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Published: 11 September 2017
Author: Mark Comito

Does the "Vulnerable Workers" Bill let franchisors off the hook?

The Federal Parliament last week passed tougher laws to protect vulnerable workers, mainly from exploitation by franchise chains.

The Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017 follows in the wake of extensive media investigations by Fairfax Media and the ABC into the underpayment and exploitation of workers by leading firms such as 7-Eleven, Caltex and Domino’s Pizza.

While the new legislation is welcome, its effectiveness in curbing wage exploitation will have to await specific cases coming to court. Of particular concern is the potential wriggle room the laws allow for parent franchisor firms to deny the degree of influence or control they have over a subsidiary franchisee’s operations.

The main features of the Bill

The main features of the new legislation are:

  1. Introducing a new (and more serious) class of breach or contravention of Civil Remedy Provisions under the Fair Work Act, called “Serious Contraventions”;
  2. For Serious Contraventions, the maximum penalty in relation to breaches of Civil Remedy Provisions under the Act for an individual has increased to 600 penalty units (equivalent to $126,000). For a Company, it is five times the maximum number of penalty units (i.e. 3000 penalty units or the equivalent of $630,000);
  3. Holding franchisor businesses and entities to account for actions by their franchisees for certain breaches;
  4. Holding parent companies of subsidiary companies to account for the actions of their subsidiary companies for certain breaches of the Act;
  5. Enabling franchisors or parent companies to recover from the "breaching employers" any payment that they were ordered to pay an employee for a breach under the Act; 
  6. Introducing new powers for the Fair Work Ombudsman (FWO) to issue notices to employers requiring information or documents to be produced, and answer questions on oath or affirmation before the Fair Work Ombudsman;
  7. Introducing penalties for people intentionally hindering or obstructing the FWO in their investigation without reasonable excuse;
  8. Introducing penalties for employers who make or keep pay records which are materially false or misleading.

An employer’s conduct will be deemed a serious contravention if it is deliberate and part of a systematic pattern of conduct relating to one or more other persons such as employees (s.557A).

In determining what is a serious contravention, a court will consider the number of breaches committed and over what period, the number of people affected by the employer’s obligation to keep proper pay records and give payslips; and whether the employer failed to make or keep pay records or failed to give payslips in the required form.

The obligation on Employers to keep proper pay records and payslips has now been elevated so that they will be found to have committed a “serious contravention” if there is a systemic pattern of conduct.

How does an employee establish a deliberate breach?

It appears that an employee might have a difficult task establishing that an employer is guilty of a “serious contravention” if there is no evidence of a “deliberate” act. For example, is it a reasonable excuse for an employer to simply argue that they were ignorant of their obligation to issue proper payslips and so have not engaged in “deliberate” action?

One would have thought it a fundamental obligation that employers keep proper payslips and pay records. As a result, any medium to large business with proper human resources and payroll facilities might find it difficult to argue that they had not deliberately engaged and a systematic pattern of conduct.

While Section 557B makes it clear that companies engage in “deliberate” actions if they “expressly, tacitly or impliedly” authorise a “serious contravention”. However, it is not clear what constitutes “deliberate” actions for non-company employers. 

Does the law hold franchisors to account? 

A franchisor will also be held accountable for a contravention by their franchisee entity if the franchisor or an “officer” of the franchisor knew or could reasonably be expected to have known about the contravention of their franchisee entity - or that it was likely to occur.

A similar test applies in relation to Holding Companies for the actions of Subsidiary Companies (Section 558B).

However, the Act introduces a defence for franchisors and parent companies if they have taken reasonable steps to prevent a contravention by their franchisee entity or subsidiary (s.558B(3)).

What counts as “reasonable steps” takes into account the size and resources of the franchise; the franchisor’s ability to influence or control the contravening employer’s conduct; and any action they may have taken in assessing an employer’s compliance. 

Additionally, for a franchisor to be responsible for the actions of a franchisee, it must have a significant degree of influence or control over the subsidiary’s entities or affairs (s.558A).

One problem with this is that it is not hard to imagine franchisors and franchisees order their affairs in such a way that it is not obvious that a significant degree of control is being exerted, at least in terms of official company documentation.

While the changes introduced by the Fair Work Amendment (Protecting Vulnerable Workers) Bill 2017 are welcome, time will tell whether the changes are effective in holding franchisors and parent companies to account for the actions of Franchisee or Subsidiary Employers.

Furthermore, the issue of what constitutes “deliberate” conduct by an employee for the purposes of a “serious contravention”, will be a matter which the courts will need to better define as breach cases are decided.