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Where lies the risk of franchisee underpayment of employees?

Recent events and developments arising from franchisee underpayment of employees should focus the attention of franchisors on whether the risk of penalties or damages may fall on the franchisor or the franchisee or both parties to a franchise agreement.

Recent media reports that Caltex Australia has announced a $20 million fund to compensate underpaid employees of its franchisees follows the widely publicised problems faced by 7-Eleven, which also established a fund to compensate employees for underpayment by franchisees, and late last year entered a compliance deed with the Fair Work Ombudsman.

Caltex Australia was proactive in the face of franchisee underpayment of employees and not only set up the employee compensation fund but undertook a review of the profitability of its franchise model.

On 4 May 2017, there were media reports of a Coffee Club Café franchisee allegedly coercing an overseas worker to repay $18,000.00 of his wages by threatening to cancel his work visa. This happened even though there is a compliance deed in place between the Coffee Club franchisor and the Fair Work Ombudsman.

In the case of Caltex, there are reports that 70 Caltex store owners marched through Sydney’s business district alleging that Caltex was running an unprofitable franchise model. It remains to be seen whether the store owners believe that an unprofitable business model and franchisee financial stress is a cause of underpayment of employees of franchisees, or that the announcement of the $20 million fund was a catalyst for store owners to make complaints about franchisee financial stress and lack of profitability.

Franchisee underpayment of their employees’ wages may be a symptom of struggling franchisees but it is not an excuse for franchisees to fail to comply with the Fair Work Act 2009.

Franchisors need to be aware of the potential for franchisees to underpay employees, and that financial stress may increase the risk of employee underpayment. It would be naive to expect that the pressure to underpay employees will not increase if the franchisee is unprofitable. Franchisors should ensure that franchise agreements contain terms that provide for the termination of the franchise agreement if the franchisee has breached the Fair Work Act 2009.

Franchisees should be aware of the serious consequences of underpaying employees. Notwithstanding the considerable pressure franchisees may face because of falling profits or trading losses, there is no excuse to underpay employees. The consequences a franchisee may face by underpaying employees include termination of the franchise agreement without compensation by the franchisor or the payment of penalties ordered by the Court in proceedings commenced against the franchisee by the Fair Work Ombudsman. There have been recent cases that demonstrates both these risks to the franchisee.

A recent example of the risk to franchisees of liability for pecuniary penalties occurred in the case of Fair Work Ombudsman v Mai Pty Ltd [2016] FCCA 1481 in which a 7-Eleven franchisee who was ordered by the Federal Circuit Court of Australia to pay pecuniary penalties in the sum of $408,340.00 arising from a number of contraventions of the Fair Work Act 2009, including failure to pay minimum rates of pay, over a period of about 21 months

An example of the risk of termination of the franchise agreement, also involving a 7-Eleven franchisee, was the decision of the New South Wales Supreme Court in Chahal Group Pty Ltd v. 7-Eleven Stores Pty Ltd [2017] NSWSC 532. The franchisee’s franchise agreement was terminated by the franchisor in October 2016 for an alleged arrangement by which two employees were paid award wages, but were required to pay part of the wages back to the franchisee. The franchisee was only half way through a 10 year franchise term. The franchisee was not successful in seeking orders for the continuation of the franchise agreement.

Despite these cases, risks also exist for franchisors who should be aware that there have been calls for work place laws to be changed to make franchisors responsible for failure to monitor and take steps concerning the conduct of their franchisees in relation to their dealings with employees.

The Fair Work Amendment (Protecting the Vulnerable Workers) Bill 2017 proposes key changes including making franchisors responsible for contraventions of the Fair Work Act 2009 by their franchisees.

Under the proposed changes to the legislation a franchisor will be liable for a contravention of the Fair Work Act 2009 by an employee if the franchisor knew, or could reasonably have been expected to have known, that the contravention would occur. A franchisor will be liable if it has a significant degree of influence or control over the franchisee’s affairs and if the franchisee’s business is substantially associated with the intellectual property of the franchisor. A franchisor will be able to avoid liability if it has taken reasonable steps to prevent the contravention by the franchisee. In other words, the franchisor may be able to argue a reasonable steps defence.

The proposed new provision expands the potential liability of a franchisor beyond the accessorial liability provided for in section 550 of the Fair Work Act 2009.

The availability of a reasonable steps defence will require a franchisor to have taken proactive steps to implement systems and processes that prevent or minimise the risk of franchisee contraventions and which ensure that franchisee contraventions can be quickly detected and remedied.

The Explanatory Memorandum for the new Bill refers to franchise business models based on underpaying workers and states that some franchisors “have either been blind to the problem or not taken sufficient action to deal with it once it was brought to their attention”.

The recent developments in the franchising industry concerning underpayment of employees of franchisees shows that the risks to franchisors and franchisees are more serious than ever before and both franchisors and franchisees need to obtain advice on what steps they should take to minimise risk.

For legal advice concerning all matters of franchise law including franchise disputes, consult an experienced Brisbane franchise dispute lawyer today.

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