This report provides an analysis and evaluation of the Fair Work Act 2009 that was recently amended to protect vulnerable workers. Methods of analysis include web research, reading Parliament AU articles in line with the new laws, understanding the history of the Act and the need to amend the bill. Other evaluations include new penalties for serious contraventions, new power given to Fair Work Ombudsman and in assessing potential implications of the new law.
Results of evaluation shows the implications of the new laws on the Franchising Sector. In particular, the liabilities of the Franchisor for the underpayments made by the franchisees to its employees and the falsification of documents by the franchisees.
The National Workplace Relations System is established by the Fair Work Act 2009 (Fair Work Act) and related laws and covers the majority of private sector employees and employers in Australia. It provides a safety net of minimum entitlements and imposes obligations on both employers and employees. The Fair Work Ombudsman is the workplace relations regulator and is responsible for ensuring compliance with national workplace relations laws. Over the past year, there has been an increased focus on employment compliance issues in the retail and fast food industry. A number of high profile brands have been the subject of scrutiny by the Fair Work Ombudsman (FWO), the Courts and the media, due to alleged (and proven) contraventions of the Fair Work Act 2009 (FW Act) by franchisees.
As per Fair Work Ombudsman -In 2016, a number of high-profile franchises were caught underpaying their staff. One of the high-profile franchise is the convenience store giant 7-Eleven and one of Australia’s biggest pizza chain, Domino’s. Domino’s and 7-Eleven are two high-profile cases that have generated much discussion around the protection of workers in franchised stores.
The Fair Work Act sets out, among other principles, minimum pay and award conditions (along with the National Employment Standards). Even in particular circumstances under the previous Act (Fair Work Act 2009), “a franchisor can be held responsible for a franchisee’s breach”. In 2016 , a franchisor for Yogurberry was found liable (along with the relevant franchisee) for underpaying employees at the World Square store in Sydney. For a number of reasons, including the influence that the part-owner of the franchise has over wage levels, the franchisor was joined to the proceedings the Ombudsman commenced. The Federal Court of Australia issued penalties totalling $146,000 against the franchisor, the franchisee and the part-owner of the franchisor (in their personal capacity). The franchisor was also required (at its expense) to undertake an audit of every franchisee to investigate each franchisee’s compliance with employment law.
To strengthen Australia’s existing employment law framework, the Federal Government has introduced the Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017 (the Bill) on March 1, 2017. The Bill seeks to amend the Fair Work Act 2009 (Cth) (the Act) which sets out an employer’s obligations and employee rights in the workplace. The Bill also seeks to crack down on non-compliance with the Fair Work Act 2009 (Cth) (Fair Work Act) and includes specific changes to protect those working for a franchise business.
On Tuesday 5th of September,2017 the Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017 (Bill) was passed by the House of Representatives after a long period of debate and following a number of amendments which were made by the Senate. The Bill includes a range of other measures including an increase in the maximum penalties for employers who deliberately flaunt the minimum wage and other entitlements under the Fair Work Act. After gaining royal assent on 14 September 2017, the Fair Work Amendment (Protecting Vulnerable Workers) Act 2017 has now come into effect. New obligations extending liability for underpayment and other breaches in franchise and subsidiary networks to head offices will start in six weeks on 27 October, 2017.
The Bill amends the Fair Work Act 2009 (Act) and introduces several new reforms that will significantly impact on the franchise sector. The legislation was introduced by the Government as part of their election commitment to do more to protect vulnerable workers after revelations of systematic exploitation of vulnerable workers (including migrant workers) by unscrupulous employers/ franchisees within a number of well known franchise networks. The exploitation of vulnerable workers has been examined in a range of reports, including the Senate Education and Employment References Committee’s report entitled A National Disgrace: The Exploitation of Temporary Work Visa Holders , March 2016; the Fair Work Ombudsman’s A Report of the Fair Work Ombudsman’s Inquiry into 7-Eleven, April 2016 and A Report on the Fair Work Ombudsman’s Inquiry into the labour procurement arrangements of the Baiada Group in New South Wales, June 2015; and the Productivity Commission’s Productivity Commission Inquiry Report: Workplace Relations Framework, No. 76, November 2015.
As a result, the bill created a ‘centralised’ system of compliance in the franchising industry, for certain employment obligations. The new laws will hold the franchisor responsible for a franchisee’s workplace violations if the franchisor:
The Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017 (the Bill) amends the Fair Work Act to implement the Government’s commitment to protect vulnerable workers by:
While a number of other amendments were made to the Bill, no significant changes were made to the proposed franchisor liability laws.
Senators Leyonhjelm (Liberal Democratic Party) and Bernardi (Australian Conservatives) had proposed to significantly narrow the definition of ‘responsible franchisor entity’ from that originally proposed, by adding a new requirement that the franchisor’s ‘influence or control’ over the franchisee have a ‘material impact’ on the franchisee. However, this amendment was not supported by the Opposition and was not passed. The definition of ‘responsible franchisor entity’ will remain:
(2) A person is a responsible franchisor entity for a franchisee entity of a franchise if:
(a) the person is a franchisor (including a subfranchisor) in relation to the franchise; and
(b) the person has a significant degree of influence or control over the franchisee entity’s affairs.
Under the new law, a franchisor will, in certain circumstances, become liable where a franchisee or one of the franchisor’s subsidiaries violates specific sections of the Act. For example:
These changes are intended to widen the ‘accessorial liability’ principle under the Act as it applies to the franchise industry. Accessorial liability means that an individual or company ‘involved in’ the breach could also be potentially responsible in situations where they were not directly participating in the breach itself.
A person can be involved if they:
For example, if a franchisee is caught underpaying its employees, the franchisor may be ‘involved in’ the breach if they knew and/or participated in the decision making process for making and setting wages. The proposed amendments will apply to both franchisors and master franchisors if they exercise a ‘significant’ level of influence or control over the franchisee’s activities.
A franchisor may be liable if it knew (or could reasonably be expected to have known) that:
There must be a reasonable basis for the franchisor to believe either:
In relation to the level of knowledge required, the person bringing the proceedings (usually the Fair Work Commission) does not need to show that the franchisor actually knew about the breaches or the likelihood of the breaches arising.
Importantly, a franchisor’s obligations will not extend to foreign companies that have entered into a master franchise agreement but do not have any operations in Australia.
In one of the most recent controversies regarding violation of Fair Works Act 2009, (Federal Court’s November 2016 decision in Fair Work Ombudsman v Yogurberry World Square Pty Ltd (Yogurberry case)). Justice Flick ordered four respondents to pay penalties totalling $146,000 for their involvement in contraventions of the Fair Work Act 2009 (Cth) (FW Act). The contraventions involved underpayment of workers and breaches of other provisions relating to minimum shifts, record-keeping and pay slips in respect of four employees at the World Square Yogurberry store in Sydney’s central business district. Each of the corporate respondents was part of a group of companies owned and operated by members of the same family. The relationship between the four respondents and the penalties that were imposed is summarised in the table below:
|Respondent||Relationship to the employer||Penalty ordered|
|Yogurberry World Square Pty Ltd (Yogurberry World)||Employer/Franchisee||$75,000|
|YBF Australia Pty Ltd (YBF)||Master franchisor of the Yogurberry chain||$25,000|
|CL Group Pty Ltd (CL Group)||Associated company of YBF||$35,000|
|Ms Soon Ok Oh||
Sole director and company secretary of company which owns Yogurberry World
Officer of three corporate respondents
The new legislation imposes higher penalties for serious contraventions of the National Employment Standards, awards, agreements, minimum wage and equal remuneration orders, method and frequency of payment and employer obligations in relation to employee records and pay slips. The maximum penalty for a serious contravention is now $630,000 for corporations and $126,000 for individuals, for each contravention. The legislation is targeting employer compliance with employer record keeping requirements which are now subject to the higher penalties scale. Pay slip and record keeping contraventions may now have fines of up to $63,000 for companies and $12,600 for individuals. The onus of proof in claims for unpaid wages has been reversed in cases where the employer has not produced wage slips or employment records.
A new regime for serious contraventions under the Fair Work Act 2009 has been established which provides that a contravention is only a ‘serious contravention’ if the contravening conduct was deliberate and part of a systematic pattern of conduct relating to one or more other persons. This sets out the steps to be taken in establishing whether the conduct was deliberate (e.g. a term of a modern award was deliberately contravened, or employees’ records were purposefully not made or kept). According to the Explanatory Memorandum, “a systematic pattern” of conduct refers to a recurring pattern of methodical conduct or a series of coordinated acts over time and is not intended to encompass ad hoc or inadvertent conduct.
One of the most recent controversy that highlighted the need to amend the Fair Work Act 2009 is the giant convenient store 7 Eleven. The 7-Eleven scandal revealed not only a business model that encouraged systemic underpayment of workers, but also a widespread practice of franchisees paying their employees the lawful rate, but then coercing them to pay back a certain proportion of their wages to the employer in cash. 7 Eleven received a significant amount of negative press for the underpayment of their workers. Indeed, since such scandal broke, the Fair Work Ombudsman (FWO) has demonstrated an increasing willingness to apply the section in a commercial context. In the last financial year, 46 of the 50 court proceedings brought by the FWO concerned orders against accessories. Further, the FWO has been successful in many of these applications. They recently obtained orders for penalties and underpayment exceeding $70,000 directly from a former director of a now wound up frozen yoghurt company. They even joined a Master Franchisor and its manager personally to the proceedings involving the underpayment of wages.
In the new law, a prohibition has been inserted which prevents employers requiring employees to give cash back or pay any amount of money which is unreasonable and is for the benefit of the employer. These provisions do not operate in relation to requests for overpayments of wages to be returned. For example, an unreasonable request would include franchisees who pay their workers the full Award rate but then ask their employees to pay a portion back to the franchisee. The explanatory memorandum for the Bill specifically references the Inquiry into the 7-Eleven scandal and their involvement in ‘cashback’ practices. Then convenience chain franchisee then deliberately falsified records to disguise these underpayments.
According to one of the recent statements of the Fair Work Ombudsman, Natalie James- “The Fair Work Ombudsman will apply the laws judiciously and fairly, and work with business to ensure employers understand their obligations under workplace laws. Employers should always check their obligations, either by accessing our free and comprehensive tools on our website, or asking their employer organisation or another qualified workplace relations adviser. But for those who are underpaying workers, failing to keep proper records or coercing workers to pay their wages back in cash, we will not hesitate to deploy the full set of tools in our toolbox, including using the new examination powers and seeking maximum penalties from the courts.”
The Fair Work Ombudsman also added that employees should be aware that strengthening of laws relating to ‘cashback’ schemes. “This unlawful practice should be reported immediately. In passing the new laws, the Parliament has reflected the community’s concerns about deliberate exploitation of vulnerable workers. Businesses that don’t keep the right records, don’t give proper pay slips, or who make false or misleading records and payslips can face higher penalties,.” she said.
The Fair Work Ombudsman is to have evidence gathering powers similar to those of the Australian Securities and Investment Commission and the Australian Competition and Consumer Commission. This will give the FWO enforceable powers of questioning where the FWO has reasonable grounds to believe that a person can help with an investigation.
For example, the FWO could issue a notice to individuals requesting an interview and conduct the interview under oath or affirmation. A recipient must comply with the contents of any notice (including any requirement to answer questions). If you respond to questions under an oath or affirmation and make false statements, you may face further consequences. The FWO can issue notices to both individuals and companies. Those being questioned may be legally represented and self incriminating information given in response cannot be used as evidence in subsequent proceedings. There are higher penalties for failing to comply with an FWO notice. A body corporate may be required by a notice to give information, which is held on its behalf by its officers, employees or agents. Prohibitions have been introduced which prevent a person from intentionally hindering or obstructing FWO personnel exercising their powers in relation to an FWO notice.
The Franchisors will be highly impacted by this as they will need to be compliant with the Amended FW Act, else they will be highly penalized if one of their franchisees would not be compliant.
The key changes to the Act you should be aware of include:
Despite some recent media releases, the Government did in fact successfully defeat a series of significant amendments put forward by Senator Cameron (ALP) and supported by the Greens Party which would have:
For those franchisors who traditionally placed themselves at ‘arm’s length’ from their franchisees’ employment arrangements, the new law will prompt the need for a fundamental change in approach. Franchisors will no longer be able to rely on a lack of knowledge or involvement in the local employment practices of its franchisees, as a way of avoiding legal liability. Instead, it will be incumbent on franchisors to implement and maintain a proactive compliance system that satisfies the ‘reasonable steps’ defence.
For Franchisors /franchisees, they have to be compliant and stay with the right side of the law every time. It is also important to bear in mind that both franchisors and franchisees can suffer very significant reputational damage in such situations – in addition to the costs associated with paying penalties, remedying the effect of breaches, and defending legal proceedings. It will be very important for franchisors to study the detail of any new laws and analyse carefully how their legal position may be affected by them. The Coalition’s laws require franchisors to take very proactive measures to monitor franchisees’ labour arrangements and their compliance with workplace laws.
Two important conclusions can be drawn from the 7-Eleven story. First, the conduct of the relevant 7-Eleven franchisees in relation to labour issues generated very significant adverse publicity for the franchisor. Secondly, if the 7-Eleven franchisor had known about this conduct and not acted, it could have been found liable for it as an accessory under the FW Act. There is a certain tension between these two lessons-learned.
It is suggested that franchisors review their arrangements with franchisees with a view to strengthening the obligations on the franchisee to ensure compliance with workplace and other laws. Arrangements could be put in place for the franchisee to confirm periodically with the franchisor that franchisees are in compliance with workplace and other laws. In line with the amended act, the Franchisor will have to do the following:
There are a number of practical solutions that franchisors could implement to minimise the risk of non-compliance by its franchisees. At the National Franchise Convention, Natalie James of Fair Work Ombudsman applauded the practical solutions McDonald’s implemented to ensure compliance with employment law, including:
Practical solutions above might not apply for all franchises, but there are still a number of cost-effective solutions, including:
Each of these potential solutions will help lower the risk of franchisees contravening their legal obligations as well as promote a culture of compliance with employment law.
The new law states that franchisors can protect themselves from liability by taking ‘reasonable steps’ to prevent the relevant breaches of the Act. A court can consider the following factors when deciding whether a franchisor took ‘reasonable steps’ to prevent contraventions by their franchisees:
What is reasonable for one franchise network will differ. As such, franchisors should consider what processes suit the size and nature of their business, and incorporate systems tailored to their needs. A court will not penalise franchisors for failing to take a particular action that is unreasonable. As a matter of best practice, however, all franchisors should be taking some steps to ensure their franchisees comply with employment laws.
You may also consider the following:
The Fair Work Amendment (Protecting Vulnerable Workers) Act 2017 has now come into effect. This means new, higher penalties for serious contraventions of workplace laws and record keeping breaches has started. This significantly broadens the circumstances in which franchisors can be responsible for employment law breaches by their franchisees. Franchisors should begin to implement audit and review procedures now. New obligations extending liability for underpayment and other breaches in franchise and subsidiary networks to head offices will start in six weeks on 27 October, 2017. The Franchisors are required to take greater responsibility for the employment practices of their franchisees and emphasises the importance of reporting and compliance of the franchisees to every franchisor.
The changes apply to all employers, companies and employees covered by the Fair Work Act but are particularly important for:
The Fair Work Ombudsman has the power to issue an ‘FWO notice’ if the FWO reasonably believes that a person has information or documents relevant to an investigation, or is capable of giving evidence that is relevant to such an investigation. The FWO notice may require the person to give the information, produce the documents or attend before the FWO to answer questions.
Given that these provisions will commence 27 October 2017, the franchisors needs to take immediate steps to understand the impact of these laws on their business. Based on these revisions, the Franchisor should:
Employers and employees seeking assistance can also contact the Fair Work Infoline on 13 13 94. A free interpreter service is available on 13 14 50. The Fair Work Ombudsman will be consulting with businesses about how these laws affect them, starting with a roundtable focusing on the new franchisor liability provisions. Employees can get help resolving workplace issues and also report a workplace concern anonymously on the Fair Work Ombudsman’s website.
Thiyagarajan, Amritha, “How Will the Protecting Vulnerable Workers Bill 2017 Affect Franchisors“, https://legalvision.com.au/how-will-the-protecting-vulnerable-workers-bill-2017-affect-franchisors/
“The law significantly broadens the circumstances in which franchisors can be responsible for employment law breaches by their franchisees. Franchisors should begin to implement audit and review procedures now in anticipation of greater scrutiny by the FWO”.
Watanabe, Masao, “Fro-Yo Franchisor Found Liable for Underpayment of Employees by Franchisee“,https://legalvision.com.au/franchisor-found-liable-for-underpayment-of-employees-by-franchisee
Jervis, Emma, “7 Ways to Avoid Accessorial Liability When Franchising” , https://legalvision.com.au/ways-to-avoid-accessorial-liability-when-franchising/
Sutherland, Derek, “Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017 (Bill) Passed“, http://hwlebsworth.com.au/fair-work-amendment-protecting-vulnerable-workers-bill-2017-bill-passed/
Parliament of Australia “Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017“, http://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r5826
Explanatory Memorandum – “FO WORK AMENDMENT (PROTECTING VULNERABLE WORKERS) BILL 2017‘, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22legislation%2Fems%2Fr5826_ems_e0207b3c-41de-45b8-9631-4d08f9f88e23%22
Wong, Adrian, “The Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017 passed by Parliament“, https://www.maddocks.com.au/fair-work-amendment-protecting-vulnerable-workers-bill-2017-passed-parliament/
Pedler, Ryan, “New Fair Work laws commence today“, https://www.fairwork.gov.au/about-us/news-and-media-releases/2017-media-releases/september-2017/20170915-protecting-vulnerable-workers-bill-royal-assent
 FWO, A Report of the Fair Work Ombudsman’s Inquiry into 7-Eleven (April 2016)