In Short
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Franchisors can be liable for their franchisees’ breaches of workplace law under the Fair Work Act.
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To reduce liability, provide compliance training, conduct regular checks, and offer template employment contracts.
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Non-compliance with workplace laws can lead to financial penalties and reputational damage.
Tips for Businesses
Minimise your risk by offering compliance training to franchisees, ensuring they understand their obligations under workplace law. Regularly monitor your franchisee’s employment practices and audit employee conditions. By taking proactive steps and enforcing compliance, you protect both your business and your brand while ensuring franchisee adherence to legal requirements.
As a franchisor, you can be liable for some of your franchisee’s breaches of the Fair Work Act 2009 (Cth) (‘the Act’). However, courts will consider a few factors before finding that you are legally responsible for your franchisee’s conduct. This article explains when you can be liable for a franchisee’s breach of the Act and what breaches you can be liable for.
The ultimate guide to setting up a franchise.
When Are You Responsible?
Three requirements under the Act must be satisfied for a franchisor to be responsible for a franchisee’s breaches of the Act:
- a franchise exists, meaning there is an arrangement where you allow another person (the franchisee) to operate a business using your brand;
- a major feature of the franchisee’s business is your business’s intellectual property (i.e. trademarks); and
- you have a significant degree of influence or control over your franchisee’s financial, operational and corporate affairs.
If a franchise agreement is in place, you likely satisfy the above requirements. As such, you should consider what breaches you can be liable for.
What Breaches Are You Liable For?
You can be legally responsible for your franchisee’s breaches of the Act if they do not:
- provide their employees with their entitlements under the National Employment Standards or awards and agreements;
- satisfy the national minimum wage orders, equal remuneration orders and guarantees of annual earnings;
- follow rules for methods and frequency of payment; and
- provide payslips and maintain record-keeping.
To be held legally responsible for any of the breaches your franchisees commit, you must also have:
- known or be reasonably expected to have known that the breach would happen or
- when the breach occurred, you:
- knew or were reasonably expected to have known that a breach of the same or similar kind was likely to happen; and
- did not take reasonable steps to prevent the breach.
What Are The Consequences?
Suppose the extended liability provisions in the Act apply, and a court finds that you are legally responsible for your franchisee’s breaches. In that case, you can be liable for a range of penalties, including:
- compensating the franchisee’s employees; and
- payment of penalties per contravention over $13,000 for individuals and $66,000 for corporations.
While the Act allows you to recover from your franchisee the amount a court orders you to pay the franchisee’s employees because of the franchisee’s infringement, you cannot recover any penalties a court requires you to pay.
To avoid these consequences, you should consider reducing your risk of liability for your franchisee’s breaches.
How You Can Reduce Your Risk
You can take several reasonable steps to limit your risk with respect to your franchisee’s employment obligations.
1. Compliance Training
Many franchise agreements contain clauses where franchisees agree they are solely responsible for complying with applicable laws. However, such clauses can only be effective when a franchisee has minimal experience with employing workers. For this reason, you should provide training for franchisees to ensure they comply with the Act’s requirements.
This training may include:
- outlining worker’s entitlements under the relevant award;
- developing processes where a franchisee can seek your advice when it comes to employment issues (e.g. questions regarding dismissal); and
- encouraging franchisees to access our free resources or other expert advice from lawyers.
Since compliance training can make franchisees aware of their obligations under workplace law, it can minimise the risk of a franchisee breaching this law.
2. Compliance Checks
Your franchise agreement should also include procedures where you regularly check how a franchisee handles their employees. This can include:
- undertaking audits of employee work conditions;
- requesting regular reports from your franchisee that set out some key criteria for compliance with employment laws; and
- establishing a communication channel for employees to report workplace issues
Compliance checks allow you to monitor the workplace for potential or actual breaches and encourage franchisees to comply with their obligations to their employees.
3. Contract Review
By providing franchisees with template employment agreements, you can ensure that their employees can receive their entitlements under their relevant award or enterprise agreement.
It would also help to incorporate an express term in the franchise agreement that requires franchisees to enter into an employment agreement with their workers. This way, you can minimise the chances of your franchisee engaging in sham contracting.
Key Takeaways
Ultimately, you can be liable for some of your franchisee’s breaches of the Fair Work Act if:
- there is a franchise agreement in place; and
- you knew or are reasonably expected to have known that a breach of the same or similar kind was likely to happen.
To avoid being legally responsible for your franchisee’s breaches, you should consider:
- providing your franchisee with compliance training to ensure they are aware of their employees’ entitlements and any new laws that affect their employer obligations;
- conduct regular compliance checks to ensure franchisees are following workplace laws; and
- provide template employment agreements to franchisees to ensure vulnerable workers receive workplace entitlements.
If you have any questions about your liability as a franchisor, our experienced franchising lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
What is a franchise agreement?
A franchise agreement is a contract that binds the franchisor and franchisee, covering various aspects such as ownership of intellectual property, fees, and operational terms.
What is an operations manual?
An operations manual contains essential information for running a franchise, including staff training, business operations, and core functions required for franchise success.
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