By Bethany Silverman

Recently, the Fair Work Ombudsman (FWO), Sandra Parker announced the regulator’s annual Compliance and Enforcement Priorities for 2021-2022, with a clear focus on supporting workplaces as they recover from the impacts of COVID-19.

Through its statement, the FWO has reaffirmed its clear focus on large corporate underpayments and the franchise sector, together with the contract cleaning, fast food, restaurant and horticulture industries.

In this article, we explore why the FWO is focused on franchising and what franchisors need to do to ensure they stay on the right side of the FWO.

Compliance with the law

In response to significant systematic underpayments uncovered within the franchise sector, the FWO has set up a sham contracting and franchising unit, designed to investigate alleged breaches of workplace laws within the franchising space. The close focus of the FWO in this area is aligned with community expectations and the FWO’s focus upon ‘vulnerable’ workers.

As part of that focus, the Government significantly amended the industrial legislation such that franchisors can be held liable for breaches of workplace laws arising out of the franchise network both under the Fair Work Amendment (Protecting Vulnerable Workers) Act 2017, and possibly under the accessorial liability provisions under the Fair Work Act 2009 where the franchisor is knowingly involved in any such contravention.

As a result, franchisors must ensure their franchise network is compliant. Failure to do so may result in significant penalties and reputational damage. If a franchisor is found liable for a franchisee’s conduct, a court can make a range of orders, including that the responsible franchisor pays compensation to the franchisee’s employees. The court can also order that the franchisor pay penalties (per contravention) in excess of $13,320 for individuals and $66,600 for corporations (however, these penalties are increased tenfold if the contravention is ‘serious’.

The Fair Work Amendment (Protecting Vulnerable Workers) Act 2017 also provided the FWO with the ability to seek significantly higher penalties for breaches of the Fair Work Act 2009

The only effective way for a franchisor to avoid liability is for the franchisor to take all reasonable steps and measures to prevent an underpayment of that type occurring.

Fraudulent underpayment scandal

The need for the protection of vulnerable workers in franchise networks was highlighted in the 7-Eleven Storey Pty Ltd underpayment saga. In 2016, the FWO launched an inquiry into 7-Eleven stores Pty Ltd to investigate potential underpayments, unlawful cashback schemes and deliberate falsification of records. From an outside perspective, the billion-dollar enterprise (which operates as a franchise network) appeared to have meticulous and detailed workplace compliance procedures. However, there was still an absence of commitment to identifying and addressing possible workplace law breaches.

At large, 7-Eleven exercised a high degree of control over the operations of its franchisees including management of their payroll systems, fortnightly visits by district managers, and biannual store audits. Despite these safeguards and protective mechanisms in place, there was a failure to detect the extent and severity of the underpayment scandal within the 7-Eleven network. Whilst 7-Eleven avoided prosecution, the case highlights the reasoning for the introduction of the Fair Work Amendment (Protecting Vulnerable Workers) Act 2017 and makes it clear that franchisors cannot consider themselves as protected by the franchise model. Franchisors should take active steps to ensure compliance with workplace laws within their franchise network.

What can franchisors be held liable for?

Liability can extend to a franchisor where a franchisee breaches workplace laws related to:

  • the National Employment Standards;
  • a modern award;
  • an enterprise agreement;
  • method and frequency of paying wages;
  • deductions from pay and cashback schemes;
  • guarantees of annual earnings;
  • sham contracting;
  • record-keeping requirements;
  • payslip requirements;
  • an equal remuneration wage order;
  • a workplace determination; and
  • a national minimum wage order.

Wage theft

While it’s rare to see a company deliberately underpay its workforce, regardless of whether an underpayment is accidental or not, franchisors need to ensure their network is protected and risks are mitigated.

Liability for underpayments is particularly important, not only as this is a key focus of the FWO this financial year, but also, recently, anti-wage theft legislation was introduced in Victoria.

On 1 July 2021, the Wage Theft Act 2020 (Vic) which criminalises wage theft including:

  • deliberately underpaying employees;
  • dishonestly withholding wages, superannuation or other employee entitlements;
  • falsifying employee entitlement records to gain a financial advantage;
  • avoiding keeping employee entitlement records to gain a financial advantage.

These offences come with the penalty of a fine of up to $218,088.00 or up to ten years imprisonment for individuals and a fine of up to $1,090,440.00 for companies.

These penalties are issued once proven that wage theft eventuated through deliberate and dishonest conduct. If an employer makes an honest mistake and generally exercises due diligence in paying wages and entitlements, this would not be considered as wage theft.

The Wage Inspectorate Victoria has been set up to promote and enforce the Wage Theft Act 2020 (Vic), however, the FWO is responsible for investigating and enforcing compliance with workplace laws and regulations, including enforcing an order that an employee is to be paid their correct entitlements.

In New South Wales, Parliament is currently considering the Tax Administration Amendment (Combating Wage Theft) Bill 2021. In Queensland, the Criminal Code and Other Legislation (Wage Theft) Amendment Act 2020broadened the definition of stealing to include wage theft. In the Australian Capital Territory, courts are now able to hear small-claim matters, inclusive of wage theft, as stipulated by the Courts (Fair Work and Work Safety) Act 2019 (ACT).

At present, Western Australia, South Australia and Tasmania have not enacted legislation to criminalise wage theft, however, the introduction of such legislation within Victoria will likely be a precursor for them to introduce similar legislation.

Such legislation highlights the need for strict compliance with workplace laws.

Avoiding penalties

Given the increased focus by the FWO on franchise relationships, franchisors must take active steps to ensure that their franchisees remain compliant.

As seen in the 7-Eleven example above, a detailed and best-practice compliance and educational framework is often prohibitively difficult and costly for franchisors to implement, which will inevitably require the engagement of a team of senior workplace relations experts to ensure that the nature and quality of the support implemented is fit for purpose.

In most cases, a franchisor can avoid liability by putting in place a compliance framework which includes:

  1. Information and resources necessary for a franchisee to engage and manage their people in a compliant manner;
  2. Implementing an employee complaint service where employees of a franchisee can raise compliance concerns with the franchisor;
  3. Having an appropriately worded Franchise Agreement which mandates compliance and the franchisors ability to assess compliance;
  4. Undertaking a regular compliance audit of franchisee businesses; and
  5. Education campaigns to share learnings and compliance issues identified.

HR Assured offers franchise networks end-to-end HR and WHS solutions that provides clients with the protection they need to be compliant, including the compliance framework mentioned above. From record-keeping, payslips and compliance audits to HR and WHS software and 24/7 telephone advice and support, we have the right services to ensure your franchise network is on the right side of the law. Get in touch with us if you’d like to find out how we can help.

Experience the difference

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Bethany Silvermanis a Senior Workplace Relations Consultant at FCB Group and HR Assured. She regularly provides advice to a wide range of businesses in respect of compliance with workplace laws and managing complex matters including disciplinary and performance management processes and terminations.