Franchising is a big deal in Australia. The $1.8 billion industry employs over 600,000 people across the country, but you don’t have to scan the news too hard to see that franchisors can run into serious trouble if they fail to ensure their franchisees adhere to labour laws.
The latest in a slew of high-profile cases involves the managing director of large bubble tea franchise, Chatime, being found liable for franchise outlets underpaying employees, despite claiming he was unaware of the unlawful conduct (penalties and fines are pending).
The Fair Work Act lays out specific responsibilities for franchisors to ensure they and their franchisees meet their legal obligations, particularly around employee rights, minimum entitlements, and workplace conditions.
In 2021, Fair Work Ombudsman Sandra Parker warned: “All franchise outlets are on notice that they must pay staff lawful minimum pay rates and franchisors should take responsibility for ensuring that their franchisees comply with the law.”
So just what are the franchisor responsibilities under the Fair Work Act? This article takes an in-depth look at franchisor obligations, the law around responsible franchisors, penalties for non-compliance, and how to ensure your employment practices are fair and lawful.
When is a franchisor liable for their franchisee's actions?
In 2017, changes to the Fair Work Act made certain franchisors legally responsible for breaches of workplace laws by franchisees in their network. To be liable, there has to be:
- A franchise, i.e. an arrangement where the owner of a brand or trademark allows a person to run a business using the brand or trademark, or the reputation of the brand.
- An association (substantial or material) between the intellectual property of the franchise and the franchisee’s business, e.g. using the franchise branding, trademark, logo, or marketing materials.
- A significant degree of influence or control over the franchise’s affairs by the franchisor, (this includes instances where the franchisor’s influence or control does not extend to the franchisee’s employment practices).
When a franchisor meets these conditions, they are known as a "responsible franchisor entity" (or "responsible franchisor") and can be held legally responsible for contraventions of provisions such as the National Employment Standards, national minimum wage orders, entitlements under awards and registered agreements, sham contracting rules, wage deductions and record-keeping obligations.
There’s another layer of legal complexity in that the franchisor has to have known (or could reasonably be expected to have known) that a contravention would happen, or they didn’t take reasonable steps to prevent it.
Contraventions can include those of a “same or similar character”, so a franchisor could be liable if they knew (or were expected to know) about a pattern of non-compliance within their network that was likely to result in employees being underpaid or not given their full entitlements.
Find out more about franchisor obligations at the Fair Work Ombudsman website.
Penalties for non-compliance
If a breach of labour laws happens in a franchise network controlled by a responsible franchisor, courts can order the franchisor to pay any underpayments owed to employees of the franchisee and penalties for each contravention of up to $18,780 for individuals and $93,900 for corporations.
As we’ve seen in recent court rulings, franchisors can be fined $100,000s for the actions of their franchisees.
It is also worth noting that proposed reforms in the Fair Work Legislation Amendment (Closing Loopholes) Bill will make wage theft a federal crime, with penalties of up to 10 years’ jail and fines of up to $7.8 million.
Find out more about employee underpayment and the proposed law changes.
Our advice: take proactive steps to minimise risk
The Fair Work Act places a critical responsibility on franchisors to uphold fair working conditions and ensure everyone in their franchise network adheres to labour laws.
The Fair Work Ombudsman has stated that: “franchisors won’t be held responsible if they can show they took reasonable steps to prevent a contravention (or one of a similar kind)”.
To minimise the risk of liability for franchisees' non-compliance, we recommend you and your franchisees understand all the relevant workplace laws and obligations under them, so you can work to proactively prevent any breaches.
Ensure you set clear expectations for franchisees, provide compliance guidance and resources, and offer training on workplace legislation and standards. Monitoring compliance is also essential so conduct regular audits. If you find evidence of wrongdoing, whether by action or omission, make sure you take steps to rectify the situation.
These “reasonable steps” will help you build a culture of workplace fairness and compliance, and mitigate liability if a franchisee doesn’t adhere to the law.
The Chatime wage-underpayment case serves as a stark reminder that franchisors cannot distance themselves from the actions of employers in their network, and that committing to fair labour practices is essential for the reputation and success of both franchisees and franchisors.
