advertising, menus, staff uniforms, food containers and social media.

3. The franchisor has a significant degree of influence or control over the franchisee’s affairs

This examines the degree of influence or control a franchisor has over a franchisee’s financial, operational and/or corporate affairs. There will be some degree of influence or control in all franchise arrangements. In order for the extended liability provisions to cover a franchisor, a greater level of involvement in the franchisee’s business affairs is needed.

Determining whether influence or control is significant will depend on the franchise model and the parties. It looks at:

  • the rights of the franchisor to direct, manage, regulate, determine or command the franchisee entity about financial, operational and/or corporate matters. For example things like trading hours, sales targets or quotas, staffing levels, expenditure on business expenses and costs
  • how the relationship works in practice, such as how much the franchisor influences or contributes to management or operational decisions of the franchisee business, or affects the franchisee’s ability to generate revenue or profits.

Example: ABC Foods Pty Ltd specifies the systems XYZ is to use when running the Good Food outlet. It also sets the store opening hours, prices, service standards, promotions and advertising campaigns, and which suppliers XYZ can use to buy ingredients and business supplies and equipment. Given ABC has significant influence and control over XYZ’s business it would be a ‘responsible franchisor entity’.

What kinds of contraventions are covered?

A responsible franchisor entity can be held responsible if a franchisee contravenes certain provisions of the Fair Work Act. These provisions include:

  • entitlements under the
    • National Employment Standards
    • Modern awards and agreements
    • national minimum wage orders, equal remuneration orders and guarantees of annual earnings
  • rules about methods and frequency of payment, including deductions from wages or paying money
  • pay slips and record-keeping
  • sham contracting

When would a franchisor be liable?

Responsible franchisors can be liable for a contravention if they (including an officer of the franchisor):

  • knew, or could reasonably be expected to have known, that a relevant contravention would happen, or
  • at the time the contravention happened, knew, or could reasonably be expected to have known, that a contravention of the same or similar kind was likely to happen, and
  • haven’t taken reasonable steps to prevent the contravention or a contravention of the same or similar character.

What actions can be taken?

Responsible franchisors can be subject to enforcement action for breaches of their extended liability provisions in the Fair Work Act and can be subject to court proceedings.

A court can make a range of orders, including that a responsible franchisor pay compensation to employees of the franchisee for the contraventions. It can also order a penalty for each contravention.

The Fair Work Act enables responsible franchisors to apply to a court to recover from the franchisee (if it hasn’t already) amounts it was ordered to pay to the franchisee’s employees because of the franchisee’s contravention. Interest may also apply.

Any penalties the responsible franchisor was required to pay are not recoverable under the Fair Work Act.

Any person or franchisor who was knowingly involved in a contravention remains subject to the existing accessorial liability provisions in the Fair Work Act.

How can franchisors prevent workplace contraventions?

If the responsible franchisor had taken reasonable steps to prevent a contravention of the same or similar character as the contravention that happened, they won’t be held liable.

Working out whether any steps a responsible franchisor did take were reasonable depends on a number of factors including:

  • the size and resources of the responsible franchisor
  • the ability for the responsible franchisor to influence or control the actions of the franchisee in relation to the obligation it didn’t meet
  • procedures for handling complaints about possible underpayments or breaches of workplace laws in the franchise
  • what steps the responsible franchisor took to encourage, support or train franchisees regarding complying with workplace laws
  • whether the responsible franchisor had any arrangements in place to monitor or assess the franchisee’s compliance with wage, payment and record-keeping obligations in relation to employees.

Franchisors may already have processes in place to promote and monitor workplace compliance in their networks. For franchisors who need to take additional steps, consider:

  • including workplace compliance as a term in your franchise agreement or ensure other business arrangements require franchisees to comply with workplace laws
  • providing franchisees support to comply with workplace laws and encourage franchisees to access our free resources or other expert advice
  • encouraging franchisees to cooperate with any audits by the franchisor or the Fair Work Ombudsman (FWO)
  • establishing a channel (e.g. an email or phone number) for employees to report workplace issues
  • monitoring of workplace compliance in the network.

What should franchisors do now?

Franchisors should review the arrangements they have in place that support compliance with workplace laws by their franchisees who employ people to work in the business.

Need help with HR and compliance?

Workforce Guardian help over 300 partners, including many Australian franchisors, to help their franchises manage HR and compliance: Read more.

To find out how we can help you: Contact Workforce Guardian.

Sean Wilson

Sean Wilson

Sean Wilson

Chief Operating Officer at Workforce Guardian
Sean Wilson is the Chief Operating Officer at Workforce Guardian. With responsibility for general management, marketing, sales, customer care, IT and business administration. This includes leading product development of industry leading cloud HR solutions and managing a national partner program of over 300 major partners/resellers such as Telstra. Sean has also been the Deputy Managing Director since 2015.
Sean Wilson

Latest posts by Sean Wilson (see all)

Knowledge Practice Management

About Author

Sean Wilson

Sean Wilson is the Chief Operating Officer at Workforce Guardian. With responsibility for general management, marketing, sales, customer care, IT and business administration. This includes leading product development of industry leading cloud HR solutions and managing a national partner program of over 300 major partners/resellers such as Telstra. Sean has also been the Deputy Managing Director since 2015.