Franchisors and holding companies beware! — New protections for vulnerable workers

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On 5 September 2017, the Federal Government's Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017 (the Bill) was passed by the House of Representatives. The Bill will become law following assent, with the new responsibilities for franchisors and holding companies starting six weeks later.

The Bill's key change is the increased responsibility for certain franchisors and holding companies to take reasonable steps to prevent contraventions of workplace laws by their franchisees and subsidiaries.

In this eBulletin, we summarise the changes and explain what they mean for franchisors and holding companies, as well as share practical tips for minimising risks.

What is the Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017 and what are the changes?

As the name suggests, the Bill was introduced in an effort to combat the exploitation of vulnerable workers. It follows numerous public wage scandals involving high profile businesses, particularly franchises. While most of the focus on the Bill has been on franchisors, its application to holding companies may well have broader and more significant long term implications for corporate Australia.

The Bill amends the Fair Work Act 2009 (Cth) to protect vulnerable workers by doing five key things:

  1. Making franchisors and holding companies responsible for underpayments by their franchisees or subsidiaries in certain circumstances.
  2. Introducing a much higher scale of penalties for "serious contraventions" of the Fair Work Act.
  3. Increasing penalties for record-keeping failures by employers.
  4. Expressly prohibiting employers from unreasonably requiring their employees to make certain payments (e.g. demanding part of their wages be paid back to the employer in cash).
  5. Strengthening the evidence — gathering powers of the Fair Work Ombudsman (FWO) when investigating alleged exploitation of vulnerable workers.

Franchisor and holding company responsibility

The Bill will apply where the responsible franchisor or holding company:

  • had a significant degree of influence or control over the franchisee's or subsidiary's affairs;
  • knew or ought to have reasonably known of the breaches; and
  • failed to take reasonable steps to prevent the breaches.

In determining whether reasonable steps have been taken to prevent a breach courts will consider all relevant matters including:

  • The size and resources of the franchise or body corporate.
  • The extent to which the person had the ability to influence or control the employer's conduct concerning the contravention.
  • Any action the person took to ensure the contravening employer had a reasonable knowledge and understanding of the relevant requirements.
  • The person's arrangements, if any for assessing compliance with the relevant laws.
  • The person's arrangements, if any for receiving and addressing possible complaints about alleged underpayments or other alleged contraventions; and
  • The extent to which the person's arrangements with the contravening employer encourage or require the contravening employer to comply with the Fair Work Act or any other workplace law.

Higher penalties for "serious contraventions"

A "serious contravention" occurs if an employer has knowingly contravened the provision and if the employer's conduct was part of a systematic and deliberate pattern of conduct relating to one or more other persons.

The new maximum civil penalties for a serious contravention are 600 penalty units for individuals (currently $126,000) and 3,000 penalty units for companies (currently $630,000).

The ten-fold increase in penalties applies to contraventions involving:

  • The National Employment Standards;
  • Modern Awards
  • Enterprise Agreements
  • Workplace Determinations
  • National Minimum Wage Orders
  • Equal Remuneration Wage Orders
  • Requirements relating to the method and frequency of payment to employees.
  • Unreasonable requirements to spend amounts, employer obligations relating to guarantees of annual earnings; and
  • Employer obligations regarding employee records and pay slips.

The approach to unreasonable employer requirements and stronger powers for the FWO

The Bill also addresses the need to prevent exploitative practices requiring employees or prospective employees to repay some of their wages back to their employer. It will:

  • prohibit such unreasonable requirements that benefit employers; and
  • render ineffective any term of a modern award, enterprise agreement, or employment contract that allows such unreasonable pay deductions, wage repayments, or the like.

The FWO's enhanced powers concerning the investigation of underpayments or other exploitation of employees will require people to:

  • give information
  • produce documents; and
  • attend the FWO and answer questions.

These new powers must be exercised under the supervision of the Administrative Appeals Tribunal.

Practical tips for franchisors and holding companies to minimise risks

The Bill awaits royal assent before commencing. Once it is in force, the Bill's key change is the increased responsibility for certain franchisors and holding companies to take reasonable steps to prevent contraventions of workplace laws by their franchisees and subsidiaries.

To make out the "reasonable steps" defence, franchisors should decide if they are a "responsible franchisor entity", and both franchisors and holding companies should, as a minimum:

  • ensure that their staff, franchisees, and subsidiaries are educated and trained so that they are aware of their responsibilities to comply with workplace laws;
  • review their systems regularly to ensure compliance and take appropriate action when non-compliance is identified;
  • ensure that allegations of underpayment of wages or other alleged breaches of workplace laws are promptly and properly investigated and resolved; and
  • implement random audits to reinforce a compliance culture, with appropriate sanctions for non-compliance.

Exactly what steps will be required to make out the defence in a particular case will vary from business to business. What is clear, however, is that now, more than ever, turning a blind eye to breaches of workplace laws or relying on strict legal allocation of workplace law risks through, for example, franchise agreements, detailed contracts or use of the "corporate veil" will not protect franchisors and holding companies. Instead, responsible franchisor entities and holding companies facing potential prosecutions under the new laws will need to be able to demonstrate that they have taken a pro-active approach to workplace compliance. Now is a good time to start.

All information on this site is of a general nature only and is not intended to be relied upon as, nor to be a substitute for, specific legal professional advice. No responsibility for the loss occasioned to any person acting on or refraining from action as a result of any material published can be accepted.

Key contacts

Daniel Proietto

Partner & Practice Group Leader