Increased liability for Franchisors

There is significant movement in the franchisee and franchisor space at the moment with franchisors being held increasingly accountable for the actions of franchisees and for failing to adhere to certain requirements under the Franchising Code of Conduct.

In May of this year, the Australian Competition and Consumer Commission (ACCC) fired a warning shot at franchisors, issuing of almost $20,000 in fines to Domino’s Pizza Enterprises Ltd for failing to adequately satisfy disclosure requirements under the Franchising Code of Conduct (the Code).

Dominos is the first company to be fined since the provisions requiring franchisors to provide franchisees with copies of marketing fund statements and reports were implemented in January of 2015. The new provisions seek to impose civil penalties for non-compliance along with the issuing of infringement notices for alleged breaches.

More changes coming with the Fair Work Amendment Bill 2017

In addition to fending off fines from the ACCC, franchisors are also set to be held increasingly liable for the actions of franchisees with the introduction of the Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017 (the Bill). The Bill, which was recently passed by the House of Representatives, will be enacted later this year.

The Bill was introduced in the wake of the Federal Circuit Court decision of FWO v Mai Pty Ltd and Another [2016] FCCA in which the Respondent, the operator of 7-Eleven a store in Brisbane, was found to have breached a number of award conditions resulting in orders for the payment of more than $400,000 in penalties as well as the back-payment of wages.

These provisions aim to capture the liability of not only the franchisors but the directors themselves removing the possibility of liquidating the company to avoid the consequences of non-compliance with the Fair Work Act 2009 (Cth).

One of the Bills proposed amendments sees the amending of section 550, which aims to capture not only the employing entity, but also those companies that have “aided, abetted, counselled or procured the contravention of” or have been in any way “by act or omission, directly or indirectly, knowingly concerned in or party to the contravention in any way.”

A contemporary example of this was the 2016 decision in the matter of Fair Work Ombudsman v Yogurberry World Square Pty Ltd [2016] FCA 1290 in which the payroll company, as well as the master franchisor, were found to be in breach using accessorial liability provisions for “participation” in the underpayment of staff wages by the franchisee business. Fines in excess of $140,000 were issued for the underpayment of approximately $17,000.00 in wages.

What do these changes mean for franchisors?

Essentially, the amended section 550 prevents a company circumventing compliance by outsourcing to third parties. This may have broad implications for companies that use extensive outsourcing, franchise arrangements, and complex supply chains.

The amendments also grant the Fair Work Ombudsman (FWO) coercive questioning powers when conducting investigations. It is important to note however that this power will be restricted to matters concerning underpayment and the exploitation of vulnerable workers.

These provisions also apply only to franchisors who exercise a significant degree of influence or control over the affairs of the franchisee. With the introduction of the amended provisions, franchisors will no longer be able to turn a blind eye to the contraventions of franchisees.

Understandably, the Franchisor community has expressed concern in response to the severity of the proposed changes and liability for the actions of Franchisees it is, to a large extent, unable to control.

To mitigate risk and liability the best defence franchisors have is compliance. We encourage Franchisors to take active steps to ensure that Franchisees regularly report to them to verify compliance with all statutory obligations and to have these requirements (together with appropriate indemnity clauses) reflected in all contractual agreements.

If you have any questions or would like to discuss your risks and requirements as a franchisor in relation to the increased liability, please contact our office on (07) 3876 5111 for a consultation.

Written by Jonathan Mamaril, Principal and Director and
Regina Michaletos, Special Counsel
NB Lawyers – the Lawyers for Employers
jonathanm@nb-lawyers.com.au
reginam@nb-lawyers.com.au
(07) 3876 5111

Bibliography

Australian Competition and Consumer Commission, Domino’s pays penalty for alleged Franchising Code breach (May 2017) Australian Competition and Consumer Commission https://www.accc.gov.au/media-release/domino%E2%80%99s-pays-penalty-for-alleged-franchising-code-breach