Am I Liable if my Franchisee isn’t Complying with their Employment Law Obligations?

by LegalVision

Even though it is your franchisee that employs workers directly, as you run the overall franchise network you may find yourself in hot water if you are seen to be “involved” in your franchisee’s breaches of Australian employment law. This article sets out when you may be liable for your franchisee’s actions when they do not comply with their employment law obligations. 

Fair Work Act

The Fair Work Act 2009 (Cth) (the Act) is the key legislation governing employment law in Australia. The Act contains a number of provisions that are relevant to all workers – including those employed by the franchising sector. For example, the Act specifies the national minimum wage and the National Employment Standards. Your franchisees must comply with the Act when employing workers. The Fair Work Ombudsman enforces the Act and can initiate proceedings for breaches of employment laws. 

Accessorial Liability

Individuals who are employed by each of your franchisees will have usually entered into a written employment contract. This contract is between your franchisee and its employee. You are not a party to this contract – so you would be forgiven for thinking that any breaches of the Act could only be enforced against the employer entity (i.e. your franchisee). Indeed, in the majority of cases, the franchisee employer is solely liable for contravening the Act.

However, the concept of “accessorial liability” can still make you can be liable if your franchisee isn’t complying with their obligations under the Act. This concept extends liability from the franchisee (as the employer of the worker in question) to you (as a third party to the relevant employment agreement) in certain circumstances. For example, in one case involving the Yogurberry store at World Square in Sydney, the franchisor company, one of the related corporate entities of the franchisor, and one owner of the franchisor company (in his individual capacity) was found to have been involved in underpayment of the store’s employees. 

Section 550 of the Act states that if you are “involved” in a breach of a “civil remedy provision” the Act (which is defined below), this will be treated the same as if you had actually engaged in that breach. For example, if your franchisee is underpaying workers, if you are found to be “involved” in that underpayment, you can be liable in the same way as your franchisee. This is the case even though it is your franchisee that is specifically engaging in the illegal behaviour.

The meaning of “involved” is not an easy question to resolve as courts are still considering and deciding upon the types of arrangements that fall within section 550 of the Act. Section 550(2) of the Act specifies that the following circumstances amount to “involvement” in a breach:

  1. aiding, abetting, counseling or procuring the breach;
  2. inducing the breach;
  3. being (directly/indirectly/by act/by omission) knowingly concerned in, or party to, the breach; or
  4. conspiring with others to effect the breach.

The civil remedy provisions of the Act include contraventions of:

  1. the National Employment Standards (section 44(1));
  2. a term of a modern award (section 45);
  3. an enterprise agreement (section 50);
  4. a bargaining order (section 233);
  5. a workplace determination (section 280);
  6. a national minimum wage order (section 293);
  7. an equal remuneration order (section 305);
  8. the method and frequency of amounts payable to employees (section 323);
  9. an employer’s obligations in relation to the guarantee of annual earnings (section 328);
  10. some general protections provisions (Part 3-1); and
  11. an employer’s obligations in relation to employee records (section 535) and in relation to pay slips (section 536).

This means that if your franchisee has breached one or more of the above (or any of the other civil penalty provisions), and you were “involved” in the contravention, you could be liable under section 550 of the Act.

As to how the statutory definition of “involved” will apply to you and your franchisees, much will depend upon the circumstances of each case. That said, you cannot be found guilty under the accessorial liability provisions if you genuinely did not know about the franchisee’s breach/es or contravention/s of the Act.

Consequences of Accessorial Liability

The maximum penalty for being involved in a breach of the Act is up to $5,400 or up to $10,800, depending upon the provision of the Act that has been breached. Importantly, as a franchisor, you can potentially be liable both as a corporation, and in your personal capacity (such as where you are an owner/director of the franchisor entity).

Minimising your Liability

There are a number of practical strategies to avoid accessorial liability that you can adopt to minimize the risk that you are found to be responsible for your franchisee’s breaches of Australian employment laws. These include:

  • conducting training for your franchisees on the Act and best practices for complying with their obligations as an employer;
  • completing regular audits of your franchisees (which could include interviewing employees and requesting copies of employee records); and
  • incorporating express terms in the franchise agreement that require franchisees to enter into a pro forma employment agreement with their workers (and providing franchisees with this pro forma template).

As is often the case with legal risks, there is no hard-and-fast rule that guarantees you will be protected if you adopt any or all of these strategies. Should a dispute be raised, and your accessorial liability called into question, a court would look at the circumstances surrounding that individual franchise, and your unique processes and systems as a franchisor. That said, failure to implement any process that targets compliance with employment laws would open yourself up to legal risks that could have otherwise been avoided. If you have any questions about your employment responsibilities as a franchisor or franchisee, get in touch with a franchise lawyer. Call LegalVision on 1300 544 755.






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