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Many franchise businesses will require employees. Navigating employment laws and regulations can be tricky. While there is no direct contractual link between franchisors and the employees of their franchisees, franchisors have been held to account for the conduct of their franchisees. These include big household names like 7/11. This article will discuss 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 is a Franchisor Responsible for Their Franchisee’s Employees?

The Fair Work Act (FWA) sets out a number of requirements that the franchise relationship must meet before they impose employment responsibilities on the franchisor. These obligations are separate from those under the Franchising Code of Conduct (the Code). The FWA definition of a franchise agreement is outlined below:

There must be a franchise relationship.

Generally, most franchise relationships will be formalised with a franchise agreement, as per the Code. However, for FWA purposes, it will include any arrangement where one party pays another party for the use of a trade mark, design, intellectual property or goodwill of the business. This definition will cover some licensing arrangements.

The business conducted by the franchisee must relate to the intellectual property of the franchisor.

The franchise branding must be a significant part of the business operation. Typically, a franchisee will use the trading name, logos and business processes of the franchisor.

The franchisor must have a significant degree of control over the franchisees’ affairs.

Franchisors will have some level of influence and control over franchisees. However, to have a responsibility to franchise employees, franchisors will meet certain thresholds. For example, a franchisor with significant control will set the business opening hours, product prices and service standards. They will also organise promotions and dictate suppliers for ingredients, supplies and equipment.

This is not an exhaustive list. It will ultimately depend on the franchisor’s involvement in the business.

What Type of Conduct Are Franchisors Responsible For?

If a franchisor and franchisee’s business meet the above requirements, then the franchisor can be responsible for certain franchisee conduct. This conduct can include:

  • fulfilling required pay entitlements;
  • payment records and payslips; and
  • sham contracting.

When Is a Franchisor Liable for Breaches of the FWA by a Franchisee?

There may be a franchise relationship where the franchisor has significant influence over the franchisee. In that case, the franchisor may be liable for the franchisee’s employment conduct. Additionally, a franchisor could be responsible for the franchisee’s conduct if they knew, or could be expected to know, that the misconduct could happen. Further, the franchisor will be liable if they did not take reasonable steps to prevent the misconduct from happening.

What Can Franchisors Do to Reduce Their Risk?

There are a number of actions franchisors can take to limit their risk with respect to the employment obligations of their franchisees. These recommendations include:

1. Provide Training on Complying With Employment Law

Franchise agreements often include clauses that state that a franchisee is solely responsible for complying with any applicable laws or legislation. However, a franchisee with minimal experience employing workers may struggle. Therefore, to resolve this issue, franchisors should provide training to franchisees to ensure franchisees understand their obligations to their employees. This may include: 

  • pinpointing the relevant award that will apply; or 
  • developing processes where a franchisee can seek advice from the franchisor when it comes to employment issues (e.g. questions regarding dismissal).

2. Introduce Employment Law Compliance Checks 

The franchise agreement should also include procedures where a franchisor can check on how a franchisee is handling their employees, for example: 

  • interviewing employees personally;
  • undertaking audits of employee work conditions; or
  • requesting regular reports from the franchisee setting out some key criteria for compliance with employment laws.

By introducing employment law compliance checks, a franchisor can encourage a franchisee to comply with their obligations to their employees. Failing to do so could mean a breach of the franchise agreements.

Provide or Review Employee Contracts

Franchisors may want to include draft template letters of offer and employment agreements as part of their operations manual. This will ensure that franchisees have the tools available to them to comply with employment laws. Alternatively, the franchisor may shift the responsibility onto the franchisee to have a legally sound employment law agreement for their workers, but require the franchisee to receive approval before its use.

Key Takeaways

A franchisor’s legal responsibilities towards a franchisee will depend on their overall contractual structure and business model. In some circumstances, franchisor’s can be liable for their franchisee’s employment conduct. Therefore, franchisors must take steps to mitigate any employment risks. This can include training for franchisees and providing franchisees with employment tools like template employment contracts and offer letters. In addition, ensuring franchisees comply with their employment law obligations will help with the success of the franchise as a whole. If you have any questions or need assistance drafting an employment agreement for your franchise business, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions 

When is a franchisor responsible for their franchisee’s employees?

There are a number of requirements that must be met before a franchisor is liable for the franchisee’s employment conduct regarding their employees. However, you should take steps to reduce your risk of liability.

What can franchisors do to reduce their risk of liability for their franchisees’ employment conduct?

Franchisors can provide training to franchisees to ensure they understand their obligations to their employees. Additionally, the franchise agreement should include procedures where a franchisor can check on how a franchisee is handling their employees, to ensure it is in line with employment law. A franchisor might also provide or review employment contracts to ensure franchisees have the tools to comply with employment laws.

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