Franchisor responsibility under the Fair Work Act: When can you be liable for your franchisee’s non-compliance?

In certain circumstances, franchisors can be held legally responsible for conduct of their franchisees that breaches workplace laws under the Fair Work Act 2009 (Cth) (Fair Work Act). Not every franchise arrangement gives rise to franchisor responsibility, and the factual requirements set out in the legislation can make it difficult to understand when liability will arise.

This article discusses these obligations in more detail, setting out when and to what extent a franchisor can be held legally responsible for their franchisee’s employees. It will also cover the steps that a franchisor can take to reduce their risk.

When are franchisors responsible for their franchisees’ employees?

Under the Fair Work Act, a franchisor will be responsible for its franchisee’s employees where all the following requirements are met:

1. there is a franchise arrangement;
2. the franchisee is a ‘franchisee entity’ of the franchise; and
3. the franchisor is a ‘responsible franchisor entity’ of the franchisee entity.

A ‘franchise’ is an arrangement where a person operating a business (the franchisee) earns profit or income by using a brand or trademark, or reputation or goodwill, owned by someone else (the franchisor).[1] A franchisee is a ‘franchisee entity’ if its business is ‘substantially or materially associated’ with the franchisor’s intellectual property,[2] meaning the franchise trademark, branding, logo, or marketing is a major feature of the franchisee’s business.

A franchisor is a ‘responsible franchisor entity’ if it has ‘a significant degree of influence or control over the franchisee entity’s affairs’.[3] This test depends on the responsible franchisor’s legal rights to direct or regulate the franchisee in operational or corporate matters such as trading hours, sales targets, staffing levels, and business expenditure. It can also look to whether the responsible franchisor influences or contributes to the franchisee’s operational decisions in practice.

What forms of franchisee conduct can franchisors be responsible for?

A  franchisor can held liable for conduct of the franchisee entity that breaches workplace laws including:

• entitlements under the National Employment Standards or a modern award or enterprise agreement;
• requirements for methods and frequency of payments;
• pay slip and record keeping obligations;
• national minimum wages, equal remuneration orders or guarantees of annual earnings; or
• sham contracting.

When will franchisors be held liable for their franchisees’ conduct?

A  franchisor may be liable for any of the above conduct in breach of workplace laws if it knew or could reasonably have known that the contravention would occur, or alternatively that a contravention of the same or a similar character was likely to occur.[4]

However, the franchisor will not be liable if it took ‘reasonable steps’ to prevent a contravention of the same or a similar character by the franchisee entity.[5] The following factors will be considered in determining whether such reasonable steps were taken:

• the responsible franchisor’s size and resources;
• the responsible franchisor’s ability to influence or control the franchisee’s actions in relation to the conduct;
• the franchise’s procedures for handling complaints about possible underpayments or breaches of workplace laws;
• the responsible franchisor’s efforts to encourage, support or train franchisees in relation to compliance;
• any measures in place to monitor the franchisee’s compliance with wage payment and record-keeping obligations.[6]

What can franchisors do to manage their risk?

Provide induction and training on compliance with workplace laws

Franchisors can provide regular training to assist franchisees to understand their obligations to employees, including determination of modern award or enterprise agreement coverage and classification, wages and entitlements, and record-keeping requirements.

Implement compliance checks

Franchisors may be legally entitled to require franchisees to undertake compliance monitoring procedures and activities such as providing regular compliance reports or submitting to periodic pay and conditions audits.

Provide avenues for reporting and support

Processes can be established for franchisees to seek advice from the franchisor on employment-related issues, or for employees to report issues directly to the franchisor. Franchisors can also consider providing template employment contracts and policies and procedures, and other resources and tools for complying with workplace laws.

Key takeaways

Franchisors should be aware that they may be liable under the Fair Work Act for breaches of workplace laws by their franchisees in some circumstances. Proactive steps towards compliance are recommended as the best way to manage risk under these extended liability provisions.

If you require any assistance in relation to the matters raised above, please contact the NRA Legal team on 1800 572 679.

[1] Corporations Act 2001 (Cth), s 9.

[2] Fair Work Act 2009 (Cth), s 558A(1) (‘Fair Work Act’).

[3] Fair Work Act, s 558A(2).

[4] Fair Work Act, s 558B(1).

[5] Fair Work Act, s 558B(3).

[6] Fair Work Act, s 558B(4).